Exclusive: FXCM veteran executive of 10 years who built the firm’s CFD desk founds outsourced risk facility for brokers

In January this year, a further example of the direction toward consolidation of specialist companies within the institutional FX sector took place, this time manifesting itself in the form of the risk management unit of IS Prime, IS Prime Risk Services Inc, acquiring the assets of renowned North American risk management service providers for brokers, Think Liquidity.

In keeping with FinanceFeeds predictions for 2017, this transaction represented a further example of the rise of the non-bank prime brokerage and liquidity provider, as well as the FX industry’s remit in continuing to expand via mergers and acquisitions in order to encompass a fully comprehensive commercial structure.

It also, however, brought a new consideration to light, that being the requirement for brokerages to have their own dealing desk in the future may become obsolete, especially in light of the new MiFID II requirements which, when implemented in January 2018, will require all financial derivatives entities, including what ESMA dubs ‘systematic internalizers’ (SIs), those being firms that deal on their own account and with whom customers treat as a counterparty via their own dealing desk, will have to report post trade data publicly.

Adding an extra cost and function to smaller brokers such as this means that by outsourcing a dealing facility, the reporting responsibility is also outsourced.

Additionally, brokers can now go to specialist liquidity providers and prime of prime brokerages such as ISPrime and take a full solution including risk management.

Today marks another move in this direction, with the foundation of a further specialist risk management company, this time led by Larry McGonegal, who spent ten years at FXCM’s New York head office as an FX and Futures trader, working closely with Eduard Yusupov, Chief Dealer and company co-founder.

Mr. McGonegal spoke at length with FinanceFeeds today in order to detail the new venture, which has been inaugurated under the name of Setter Trading and is based in Greenwich, Connecticut.

Where did it all start, and why is risk management expertise critical?

Taking a look back at his specialist expertise in this sector, Mr McGonegal explained to FinanceFeeds “I began in the business with FXCM back in 2003 and I worked there for just under 11 years, based in the New York office. We started out at 11 Broadway, then moved to 32 Old Slip and lastly to the current premises at 55 Water Street.”

“During my time there I was Head of CFD Trading and I reported to Eduard Yusupov” he explained.

“My current partner, Brian Griffin, was hired by FXCM CEO of the time Drew Niv in 2007 and he and I built the CFD desk and ran it until we both left in 2013” explained Mr. McGonegal.

Mr. McGonegal moved to Argosy Partners, a firm which provides risk-management and liquidity services for foreign exchange brokerages with offices in Hong Kong and New York, leaving shortly afterwards to found Settler Trading.

“During our time there the CFD desk grew very rapidly and was responsible for a large portion of FXCM’s revenues, as well as P&L so I left in 2013 to start an outsourced risk management firm (Argosy Partners) and then this week Settler Trdaing has now come to fruition” he said.

Reflecting on his experience at FXCM along with his partner Mr. Griffin, Mr. McGonegal views his team’s abilities as very in depth, having set up some of the largest and most successful risk desks in the world, and having accrued decades of collective experience doing so.

When asked by FinanceFeeds to elaborate on the ethos of the company and it functionality in the retail FX business, Mr. McGonegal said “Our website has gone live today, and the company is called Settler Trading. We provide outsourced risk management, liquidity management and we have structured our offering to be able to provide solutions for all a brokers risk or liquidity needs as we understand that every broker has a different set of needs and we cater to them all.”

“My partner Brian Griffin has also run teams and set up regional offices for CMC Markets before he joined FXCM, and was a member of senior management at the firm for some time” he said.

What is the price structure and the type of firm that Settler Trading would seek to onboard as a client, and what is the advantage of them outsourcing their trading desk?

“There are multiple ways we can structure deals and we have different deals with all our clients” explained Mr McGonegal.

“Typically we do one of 3 things, those being to offer either a flat fee, or a percentage of profits, or a mixture of the two depending on what works best for the broker. I think the advantage of using us is twofold, the first is gaining the experience of a world class dealing team (most of my employees worked for me at FXCM as well) and also using us allows brokers to cut costs as they do not have to worry about headcount, insurance costs or any other costs associated with having a large dealing staff on their own books” – Larry McGonegal, CEO, Settler Trading

This moved the subject onto what has become very much a moot point in recent years, that being trade internalization. FinanceFeeds asked Mr McGonegal what his overall perspective is with regard to trade internalization and how brokers should or should not warehouse the trades of retail customers.

“I find that most brokers have at least some business that makes sense to have internalized, however, every book of business is different and some have a lot more of this type of flow than others” said Mr. McGonegal.

“With our experience in seeing this kind of trade flow over the years we are able to identify this very quickly to ensure the brokers are operating as profitably as possible. Additionally, the STP flow we see also has to be sent to the correct liquidity provider, as we understand clearly that no two liquidity providers are the same either. We have extensive liquidity relationships that ensure both the A and B books are being efficiently maximized” he said.

When asked who those relationships are with, Mr. McGonegal exercised discretion, however he did say that this consists of over ten brokers.

“In understanding this model, FinanceFeeds recounted to Mr. McGonegal, asking if this means that Settler Trading can adjust whether to send orders to liquidity providers or to internalize them, with the brokerage using Settler Trading’s services outsourcing that decision.

“I work with the broker to determine which liquidity provider makes the most sense for thier business or just use their current liquidity provision structure as some brokers do not like to change but we have a network of liquidity management solutions should the broker need that” he concluded.

As FXCM finally reaches its NFA regulation emasculated nadir, a further talent pool has been released into the fold which may well bring further ancillary services to fruition based on the solid proving ground that FXCM provided. Let’s watch this space!