FX brokers who do capitalize on the importance of offering a full range of venue-listed products via genuine live market liquidity will be left behind. The b-book OTC world has limited future, and the companies at the top are already working on its replacement. Here is our full analysis

This week has been of great interest indeed, especially during discussions with longstanding firms in important regions for the electronic trading industry with regard to the direction which is now being explored.

It has been clear for a number of years that simply buying leads via the affiliate method and simply expecting a call center staffed with short term, inexperienced commission-hungry deposit takers is, to put it in the words of one particular prime brokerage executive we spoke to this week “not financial services at all”.

That’s for sure.

Neither is recycling those very low value leads, and attempting to churn them from one brand to another, brand being the operative word because most of the entities engaged in this are over 1230 near-identical white labels of MetaQuotes, offering the same anodyne and controlled market via the same platform with absolutely no live, correctly executed trading environment.

MetaTrader was, after all, designed and introduced as an affiliate marketing platform without a facility to connect it to a live market. That functionality came later, via specialist bridge providers which operate as pseudo affiliates and capitalize their aspect of the business via trading volume in much the same way as an introducing broker or website referral affiliate would.

It is widely accepted in most circles now that this is a very expensive and restrictive business model, and one that is being hit hard by regulators as well as by ever decreasing client lists and margins.

Yes, 2020 was a year in which many b-book retail brokers which warehouse all their trades made in some cases record profits. Many of these companies rested on their laurels, however, and did not see the need to take stock of the current marketplace and use these profits to channel their business in the right direction for the future.

Most of the activity which created these record profits was from existing clients who had perhaps only traded slightly more than usual due to being at home during lockdowns or considering trading as a main income whilst being not allowed to operate other business. Not many brokerages considered that it would be an opportune time to expand their remit in order to attract new client bases.

There is a very good reason why b-book brokers with off the shelf affiliate style platforms are not attracting new traders. The product range is not up to date, and today’s audience is wise to the ‘you against me’ nature of many of the brokers which operate in this sales-led fashion.

Yesterday, FinanceFeeds spoke to a firm in Australia which is developing its own institutional ECN, which will be integrated into its platform and will be able to distribute Tier 1 liquidity from non-bank market makers and Tier 1 FX interbank desks for the retail market.

This is effectively bringing the Tier 1 bank and prime brokerage sector into the hands of the retail trader.

Exactly as this happens, the platform and trading infrastructure market is very much gearing up for it.

Talk here in London among institutional liquidity providers has amassed, focusing on MetaTrader 4 (and some other platforms) inability to negatively price oil, clearly demonstrating that nobody ever even considered that oil could go past zero value.

“I think it is worth clarifying to retail brokers just how scared they should be about a negative Oil price. Many retail brokers seem to largely be asleep to it, and it’s a total disaster area if it happens again” said our intrepid insider.

“Interactive Brokers lost $88 million on oil trading, you would have thought that this would have woken most people up” he said.

“The market value and concentrating on market dynamics due to the oil price fall is one thing, but this is very specific to retail brokers because if the oil price goes into negative value, MetaTrader 4 cannot handle it, so MetaTraer 4 will cut all clients at $0, but the broker could be filled on their hedge at, for example, $20 which could result in tens of millions of losses. Many are asleep at the wheel because the price has gone up, but it will be back down at those levels at the time of expiry” he said.

Multi asset trading is vital to the diversification of our industry and in order to bring products that interest highly sophisticated traders into the retail electronic trading fold, and to elevate the standards of client bases, and the industry’s remit as a whole, however it certainly seems clear that finite commodities and company futures are tangible assets, whereas oil doesn’t just go up in smoke as a consumer energy product, but has political connotations too given the current climate.

FinanceFeeds spoke to Roman Nalivayko, CEO of TraderEvolution Global Ltd, which produces trading infrastructure for multi-asset brokerages to be able to conduct fully integrated exchange traded futures, options, global stocks, Foreign Exchange and CFDs, along with brokers which utilize the TraderEvolution Global solution to not only give their brokerage a unique user experience in order to generate client and brand loyalty, but also to be able to take full ownership of their brokerage and give a new and more advanced series of traders a full product range, accessing listed derivatives on major exchanges.

Mr Nalivayko’s perspective is that software companies that provide trading systems to brokerages across the entire spectrum of the electronic trading industry should operate on a fixed fee basis.

“Our solution is aimed primarily at brokerages which operate in the listed derivatives sector” said Mr Nalivayko.

“In order to provide the correct solution for futures and equities traders, our software is provided to brokers via a flat fee, therefore we do not capitalize on volume” he said.

“On average, our multi-asset projects pay between 10,000 and 15,000 euros per month as a software licensing fee for our platform, taking into account different connections to different venues and market data providers. The cost is also dependent on the front end platform solution that brokers choose, whether it is mobile, web, or a desktop platform for Microsoft Windows or Apple MacIntosh” said Mr Nalivayko.

This is certainly the right time to be going down this route.

Given that most of the investment management sector is looking not only at company stocks, but at funds and savings related products, as well as the matter that many banks, brokerage and fintech startups have been rallying resources to establish wealth management platforms over recent months, the viewpoints coming from London are yet more of a testimony to the need for FX and CFD brokerages to offer genuine multi-asset platforms and emulate the hedge fund sector.

Just a month ago, the British asset managers were looking at retail entrants into the hedge fund and managed accounts market.

Brian Dennehy of Fundexpert said last month “I would invest in International Consolidated Airlines Group (IAG) — British Airways in old money. This share, listed in London, should be a reasonably straightforward way to double your money in 2021.”

‘Why? Well, there is massive pent-up demand for holidays while IAG shares are an obvious target for investors looking for a brighter 2021 and who have a lot of cash to put into the market — be it retail investors, UK institutions, or global investors who are massively under-invested in Britain” said Mr Dennehy.

‘The big caveat, of course, is the virus taking a new and more dangerous path — so I would apply a stop-loss. I would sell the shares if they fall 15 per cent below my buying price — £1.60. So £1.36 and I’m out. But I’m confident I’m backing a winner” he said.

Jason Hollands of Tilney said “I would put the £1,000 in investment fund Fidelity Special Situations — via a tax-free Isa. It targets unloved and undervalued UK companies with bounce-back prospects — rather than those funds that are currently fashionable and trading on expensive valuations. I am convinced that 2021 — post Friday’s Brexit deal — will be a year of economic recovery in the UK.”

‘The UK stock market is undeniably cheap compared to other developed markets. It has had a terrible 2020, but it also has potential to be the star of next year, given it has big exposure to economically sensitive areas such as energy and banking that have been pummelled during the lockdowns” he said.

“The UK economy isn’t out of the woods yet and faces the challenge of high unemployment, but with coronavirus vaccines here, it’s almost impossible for things not to get better in 2021. Dividends, after being aggressively slashed this year, will start to rise again, as the vaccination programme rolls out. And people are itching to shop, socialise and travel after many months being caged up. Good news for the UK stock market. Good news for Fidelity Special Situations” said Mr Hollands.

Once again, a similar structure exists, albeit for a more complex type of trading, to that available within the FX sector, thus our seasoned executives in the electronic OTC trading business would likely find it an easy read across to get hedge fund clients on board, especially when considering a very prevalent perspective among hedge fund managers that managed accounts are super easy to audit. What are we waiting for?

Four years ago in Chicago, home to the world’s most prestigious listed derivatives exchanges, it was clear that some of the most important trading venues were looking toward the retail sector. This should have been something of concern to spot FX brokers.

One thing that has become patently apparent after several discussions with senior executives within Chicago’s institutional FX industry is that the finely honed technology that not only powers the leading edge exchanges and derivatives market places across the Windy City, but was indeed developed and operated by them, is now being taken into the wider audience, including the retail FX market.

Indeed, just five years ago it would have been unthinkable that a retail trader would be able to use trading systems and news feeds that have long been the preserve of proprietary trading shops and Chicago’s very own urbane and advanced exchanges, largely due to the prohibitive costs that such levels of advancements generate. Times are very different now, and with institutional firms looking at offering their own Tier 1 relationships down to retail traders and the ability for quality brokerages to use TraderEvolution Global’s infrastructure which is deployed on a per-broker basis, there is no longer a concern about fees and clearing costs for listed derivatives trading.

Quite the opposite. Brokers limiting themselves to b-book activity via OTC affiliate style platforms should be concerned at the loss of potential clients and that the top end of the industry is moving away from them rapidly as they stick to a legacy model.

CBOE Livevol demonstrated this clearly when it launched an Amazon style basket system for retail traders to buy its products via its market data website called Data Shop where the exchange offers clients the ability to customize an historical data set or data subscription with an Amazon-like shopping experience.

“The client can go online, create an account, customize in fine detail, pay for orders and receive an automated instruction on where to collect their data. All orders will be remembered, as will shopping behavior, and therefore it streamlines their shopping experience, in a similar way to how today’s consumers are used to this methodology with e-commerce sites such as Amazon” CBOE Livevol told FinanceFeeds during a meeting in Chicago in 2016.

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