Do You Sell to Trade or Invest: Part 1

Are you transaction or investment driven?

When you open your doors every day, are you looking to:

Transact by selling more products or services
or
Invest in your customers via your product or service?

Let me give you an example.

I used to be an FX institutional broker whose clients were the trading desks of major international and local banks.

It was a business built on relationships and trust, as the traders had me and eight other brokers give them prices every day and ask for the same instruments.

Nine people vying for the same deal or chasing them for the same order.

They were more hounded than cheerleaders in a dive bar.

Now some of the brokers were very transaction driven. They were there to make trades – again and again. Some were excellent at what they did, but for them, the individual trade came first.

Sometimes Traders didn’t even like them, but gave the best ones good business because they were aggressive and knew how to get deals done.

Other brokers were more relationship driven. The relationship was the key, and every request and trade was focused on building and maintaining trust. They too were excellent at what they did, but the relationship was more important than any individual trade.

The traders liked them, but if brokers became “clingy” and didn’t push enough to get prices and trades, they would lose their business.

After all, the traders were paid to trade, not make friends.

On the sales desk, we would sometimes butt heads – investment vs transaction brokers.

A prime example was when I asked a client for a Spot US Dollar / Saudi Riyal price. The market at that time was 3 / 4 (which means the market would buy at 3 and sell at 4).

I asked my client, who was a “market maker” (banks that made both a price to buy and sell, and thus markets), for a price and he made it 5 / 6. He obviously had mispriced because he was willing to buy at 5, while everyone else would sell at 4.

Here’s the thing. When he made a price, he was obliged to trade if I were to sell to him on the 5 bid. And it would have been for the minimum order size of US $25 million.

He would lose $2,500 on overpaying the sale and another $500 in brokerage to us.

It would’ve been a $1,000 trade for us (counting the party on the other side).

Just by saying one word – “YOURS” (i.e. we sell you there…), we would personally pocket $500 (our commissions were 50%).

When he told me the price.. I had about a second to decide. 1) Make the trade and pocket the cash or 2) stop and kill the price, but lose the trade and commission.

Do I transact for the cash or invest in the relationship?

If I transact, that is a fast $500 in my pocket.. just by saying one word..

But he could “cut the line” for the rest of the day (i.e. ignore me) and drastically pull back his support. Future trades with him would be harder because he wouldn’t be as willing to show me prices.

I immediately told him to hold off as the market was 3 / 4 and he mispriced, but did he want to buy?

“Sh*t” was his reaction.. He called off the price because he was not a natural buyer.

Now my colleague, who was transaction driven, heard this exchange and was livid. He started shouting.

“That was $1,000!!… you F***in D*ck “ he said..

“That was a misprice!.. and I’m not going to screw him over…” was my loud reply.

We argued for a minute until we moved on to the next price.

So it’s not always a clear-cut decision whether to make a transaction or an investment.

There is a price to pay for both approaches.

As for this client, he paid me $2,000 in commission for the rest of the day and an additional $10,000 for the rest of the week.

Investing in the relationship paid off.

In the next post, I’ll take it out of the world of FX trading and talk about investment versus transaction and what it means for us as SME owners..

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