Obtaining Access to Liquidity and How Banks Changed

George Tchetvertakov
Last Edited Feb 21, 2020

Accessing top-tier liquidity has never been easier, or cheaper, than it is today.

Trading has come a long way since the advent of the Internet in the 1990s. In the same vein that the Internet became ubiquitous while improving anything and everything it touched –namely payments, international money transfers and logistics – the Internet has also facilitated the most awe-inspiring shift in market access for everyone.

If comparing trading today with what it was before the Internet, the comparison would be like comparing a gentlemen’s club with a night club.

In the past, the best market access was reserved solely for companies that maintained a direct relationship with their bank. Given their small number, banks had ultimate control over market making because they controlled all liquidity.

Fast forward to today and everything has changed.

Being a large bank has never meant so little because small financial market companies and even individuals can now request (and offer their own versions of) top-tier market access assuming they have the capital to make it a possibility.

Technology has come to the fore to deliver top-tier services for everyone and given the ultra-competitive nature of modern markets, even retail traders are keen to obtain ultra-thin spreads and bare bone commission rates.

In other words, trading has gone from being akin to a gentlemen’s club where you had to be invited to join based on your stature and credentials, to a night club where everyone is welcome as long as they can afford it.

One of the cornerstone reasons for this widespread liberalism has been financial technology (fintech).

Source: Ernst & Young fintech adoption index, 2017

According to a report published by Ernst & Young in 2017, the rapid emergence of fintech is largely emanating from emerging BRIC economies such as China, India and Brazil. Financial services and modern capital markets may well have been developed in the West, but it is actually Asian countries that are adopting fintech services the most.

The report goes on to conclude that entrepreneurial start-ups, major technology firms and branchless mobile banking services are sowing the seeds of the next evolution of financial services, with further fintech adoption facilitated by greater data sharing, open application programming interfaces (APIs), biometrics and even artificial intelligence.

New fintech kids on the block

For decades, most market participants had to rely on centralised banks and a private members-only system of access.

This inherent oligopolisation within financial services, combined with the parallel improvement of technological capability, led to the blossoming of retail brokers, currency exchanges and fintech companies that are now competing with banks in providing payments and currency services.

Prime examples would include the likes of Paypal, GoCardless and so-called “neobanks” like Monzo – entities that offer traditional banking services exclusively online.

In addition, tech companies are entering the financial services market and teaming up with both banks and brokers to provide innovative services that have achieved wide uptake in a short time.

Fintech firms have responded to the increasing ubiquity of internet access and smartphones to launch digital-first versions of existing financial products, thereby making most services cheaper and more effective.

Within the money transfer industry, the likes of Currencyfair and Transferwise exemplify the shift towards fintech innovation to deliver better quality services that people have always craved.

Show me the money

Obtaining accessing to bank’s trading room, or in other words, accessing liquidity that is reserved for banks and their clients, is considered a huge advantage for traders.

This is because trading costs are reduced, execution speed is improved while price accuracy is as near to benchmark as humanly possible. There are also added bonuses such as a wider variety of tradeable instruments and professional expertise including discretionary services that most retail brokers would struggle to emulate.

If accessing a bank’s trading room was problematic for most people in the past, today, the only problem is capital.

Brokers offer their services to retail and institutional traders by accessing a bank’s large liquidity pool and offering prices to their own clients. Even this concept has developed over time to the point of retail brokers now using multiple banks as part of a prime brokerage model i.e. obtaining liquidity from multiple banks simultaneously and then filtering quotes to their own clients from within customised liquidity pools.

Obtaining access to a bank’s best prices is therefore highly desirable for all parties. Brokers benefit because they stand to gain better trading volume and revenue. Meanwhile, clients receive better prices and execution which improves their chances of being successful. For banks, the benefit is a new slew of clients that re-sell their prices to retail traders which the bank would rather not deal with directly.

Given the liberated and decentralised structure of financial services as a whole, it is now common to see small companies and even individuals obtaining access to top-tier bank liquidity.

Retail forex brokers such as FXCM and wholesale currency exchange companies such as Moneycorp can offer their proprietary services largely because of the market access they have. Moreover, even smaller companies that only have a handful of employees and relatively small trading volumes compared to their industry peers, can readily obtain bank liquidity and offer interbank rates when conducting foreign exchange business.

The primary factor that determines whether a particular market participant will obtain top-tier access is capital. If a small broker can provide the required amount of capital as stipulated by regulators and a bank’ internal policies, then it can obtain access on a sliding rule scale. Larger capital reserves allow for greater risk-taking.

Brave new world

Living in a world of persistent technological evolution combined with a vibrant, competitive entrepreneurial culture fuelled by self-interest can only mean one thing: a buyer’s market for traders.

Regardless of size or expertise, as an individual or a company, today, market participants can obtain the best market conditions in history. However, there is a premium that must still be paid despite the soothing liberalisation of financial services since the 1990s. Larger businesses and wealthy individuals still hold an advantage and can still access better market conditions compared to the past, but for different reasons.

The old world order of a select few banks maintaining total control over entire industries and sectors has become redundant and outdated. Weakened by political democratisation and fuelled by technological innovation, the old is being replaced with the new – a brave new world based on meritocracy and performance.

In the past, market access required capital, company status and an intangible sense of community that some referred to as an old boy’s network or a gentleman’s club. Nowadays, even individuals with a few thousand dollars can set up an online trading platform to obtain similar market conditions to multimillion-dollar investment funds thereby levelling the playing field in the entire trading industry.


More similar posts:

UK Banks & Scandals: A Match Made in Heaven- Biggest Scandals in UK History & Biggest Fines Paid

Large banks have become synonymous with the words ‘scandal’, and ‘manipulation’ in recent years. Since the emergence of the Global Financial

How To Obtain A Money Transmitter License In The UK?

Money plays a crucial role in both local and international trade, shaping everything from daily grocery shopping to the global

history of Banks and fintech

How Banks and the Banking System Has Shaped Our Life

Banking is an essential part of the modern world. Banks play a vital role in the economy by providing a

Obtaining Access to Liquidity and How Banks Changed

Accessing top-tier liquidity has never been easier, or cheaper, than it is today. Trading has come a long way since

Notify of

Inline Feedbacks
View all comments