IG Group
Max Hayden
12 May 2020
Max Hayden, global head of prime brokerage at IG Group, discusses the launch of IG Prime, which aims to act as a challenger in the prime brokerage market
Image: Ophat Angworakun/Shutterstock.com
How has the prime brokerage space evolved since the 2008 financial crisis?
Following the crisis, all the major players in the prime brokerage space had to re-evaluate their businesses in order to regain market share. It was during this time that the tier one investment banks realised the true cost of offering these services and extending leverage. From that analysis, they became more precise in their understanding of the value of certain accounts and business lines, when compared to other areas of the firm.
This opened the door to a series of new entrants to come in, being banks which were not historically focussed upon this sector, as well as new enterprises, which became known as the mini prime community. Mini primes operate by effectively intermediating on another prime brokers’ services to smaller hedge funds, or hedge funds that are finding it difficult to get access to certain products due to their size or their ability to meet certain revenue levels.
That was a very successful model for some firms and started to gain traction around 2012. Now, we are moving into the next stage of the evolution of this industry which is the response to a perceived void that has arisen between the tier one investment bank community that provide prime and everyone else.
The mini primes created a service that was desperately needed after the financial crisis, but their very nature means that they encounter the same regulatory requirements from a capital perspective as the larger firms. Over time this has proved to be an equivalently expensive business for them and the introspective review of what’s needed to participate in this market from a capital strength perspective is starting to reveal itself. This is why we have seen some firms consider their future in this space.
The point we are at in the cycle presents an opportunity for a firm like IG and others, which have financial robustness, a large workforce and global reach, to step into the gap others leave.
The void that is being forged between smaller clients and the big hedge fund constructs is a natural fit for firms like us that can go in either direction of the midpoint but also have what is needed to participate in a financing/prime style set of business activities.
Where does IG Prime fit into this new prime brokerage market landscape of bulge bracket primes and mini primes?
At IG we don’t consider ourselves as a mini prime, although that’s an area we can compete in. Mini primes predominantly access the balance sheet of larger prime brokers to fund their business services, which isn’t something IG needs to do, as we are a FTSE 250 company with a multi-billion dollar market cap.
We want to position ourselves as a firm that’s convenient and efficient to interact with by leveraging our fintech lineage but also, from a financial perspective, we want to be seen as very robust and credible.
In response to the greater demand for synthetic financing compared to traditional cash prime brokerage, we decided at IG to launch our initial products and services as a synthetic prime broker, which we believe proves to be more flexible for our current and targeted clients. This strategy is supported by a number of established firms investing in their own swap platforms to take advantage of this market pressure.
What is IG Prime’s offering?
When you come on board as a client you get two accounts. The first is a trading account and that is a synthetic prime solution. With that, you get real-time margin calculations, the ability to trade via voice, with direct market access, etc. It is multi-asset, so you get equities and indices, foreign exchange, listed derivatives, crypto, and commodities all in one account, long and short. Alongside that, we provide a safe custody to hold physical positions if you don’t want them financed and the value of these holdings can serve as collateral to cover your synthetic margin requirements. So you can optimise your pool of investments form a capital perspective.
And IG is mainly targeting hedge funds and family offices?
From an international perspective, the hedge fund industry is now mainstream in the way that the major institutions invest. The barriers to entry apply to both a massive alternative fund construct or a small new entrant, with the product demands becoming quite similar across the range.
Due to our retail businesses, we are very familiar with how to support clients which require high-end, high-touch and personalised relationships, which in turn lends itself to supporting family offices. The family office community is gradually moving into a space where the product demands are similar to that of the hedge fund sector and also IG’s execution products also sit very nicely with how the proprietary trading firms are evolving and what they require of their service suppliers.
We believe that smaller hedge funds, proprietary trading firms and family offices would prefer to start a relationship with a prime broker, which has the ability to not only develop new products as they evolve but also to have an extensive offering from the get-go.
So is this the best time or the worst time to launch a new PB product suite?
The IG ExCO team challenged the prime brokerage business with this very question. We concluded that it’s a very good time to launch because going back to the financial crisis, there were countless examples of clients transferring between prime brokers, either voluntarily or involuntarily.
We want to be viewed as an organisation which is there for clients in difficult times, both reliable and willing to develop our product and accommodate customers when the markets are volatile and uncertain.
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