For brokerages approaching the APAC region, as well as those with existing presence, liquidity provision is paramount. We look at how to get this aspect right, and how liquidity providers and brokers can forge business relationships that suit the rapidly developing APAC region from platform to execution
The Asia Pacific area of the Far East continues to be very much a region of great importance to the electronic trading industry, largely due to its sophisticated infrastructure, vast and astute potential client base and youthful, determined population with a massive drive toward investment and prosperity.
Asia has attracted the interest of Western retail FX brokerages wishing to develop their business not only in the very closed but highly lucrative (if approached properly!) Chinese market, in which introducing brokers in second tier development towns such as Shenzhen, Guangdong and Zhengzhou are operating from luxurious offices with 100 staff and full brokerage facilities including portfolio management whilst conducting over 90,000 lots per month by using Western brokerages for dealing functionality only, but also in rapidly developing Indonesia, Malaysia, South Korea and the Philippines, as well as the highly developed financial powerhouses of Hong Kong and Singapore.
As lucrative as this may be, brokerages angling their product range and services toward a client base in the Asia Pacific region have had to learn and bear in mind very significant differences between evolved Western markets and their steady but established nature and the huge, high volume, frenetic, fast paced yet fresh and undeveloped nature of FX in South East Asia.
Not only do brokers have to bear in mind the differences in marketing their products in such regions, but also may have significantly different requirements from their liquidity providers for entry and success in the Far East to be possible and sustainable, ranging from how trades are executed, to where the servers are hosted, to what asset classes can be delivered via which platform under what conditions.
FinanceFeeds took a close look at this, today speaking to several industry professionals with regard to this matter.
Local or overseas?
Today, FinanceFeeds spoke to Itai Damti, Managing Director for the Asia Pacific region at Leverate. Leverate is a Western company that compares with other local firms such as Monex in Indonesia for liquidity provision and broker solutions, therefore it is interesting to examine what the differentiating factors are with brokers in Asia compared to the West with regard to what they require from their institutional service provider.
Mr. Damti explained “The APAC region is very fragmented in terms of regulations, cultures and the maturity of local markets. That leads to different preferences in the area of liquidity. The most established and well educated FX scenes in the regions are those of Australia, Japan, HK and Singapore.
“Brokers in those countries have seen numerous black swan events and therefore pay serious attention to safety of funds and reputable liquidity providers.”
“In China, another important territory for FX trading in APAC, the scene is still emerging and rapidly changing. Some brokers care less about the history and regulation of the LP, and mostly seek high leverage that they can pass on to their retail clients. But most brokers now learn to look beyond leverage and learn to ask the important questions about (1) safety of funds (2) quality of execution. The latter is especially important considering the size of the money management market (MAM) and the vast use of MT4 EA’s by traders in China” – Itai Damti, Managing Director Asia Pacific, Leverate
The MetaTrader 4 platform has been a mainstay in the Asia Pacific region for quite some time, largely due to its compatibility with Expert Advisors (EAs) which are automatic trading robots that are often configured by retail traders themselves. In many parts of the Far East, traders do not manually execute trades at all, favoring completely automatic trading via EAs.
In almost the entire region with the exception of Japan, where trading is executed manually and often via proprietary platforms and is not a relevent market for any broker or liquidity firm outside Japan as the entire Japanese market, some 35% of the entire global retail FX business, operates domestically in terms of platform development, liquidity provision, trade execution, all provided to a domestic client base.
The $10 million white elephant – Japan
Western brokerages that have attempted to establish presence in Japan have often come back with no market share and a very expensive business development bill after attempting to gain traction within the giants of the retail FX industry by attempting to climb the hierarchical and rigid ladder which is deeply ingrained within Japan’s business culture.
Examples of this are application-led retail trading platform Tradable, which regardless of its extremely interesting and advanced technology, did not make it in Japan after MONEX Group canned it. The company, led by Jannick Malling with a very strong leadership from experienced wholesale liquidity provider CFH behind it, courted the Japanese market for more than two years at the inaugural stages of its existence which in the end quite simply was not enough.
Marketspulse attempted to go this route with its binary options platform at the time during which the Financial Futures Association of Japan (FFAJ) issued its regulatory framework for binary options products.
At that time, in 2013, FxTrade Financial and Planex Trade beecame potentially vast customers for the platform provider, neither of which really came to fruition, and since then, many of the firm’s senior executives have left the firm including CEO Rachely Esman and co-founder Shai Hamama, two of the platform industry’s most highly technologically savvy professionals, instead installing Mickey Winitsky who hails from the gaming industry, thus demonstrating that attempting to penetrate Japan’s highly advanced electronic trading sector had proved too much of an uphill struggle for a non-Japanese company.
FinanceFeeds has conducted substantial research on the cost of attempting to penetrate what has been proven to be an impenetrable market and taken into account development costs and the opportunity cost of not gaining traction, and for a new platform or technology provider to attempt to establish operations and then spend two to three years courting the Japanese firms with no success would cost approximately $10 million.
In China, things are somewhat different as hosting, latency and platform speed all matter
Speaking to Yuhan Mo, Head of Operations and Marketing for the Asia Pacific region at Advanced Markets & Fortex recently during a meeting in Boston, Massachusetts, it was explained that success in Asia and being able to support brokerages there via technology and platform stability is a critical consideration for liquidity providers.
We have a hosting facility at Equinix’s HK3 data center, and can assist with the setting up actual brokerages in the region and help those brokers efficiently expand into China.” said Ms Mo.
“Most traders in China experience platform freeze and latency when operating without this type of technology infrastructure. It’s important to remember that China’s censorship and firewall systems interfere with internet speed within the country, primarily due to the extra layers within the internet between China and the “outside world”. Because most brokers host their servers either in Europe or US, Chinese traders are having hard time getting a stable connection to their brokers trade servers and are often exposed to intermittent price interruptions and loss of trades, especially during volatile economic data releases”, continued Ms. Mo.
“These days, execution speed is more important than ever, as many sophisticated Chinese traders and money managers are using automated trading systems to transact their orders. As a full service provider to FX brokerages, we can provide powerful solutions to these very real problems, allowing firms to build their business on a solid foundation.”
“Normally, a trade order is routed from China to either New York or London due to fact that most bank pricing/liquidity originates at NY4 or LD4 data centers.
Chinese firms are often hosted with second and third tier ISPs and there have been many instances in the past where orders been dropped because of an internet connection time-out or because the connection is either unstable or blocked during important economic news releases.
Our cutting-edge infrastructure overcomes these issues, and we are further adding to our capabilities by implementing an additional dedicated line from Hong Kong’s HK3 to New York’s NY4 datacenter.” – Yuhan Mo, Operations and Marketing for APAC, Advanced Markets & Fortex.
Region specific preferences are as commonplace in the FX industry as they are in other technologically advanced business when considering an Asian audience.
In Hong Kong, for example, Asia’s second largest financial center after Singapore, gold bullion trading has a substantial presence and, as with FX in Japan, is very central to Hong Kong’s domestic business.
Bullion trading outside Hong Kong has been attempted by certain firms, but with very little traction as recently exemplified by Australian company Bullion Capital’s closure of its Cyprus entity whilst FX firms in Cyprus go from strength to strength.
Prime of prime brokerage Sucden Financial understands this clearly and whilst it operates an eFX business from London, its Hong Kong division covers eFX prime brokerage solutions as well as bullion.
FinanceFeeds met recently with Raymond Mok, who heads Sucden Financial’s Hong Kong operations.
Mr. Mok began by explaining the background of Sucden Financial’s Asia Pacific business. “Sucden Financial HK Limited is licensed by the Securities and Futures Commission (SFC). We focus on B2B business and provide customized solutions to our clients. We have very stable platforms and can provide tailored solutions according to a broker’s need; therefore brokers stay with us through their growth period and beyond.”
“Hong Kong attracts a lot of capital from all parts of the world, as it is seen as a reputable place to invest. As a result of the more international nature of Hong Kong, we actually get a mix of competition, prospects and customers from the West, however we also get the same mix from China itself” said Mr. Mok.
Hong Kong as an institutional FX base
“Our focus in Hong Kong is on the institutions and the corporate side of things” said Mr. Mok. In China, there are a few private funds that would require access to trade FX outside of the mainland, and Hong Kong is the place where they look to find the liquidity channel.”
“Bullion is very popular in Hong Kong, therefore keeping a good quality multi-asset solution accommodating both FX and bullion on one platform” – Raymond Mok, Sucden Financial (HK) Ltd.
Being in Hong Kong, Mr. Mok understands that Sucden Financial HK is able to capitalize on this.
As far as the size of brokers that approach Sucden Financial HK for liquidity solutions in the Asia Pacific region is concerned, Mr. Mok explained that the firm looks for specific parameters when onboarding a brokerage as a corporate client.
“We do look for specifics. Preferably, we like to see that the firm has a Hong Kong licence. There are a lot of large retail brokerages which by definition have vast client bases, both here and in mainland. We provide a prime-of-prime service with pricing and liquidity that aligns with these brokers” concluded Mr. Mok.