Prime Brokerage is now an established, mature product in the global foreign exchange market. Two or three years ago FXPB was a emerging business, with ad-hoc services being offered to a handful of clients. Now the leading Prime Brokerage firms are offering their services to dozens of firms, with the largest having close to one hundred clients and processing several thousands of FX transactions a day.

Prime Brokerage a mature business
The essential offerings and benefits of Foreign Exchange Prime Brokerage are clear. At its core it allows a fund to trade with a much wider variety of counterparties, without the need to set up lines and collateral with each trading partner. This facilitates best execution across a range of currencies and products. Furthermore a Prime Broker will take care of the clearing, settlement and bookkeeping, allowing the fund to focus its energies, and capital, on trading strategies. Finally the Prime Brokerage relationship offers a reduction in settlement risk through the netting of payments through a single counterparty.

Unprecedented increase in trade volumes
The number of clients and the volume of trades have grown dramatically and will continue to do so. Firstly hand institutional investors have increased their allocations to currency funds. Active currency management by skilled investors is seen as an attractive source of alpha. Secondly the adoption of electronic trading, the proliferation of ECNs, and the adoption of automated trade processing systems by banks has dramatically reduced the costs associated with trading. Per trade fees have dropped, and it has become profitable to trade in much smaller lot sizes.

With the Bank of International Settlements sizing the daily turnover of the FX market at $1.9Trn, and with Hedge Funds accounting for 20% to 25% of this business, one can size the FXPB market at $380Bn to $475Bn daily turnover. An average trade size of $5MM to $10MM this would represent a low water mark of 40,000 trades a day up to 100,000 trades a day.

The reduction in trade size to $1M, afforded by ECNs, drives up that potential volume to 500,000 trades a day.

More participants, more assets under management, lower trade sizes, more channels, equals greater number of trades. Without the appropriate controls and automation, however, growth will bring increased risk and prohibitive costs. These heretofore unseen volumes can only effectively be processed using automated solutions. Automation not only Prime Brokers operation, but of the bank to bank communications, allowing executing banks and ECNs to electronically route Give-Up trades to Prime Brokers. Traianas Harmony has become the de facto industry standard to support this Give-Up processing.