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The following guest post is courtesy of Richard Perona, VP of Institutional FX at Advanced Markets.
More times than not, an interested client inquiring about liquidity will ask the quintessential question, “What is Advanced Markets’ spread in EURUSD?” My standard, truthful response is always that, “the spread is dependent upon market conditions, as Advanced Markets is a true STP Prime of Prime and only provides aggregated liquidity from top tier, global banks. With that being said, EURUSD spread should normally sit within an average range of 0.3-0.5 given our ability to provide very deep liquidity due to our favorable bank relations”.
Generally, when someone asks me this question, I will always follow up by mentioning our GOLD offering. In my opinion, Gold has the potential to offer a prospective brokerage (or Fund Manager) more than the EURUSD spread can when looking at future revenues. Many people look at the EURUSD first due to the fact that many brokers aggressively market their “tight” EURUSD spread in order to attract clients and get them in the door. Once they have them in, however, they tend to pile on the mark-ups across the other pairs in their offering.
Before I get into my rationale behind Gold being a greater revenue generator over the currency play of EURUSD, I want to offer some fundamental background and color on the Gold / US Dollar relationship. It is a well-known fact that both Gold and the Dollar are regarded as safe havens during times of global turmoil, but, of the two, Gold is still perceived as the best hedge against uncertainty. In the eyes of many it represents somewhat of confidence play as opposed to the “flawed” Euro and the less certain US Dollar.
Spot Gold, typically, has a contract size of 100 oz. per lot and moves in 0.01 ($1 per lot) increments. Recently, Gold prices have remained near five year lows as a rising dollar and speculation of higher US interest rates further curbs the appeal of bullion as a method of value preservation. That being said, one only has to look at the events of this past week to see how quickly sentiment can change and Gold has been, and will continue to be, the beneficiary of such turmoil and upheaval. It remains the currency of last resort.
Just look at the current global situation and the uncertainty that surrounds it:
- The US Federal Reserve ends their QE with the first rise in interest rates in 7 years.
- The ECB continues to debate their QE policy with no sign of consensus.
- The China economy is showing worrying signs of slowdown resulting in the massive sell-off in stocks this past week and triggering similar sell-offs across the globe.
- The Bank of China has been selling US Treasuries at an alarming rate and has surprised analysts by publishing a 57.3% increase in Gold reserves since their last disclosure in April 2009.
- The increasing threat of global terrorism.
I would now like to revisit my original comments in light of this fear and uncertainty. As mentioned, potential clients (mainly brokerages) normally inquire about the most liquid currency pair(s) and focus on the tightest spreads while dismissing metals as a major revenue generator. The benefits in offering Gold and Silver to clients as a viable alternative (or compliment) to currencies are often ignored and, as a result, potentially high revenue is missed.
Let’s look at Advanced Markets’ offering in particular. Advanced Markets’ bid/offer Gold spread normally falls between single digits and high teens, with 1,000 to 2,000 ounces of continual liquidity on both the bid and offer. However, the majority of retail brokerages offer much wider spreads to their clients in order to cover operating expenses and to generate additional P&L.
The revenue potential for those brokers looking to mark-up their offering using Gold is therefore quite significant. As an example, EURUSD and Gold have the same monetary value per tick, however, the ability to mark-up the spread in EURUSD is limited by the competiveness of that market. EURUSD generally has an industry mark-up cap of a few decimal places to, at the very most, perhaps 1 pip.
GOLD spreads, on the other hand, can be frequently found at 50 cents wide, hence netting around 35 cents mark up over the core liquidity that Advanced Markets could provide that firm. I will add, at this point, that neither I nor Advanced Markets are advocating or recommending the excessive mark-up of prices and that all commission and/or mark-up schedules proposed by any broker (or fund manager) are subject to the final approval of Advanced Markets.
For those brokerages or Money Managers whose business model relies upon, or incorporates, the ability to mark-up pricing then adding a mark up to a Gold raw spread could be an appealing solution. To see an example of the revenue in terms of mark up and (a $12 per million) commission, please see the table below:
|Mark Up||Revenue per 1 million||Commission Paid per million||Revenue Per Yard||Commission Paid per yard|
* EURUSD commission $12 per notional USD million (1mm EUR @ 1.090 = $1,090,000) X $12 = $13.08
** Spot Gold is set in 100 oz per lot. (10 lots X 100 oz X $1,100) = $1,100,000 X $12 = $13.20
As you can see, the mark up on EURUSD can result in a displayed spread of around a pip (raw spread + 0.5 mark up) creating $50 per $million traded; while clients in Gold would see a 50 cent spread (raw spread + 35 cents mark-up) generating $350 per $million. Below is a chart of 10 year XAU/USD overlaid with USD Index, showing the volatility of GOLD sitting at a 5 year low. With today’s market uncertainty, I am very interested in seeing where the GOLD price will go in the coming months and, also, the volatility and price action associated with such a move.
In conclusion, I look forward to clients potentially asking, “What is Advanced Markets’ spread in EURUSD AND GOLD?” and hopefully seeing them take advantage of the benefits that Gold has to offer their business.
If you have any questions, please feel free to reach me at [email protected].