Foreign Exchange Brokers Remain Upbeat Despite Latest Report Of Dwindling Share

Officials at major international foreign exchange brokerage firms remain stubbornly optimistic about the industry's future despite recently released statistics showing a decline in brokers' market share. But the increasing competition over the past few years has clearly hurt: several companies have faced near bankruptcy, reorganization, merger and buyout.

One casualty is the London-based Foreign Exchange Brokers' Association, formally disbanded over the summer. "It didn't serve a function any longer," explains one executive of a prominent firm who didn't want to be quoted by name. "These things go in cycles: sometimes we're friendlier with each other, we see common interests, sometimes we're more competitive. Right now we're in a more competitive phase."

Banks' cost-cutting efforts have meant that brokerage commissions are one of the first areas to be squeezed, he says. "Brokerage is very visible; it's right there in front of you coming off your bottom line."

Other reasons are clear for this dog-eat-dog attitude: the statistics on the market collected by the central banks in April and released last month show that brokers' share of net turnover in London, for example, has declined 10.5 percent in the past three years, from 38 percent in 1989, last time the survey was done, to 34 percent of the overall market in 1992.

While London brokers' business between banks in the U.K. and abroad held up pretty well, their share of turnover between London-based banks fell from 36 percent of the total to 33 percent. And, as brokers have increasingly internationalized their businesses, the number of trades booked between two principals abroad has also fallen--from 13 to 10 percent. The area where brokers have gained business is with non-banks--investment banks chiefly--which grew from one percent of their turnover in 1989 to eight percent in 1992.

Similar trends were visible in other markets which reported figures for brokers' activity. In Hong Kong, for example, brokers' market share dropped from 35 percent to 31 percent over the three years and Hong Kong monetary authorities noted a relative increase of business in cross currency, dollar/Canadian and dollar/Hong Kong business from brokers. In some markets, however, there were distinct anomalies.

In Paris, although overall market share for brokers dropped from 50 percent in 1989 to 44 percent in 1992, that for Paris-based, as opposed to internationally-owned, firms grew. Market concentration, the Banque de France report notes, has likewise grown in the brokerage industry.

In Norway, brokerage seems to have nearly died out over the three-year period. According to the Central Bank of Norway report, brokers had 43.4 percent of the market in 1989, but in 1992, if they are present at all, they are lumped with the 8.4 percent devoted to "other financial institutions."

But brokers remain positive about their prospects. "Turnover is up," points out one executive. "We have a smaller percentage, but it's of a bigger cake." And he says brokers are adapting to the changes in the market as a whole to meet the needs of bank customers.

Two major shifts have taken place in the composition of London brokers' volume: one is that the predominance of spot business has given way to a more even split between spot and forward transactions, mirroring the development in the overall market.

"Our turnover reflects the way the banks trade," says the managing director of one large firm. "Off balance sheet is gaining--we are moving away from spot into forwards trading." He describes the Bank of England figures as "quite an eye opener."

But brokers do a larger proportion of their turnover in the options market than the banks do: five percent as opposed to three percent for the total market. This is a huge increase, since in 1989 London brokers did little options trading at all.

The second shift is away from dollar currency pairs into cross-currency trading based chiefly on the Deutsche mark. In the brokers' figures, this trend is far more pronounced than in the market as a whole.

Some firms say they have benefited from the market shifts. "We have been building our business over the past two or three years," says David Buik, chairman of the London subsidiary of Prebon Yamane. Buik says Prebon is a specialist in the forward market and in selected spot currencies, particularly in Ecu, cross currencies, lira, peseta, dollar/Paris, Australian dollar and Canadian dollar. "We're really a money market and arbitrage house," he says. The forward market is less vulnerable to electronic competition in the future than major commodity spot trading such as in dollar/mark, he suggests.

The Bank of England's figures on just how large a share of the market the electronic trading systems now command have not yet been released. But brokers don't seem too worried about the prospect of electronic broking systems. "Brokers have to learn to live with technology and make the fullest use of it," says Buik. "There's no use complaining and moaning that this isn't fair." One firm's managing director says he thinks electronic systems may simply multiply turnover rather than take a lot of business away from brokers. "For the moment, we don't have any neurosis about it," he says.