Saxo Bank has positioned itself as a leading player in online trading thanks to its superior client service, competitive pricing and its focus on developing industry-leading trading platforms. The New Europe speaks to Lars Seier Christensen about the financial crisis, winning awards and white label business
TNE: The Saxo Bank website describes your services as that of the ‘facilitator’. Explain in more detail what you mean by this?
Lars Seier Christensen: We see our world consisting of three primary segments. At one end of the spectrum, we find liquidity, meaning product providers, such as investment banks, exchanges and others that deliver high quality liquidity that we integrate into the platform. At the other end of the spectrum, distribution, meaning banks, brokers and other financial institutions that have well established client franchises that they want to provide the best products to. In between, facilitation, where companies like Saxo Bank seeks to link the two other areas. This is truly a win-win-win; liquidity providers can reach client segments through us that would otherwise be difficult to access efficiently, and the distribution channels gain easy access to both technology and superior products for the benefit of their clients, helping them build their business without inventing the wheel. Saxo Bank – as facilitators of this link between products and clients – benefit from the superior reach that thousands of financial institutions all over the world achieve in local markets where they have a strong franchise.
Our integrated platforms, SaxoWeb Trader, SaxoTrader and SaxoMobileTrader, as well as Saxo-E*Trade Broker enable clients to trade in exchange-traded securities or derivative contracts by routing the orders directly to the markets and relevant exchanges. This is done via one of Saxo Bank’s liquidity and infrastructure partners. Saxo Bank may also act as a client counterpart for products that are traded over-the-counter. The liquidity and infrastructure partners of Saxo Bank are large financial institutions. By entering into an active cooperation with these institutions, Saxo Bank has ensured access to a one-stop trade execution, settlement and custody offering.
TNE: How has the nature of the FX market changed since the financial crisis? Has this had an effect on Saxo Bank’s role within the online trading platform?
LSC: The aftermath of the financial crisis was all about an unwinding of JPY-funded, and to a lesser extent, USD-funded carry trades. This deleveraging saw a huge boost to the USD and JPY while it appeared that the financial world was headed into the abyss in late 2008 and early 2009. But as the world economy has recovered, the market is feeling increasingly comfortable with putting back on the carry trade – mostly using the USD as the funding currency due to the woeful recovery process in the U.S. and a U.S. Federal Reserve that appears bent on keeping its interest rate at zero and even printing money and doing whatever else it takes to generate inflation, regardless of what this means for the country’s currency.
On this theme, funds are so rapidly leaving the U.S. and rushing into emerging market economies and radically boosting the exchange rates in those Emerging Market countries that the term ‘currency wars’ has gained increasing cachet. These countries are afraid that their increasingly strong currencies will wreck their export-driven economies. The tensions created by this war of so-called competitive devaluation are defining global relations at present as currencies have become a central issue in world politics. I think it’s safe to say that the stakes in the currency market are more important than ever. This of course makes our core business of facilitating FX traders more relevant than ever. Another important aspect of the crisis has been an increasing investor demand for competitive pricing, transparency and self-empowerment in trading, all trends that our business model is designed to meet.
TNE: A recent FX survey by the Bank for International Settlements shows the currency market trading at record levels this year. What are the inherent properties of the currency market that have made robust during the recent financial crisis?
LSC: Because currency issues are increasingly at the centre of the macroeconomic trends moving markets at the moment, and because the currency market offers generally deep and around the clock liquidity, fund managers are likely finding that currency trades are an excellent way to express a market view in this climate. Also, the USD is an enormously important reserve currency in a steep downtrend, and any strongly trending market will attract a tremendous following from funds that invest in secular trends. There are risks here, however, as the currency focus has become so overwhelming ahead of the anticipated move into further quantitative easing from the U.S. Federal Reserve that one can almost speak of an Everything Up vs. the USD trade, and signs are that all pro-risk assets are moving higher in lockstep with the U.S. dollar’s decline.
This could create extreme volatility because there is no diversification potential when everything is moving together. With everyone in the same trade, new developments that create doubt about the efficacy of the trade, for example, if China slows, or if he U.S. Federal Reserve’s new quantitative easing measures prove far more modest than anticipated, it could create near panic as everyone tries to exit the sure-thing-trade at the same time.
That being said, for most individual traders, currency markets offer a low cost, high liquidity investment opportunity, where the active traders can get much more leverage and efficiency than in most other markets. This is still only known by a small segment of private investors, and the growth expectations are therefore as strong as ever – probably only one in a hundred investors are familiar with FX as an investment opportunity. This creates a great opportunity, but also an educational responsibility for firms like Saxo Bank – two things that actually go well hand in hand as education is today one of the major sales channels in our business.
TNE: Are fund managers now beginning to recognise a new potency in the currency markets?
LSC: Actually, during the financial crisis, it was proven that the currency market, like all other markets, was under severe strain, as liquidity became almost non-existent at times. Someone who wanted to get out of a long South African Rand position in October of 2008, for example, quickly discovered that there were no buyers in size because the generalised panic meant all of the flow was heading out of the country and everyone else wanted to sell for a time as well.
However, the central banks’ efforts to provide liquidity and swap facilities quickly re-established an orderly currency market after those scary couple of months in late 2008, and now the assumption is that market liquidity in currencies will never experience the kind of desperate times we saw during the panic deleveraging months. Still, the risk of extreme policy measures in an environment of ‘currency wars’ is always a background threat that is out there in the coming months, so market participants should be careful about getting too complacent believing that extreme volatility is impossible, especially now that it appears that speculative fervour in the USD is approaching new heights.
TNE: In 2009 Saxo were awarded FX Week’s Best Bank for FX for Investors for the fourth year running as well as numerous awards in Euromoney’s FX poll. What sets Saxo apart in the FX market?
LSC: It’s easy. The platforms. A lot of clients are looking for new opportunities, new ways of handling their portfolios, more transparency, better products, pricing and services and that is where Saxo Bank really stands out. I also think that while Saxo Bank might be a leader when it comes to online banking, our advantage is also the fact that we combine technology with human interaction. This is why we continue to widen our geographical footprint.
TNE: An award-winning part of Saxo Bank’s success has come via white label business. Expand on this aspect of the bank’s service?
LSC: White labelling is a major part of our business although the retail business and Saxo Asset Management are growing faster at the moment. We launched our first white label solution in 2001 with a visionary Portuguese securities dealer with 150 years of market experience. I think the reason our white label business became so successful is that many financial institutions, not least since the financial crisis, have realised that it doesn’t make sense to use a lot of money and try to build your own trading platform when you can get an award-winning platform like SaxoTrader, and therefore benefit from a decade of white label experience. I don’t think anyone out there matches us in actual, practical experience of implementing white label solutions.
In the many years of working with world leading financial institutions that apply Saxo Bank’s technology, such as Citi, America’s largest financial services company, we now have a solid track record of experience in assisting white label clients in expanding their business through using our platform. Our technology provides the platform that enables us to develop long term, scalable solutions and build mutually successful business relationships.
The combination of forces – our deep understanding and experience with technology and liquidity, combined with the white label institutions strong client franchise – is very powerful and truly a win-win situation. Obviously, there is no assurance that an unlawful or unethical act by clients would not have a negative effect on Saxo Bank’s reputation or otherwise have a material adverse effect on the bank’s financial results but we have procedures in place to manage the risk associated with white label clients.