FX Trading: Broker Panel
15/05/2023
Damien Lodge
When assessing the strategy of broker panel selection, (the counterparties selected to compete for our business), it is essential to understand the micro-structure of a market and how liquidity is distributed by liquidity providers and accessed by clients. The market structure is nuanced and due to the interactions of market participants, a larger panel of brokers does not automatically deliver better results. Execution strategy is complex and takes into account many dynamic factors that evolve in real time and we believe that best results are achieved by careful selection of liquidity providers, innovative technology and strong relationships with counterparties.
JPMAM strategic solution
In 2013, J.P. Morgan Asset Management (JPMAM), Global Fixed Income Currency & Commodities (GFICC) made the strategic decision to build a proprietary connectivity solution to access liquidity after identifying shortcomings within the market structure. We found that real liquidity was confined to a smaller subset of tier 1 market makers and that liquidity was simply being recycled by other participants. JPMAM is a fiduciary and executes all foreign exchange (FX) business on an agency basis, meaning that all trading cost savings are passed on for the direct benefit of our clients. We recognised that we could drive pricing lower by removing third party brokerage costs and building stronger relationships with our strategic partners to deliver the best client outcomes.
To do this, we built proprietary, direct, bilateral connectivity to a panel of brokers who were selected for their ability to provide liquidity, their technology expertise and a willingness to be partners in the solution. In return, JPMAM does not charge our liquidity providers a brokerage fee, enforcing the cleanest and most transparent price possible.
Our FX trading panel consists of 10 liquidity providers, who we refer to as our ‘standard counterparty list’ and contains primary liquidity providers and key strategic relationships. In addition, we have bilateral connections to another seven liquidity providers who we can also use to support client requests and access specialist liquidity, if required.
Counterparty performance is reviewed regularly and modifications can be made to our standard list to reflect changes in liquidity providers’ capabilities. Although we have a larger panel available, we will curate the size of the panel for price requests based on our analysis to achieve the best outcome for our clients.
JPMAM’s key advantages
JPMAM executes on an agency basis, so all efficiency gains directly benefit the clients.
Optimal pricing that is clean without embedded charges.
As one of the largest asset managers, JPMAM is able to command the best price tiering (most competitive pricing) based on our global presence across asset classes. This is particularly useful for balance sheet intensive FX trades such as forwards and swaps, which have the largest impact on efficiently managing multicurrency portfolios. Price tiering is determined by a liquidity provider’s willingness to allocate its balance sheet to a client, which reflects the profitability of the business. At JPMAM, our global diversity, size, relationship and total contribution to counterparty return on equity (ROE) ensures we receive the best tier of pricing.
The JPMAM execution protocol is to trade in competition using Request for Quotes (RFQs) to broken dates (non-standard market date conventions for both spot and forward rates) without disclosing the buy or sell intention. This process leverages our liquidity panel expertise in aggregating the fragmented market structure and providing the best available price.
We maintain ownership of our trading data which supports our internal trading analytics and best execution processes.
We have bilateral trading agreement documentation (ISDA’s) and are not reliant on credit intermediation which reduces other explicit costs incurred in models such as prime brokerage.
We have the flexibility to build bespoke solutions for our workflows, such as post account allocation, benchmark and algo execution protocols.
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