Why the pop broker encourages the tough conversations with retail brokers

FMLS:23 was held at Old Billingsgate in London. This gathering drew professionals eager to explore new technologies, trends, and networking opportunities. Among the attendees were 26 Degrees Global Markets, an acclaimed multi-asset prime broker based in Sydney, Australia, with a global client base.

26 Degrees, formerly Invast Global, has carved a niche in the global financial market with its specialised services. The firm’s offerings are distinctly tailored for two key client groups: broker dealers and hedge funds, each with its unique set of needs and challenges in the financial landscape.

For broker dealers, 26 Degrees Global Markets provides a comprehensive suite of services designed to enhance trading efficiency and market engagement. Central to their offerings are bespoke liquidity solutions, offering optimised liquidity streams crucial for broker dealer operations. They place a strong emphasis on transparent liquidity and execution analysis, as well as state-of-the-art trading technologies, customisable market data solutions, reporting services that cover essential middle and back-office functions, and proprietary data analysis tools to help broker dealers navigate market risks.

For hedge funds, the prime broker offers a full-service prime brokerage solution, including seamless connectivity to execution management systems, proprietary back-office reporting access and dedicated trading servers strategically located in major financial hubs like London, New York, and Tokyo. Furthermore, the firm engages in capital introduction services, working closely with emerging managers and facilitating meaningful introductions in the financial world.

In an enlightening session at FMLS:23, 26 Degrees’ Lochlan White and James Meek delved into the year’s market dynamics and the evolving role of prime brokerage. Their insights into execution, data management, and the future of prime brokerage provided valuable foresight for industry players navigating the complex financial landscape.

More volumes for Prime Brokers due to increased hedging

The discussion revolved around the current market scenario and the strategic approaches adopted by brokers in the face of declining market volatility.

Lochlan White began by addressing the current market difficulties, noting the curiosity among brokers about their peers’ performance. “It’s been an interesting year where a lot of brokers have been asking us how everyone else is going,” he said, indicating a market-wide concern for performance under challenging conditions.

White continued, explaining how prime brokers have gained more volume this year due to increased hedging by retail brokers. He stated, “They’re trying to hedge quite a bit more in order to reduce their revenue volatility,” highlighting the shift in focus towards cost-effective liquidity solutions. “The percentage of externalisation to Prime of Primes, other Liquidity Providers or even tier 1 bank prime brokers has dramatically increased.”

The EMEA-focused executive also elaborated on 26 Degrees’ unique positioning as a true Prime of Prime broker, “We have relationships with multiple tier 1 bank prime brokers,” he said, underlining their competitive edge in the market.

The A-book model and a solid data system

James Meek turned the focus to the shift in broker models as volatility subsided, observing a move away from an internalisation focused model, towards more active hedging and risk management. “For retail brokers, this means focusing on key statistics like execution and liquidity management, which weren’t as important when they were running a high internalisation model. Now, they’re looking at how the liquidity mix interacts with the flow. It’s been a period where brokers have moved away from such a strong focus on internalisation that part of our focus this year has been working with our broker partners to assist them to better monetise flows, whether internalised or not, by focusing on key statistics and proper data management.”

He mentioned how this change influenced the focus on execution and liquidity management. “Retail brokers are starting to really sharpen their focus on execution quality again,” Meek explained, signifying a renewed focus on these aspects.

Highlighting the importance of data in decision-making, Meek said, “Selecting the right panel of liquidity providers is crucial for retail brokers, and it’s essential to focus on the most important data points. Data is growing in importance every day, and it’s vital for making informed decisions. The difference between working with a broker who bases decisions on solid data versus gut feeling is substantial. Brokers with a solid data system, whether in-house or through a partner, offer a completely different experience compared to those who don’t. It’s crucial for brokers to get access to key data points so we can help optimise their liquidity and make informed decisions. The ability to present data effectively to teams and liquidity providers is also essential for retail brokers.”

The gap in the market for non-bank Prime Brokers

Meek spoke about the anticipated withdrawal of bank prime brokers from the market, identifying an opportunity for non-bank entities like 26 Degrees. “There’s a 26 Degrees-sized gap, somewhere in there, to be a non-bank prime broker,” he said, acknowledging their potential role in filling this void.

In closing their discussion, White and Meek addressed the future of the industry, particularly in prime brokerage and credit access. He predicted ongoing trends where, “those with smaller balance sheets, or those that aren’t willing to put their balance sheet forward, will need to consider doing so,” suggesting potential consolidation in the industry.