Now that the cost of clearing and membership appears to have been overcome, we take a very close look, with insights from the innovative leaders of the industry, at how exchange traded US futures could be the savior of the ultra-competitive MT4 brokerage structure.
Cold, hard figures. That is what retail FX brokerage is about these days. Outside the United States, the average deposit amount is $3,300 per client during the entire trading lifetime of said client.
The average length of time that a new trader spends in retail FX is six months. The average cost of acquiring such a client is between $1,200 and $1,500, unless you are Plus500 which has got acquisition efficiency down to a fine art, in which case it is between $800 and $1,000 per new client.
The costs of operating a facility which houses sales and retention staff, requires the payment of per-square-meter office rent and business rates, plus salaries, which FinanceFeeds calculated recently, are all vital considerations when operating a retail FX firm.
Remuneration of IBs, supporting partners and customers, and maintaining a proprietary platform (approximately $150,000 per month excluding development costs) or paying volume costs to MetaQuotes or a white label solutions provider whilst taking into account the very low spreads on the major currencies and keen commissions that IBs and traders demand, all make for a business in which even the least astute accountant would spend all day nickel-and-diming the company’s executive team.
There is, however, a way to mitigate this and to retain not only good quality global market share in that ultra-competitive spot FX arena, but to have the breathing space to be able to develop further asset classes, execution methods and attract traders that have far higher average deposit amounts, much longer lifetime values and less leverage, therefore creating a very sustainable environment and a ‘cushion’ with which to be able to invest resources into providing a good trading environment for spot FX customers (core business) and a quality execution model.
Just one year ago, the mere suggestion that a diversification toward exchange traded futures via a retail platform would be viable would have resulted in many a furrowed brow.
In June last year, Marc Spaelti, COO at Dukascopy Bank SA discussed this with me at a meeting in Geneva, Switzerland. Mr. Spaelti understands the infrastructural requirements within institutional banking in Switzerland, having spent several years at Swiss Banking Corporation, as well as having led the establishment of retail brokerages and the supply of white label solutions to broker partners.
Mr. Spaelti said “In the infancy of electronic FX trading, many brokers saw that exchanges were somewhat expensive, could be inefficient, and did not contribute an OTC market that had huge amounts of liquidity, and this view was held for a long time.”
With the Swiss National Bank event having happened last year, and the ongoing fragmentation of the market which constitutes a proliferation of non-bank liquidity providers, and the idea of a central exchange model perhaps has some merit if it could be made cost-effective.
Mr. Spaelti said “I am coming a bit from the other side, having a background in investment banking, trading spot FX over the counter for years, I quite like the diversification that we currently have with each bank effectively free to quote their prices to their clients, I see some problems of course that the FX market being a global market, as to where to place these exchanges.”
“There may also be difficulties associated with size, as the FX market is so vast, in which trillions of dollars are traded every day, and I’m not so sure that an exchange could so easily handle that, and then there is the question of fees and who is actually going to own these exchanges” – Marc Spaelti, COO, Dukascopy Bank SA
At this point, the subject of a virtual, dedicated exchange was invoked, emulating an exchange and perhaps operated by an exchange provider, or indeed a non-bank infrastructure or liquidity firm was brought up as it cannot be capitalized under the current model of exchange systems.
Indeed, Divisa Capital introduced an OTC exchange called OTCX which is an electronic exchange built by FastMatch without a physical venue, has very low fees, does not have a physical presence but will act as a type of central point between two parties.
With regard to how this type of system may function, FinanceFeeds spoke to Ryan Gagne, of Divisa Capital, who explained “Under this type of system, the central counterparty will carry out credit line & trading approval processing, much the same as if it were a bi-lateral arrangement but in this case, all parties only have to carry out this process once and when a new PB comes to clear business for a new client to OTCX, there is only one firm, the central counterparty, which has to do anything.”
“This type of system would be a big relief to all the other prime brokerages on the platform, and additionally, it centralizes counterparty risk on OTCX and over the past 8 or so years, this is something everyone has to pay attention to. Since some platforms are US hosted, all of their business globally is matched in one location so all of their business globally is being competed for with a US matching engine, for example Currenex and Integral” Ryan Gagne, Sales, North America at Divisa Captial UK
“Other firms that have realized that regional matching engines are more efficient for end users or as I like to call them, participants” he said. “US based clients can still trade abroad to facilities like LD4, BATS/Hotspot made that realization and have made strides to come up to speed” he concluded.
The sheer cost of operating via a major executing venue would also have been prohibitive. In Chicago, it is quite common to pay $500,000 membership fees to major venues and then vast clearing and post trade processing fees, thus putting exchange traded futures out of the scope of many retail brokers.
But not anymore
Integration companies which connect retail platforms to the live market are at the absolute forefront of the evolutionary process of trading platforms and the retail trading environment.
Not the liquidity firms, not the institutional FX giants, not London’s Tier 1 interbank FX dealers, not the brokerages themselves and not the large corporate belt-and-braces exchanges of Chicago. The ability to enhance and further the trading environment lies almost inextricably with the bridge and integration providers, and that can be narrowed down to three companies, those being Gold-i, oneZero and PrimeXM.
In Chicago, the heart of the exchange traded futures sector, I met with Ryan Hansen, President of Tradovate who explained how the capitalization of futures platforms that are aimed at retail traders can be monetized. Mr. Hansen explained “We don’t charge a trade commission nor do we operate on a cost per million basis. Instead, we charge a monthly membership fee, rather like online portals such as Amazon Prime or Netflix.”
“There used to be a reason that this was done differently in the past, as used by firms that operate a commission model. The old way of doing business where a human touched every aspect of an order at multiple stages is no longer relevant, it went through a process in which a customer called a broker, then the broker called the trade desk, then the trade desk called the trading floor, the trading floor then transacted the order potentially with a market maker. The trade was then reported back. This required a lot of manual work” explained Mr. Hansen.
“With electronic trading, the costs created by the manual element are no longer the case.”
“For example, 1,000 contracts could be executed, or just 1 contract could be executed, and there would be no extra work for either scenario.
“Traditional brokers charge a commission on every single contract. What we are providing is a means by which we impact value the most for customers. We therefore charge a membership fee that covers the technology cost and the brokerage in one.”
In terms of connectivity to venues, Mr. Hansen confirmed that Tradovate is connected to CME Group (which includes CME, CBOT, NYMEX and COMEX), ICE US & Europe, and Eurex derivatives exchange.
With this in mind, the question began to surface among industry innovators as to how this model can be incorporated into MetaTrader 4, thus making matters very cheap and very effective for retail brokers wanting to attract a longer term client base with higher deposits and much less risk.
This is now very much in effect.
The dynamic began with MetaQuotes having gained substantial traction among emerging exchanges in the Middle East such as DGCX (Dubai Gold and Commodities Exchange) which now has 10 firms connected to its executing venue, using MetaTrader 5 to execute futures contracts, mainly on the Indian Rupee.
That is all very well, however DGCX cannot be compared to the institutional electronic venues of Chicago such as CME and ICE.
However nowadays, things are changing because for the very first time ever, with the assistance of highly advanced integration technology from oneZero, DirectFX has connected to futures exchanges and is offering a US futures trading facility which is actually integrated within MetaTrader 4.
Think about this: This brings previously out of reach trading of futures on America’s esteemed electronic exchanges into the realms of the retail trader and within the budget of the retail broker.
Yesterday, FinanceFeeds spoke to Tim Brankin at DirectFX who is a pioneer of this methodology. When he was at TradeTools FX, Mr. Brankin demonstrated to me the first fully integrated exchange traded binary options solution which was fully integrated into MetaTrader 4 during a meeting in Shanghai, China in December.
Mr. Brankin, alongside oneZero, has taken this further and DirectFX is now able to lay claim to being the first MetaTrader 4 provider to integrate US futures into the MetaTrader 4 platform.
Futures traders are often experienced and have portfolios of investments, their average deposit sizes being $50,000 rather than $6600 (US) and $3,300 (non-US) with much less leverage and much less likelihood of disappearing after three to six months.
Andrew Ralich, CEO of oneZero recently highlighted to me in a meeting about how to enhance the cause of connectivity: “Will the legacy aggregators such as FlexTrade, Currenex and Integral Development Corporation be able to engineer their services to cater all the way downstream to the retail broker, or will the providers such as oneZero, PrimeXM and Gold-i which have grown up in the retail space, be able to adapt to this specific institutional functionality to be able to move upstream for their clients?” This latest dynamic is a case in point.
With regard to where this will lead, I spoke to those at the very leading edge of connectivity and integration, those being experts in the integration of MetaTrader into trading facilities, with Tom Higgins, CEO of Gold-i explaining “There are 1000’s of trading venues in the world and therefore MetaQuotes will need to continue to work with trusted partners like Gold-i to integrate with them. After FX and CFDs, commodities are a very interesting proposition for retail and High Net Worth Individuals to trade in as they have the necessary characteristics of high volatility, deep liquidity and global access.”
“Gold-i has already integrated commodity products into MT4 but due to the limited number of symbols that MT4 can offer they have never been as popular as I thought they should be. MT5, however, does not that this limitation, and so commodities as well as other on-exchange Futures products should prove to be very popular on MT5” – Tom Higgins, CEO, Gold-i
Looking toward the future of this dynamic, Mr. Higgins said “We are currently in the process of porting all of our MT4 Bridges to MT5 and will certainly be looking at adding more commodity products as time goes by.”
Andrew Ralich, CEO of oneZero explained to FinanceFeeds “We are seeing an increased demand from our clients for MT5 connectivity to both FX and Exchange venues.”
“We have been working closely with MetaQuotes to integrate our Hub to new partners and liquidity venues that take advantage of MT5’s ability to handle DOM, exchange traded instruments and complex CFD setups” – Andrew Ralich, CEO, oneZero
Yesterday’s revolutionary partnership between DriveWealth, DirectFX and oneZero indeed shows that this is now coming to fruition.
“oneZero is pleased to be chosen as the access point for providing exchange traded equity products via DriveWealth on MetaTrader4. We have seen global demand for access to equities and futures markets via a well-recognized trading platform like MetaTrader4. The performance, stability and flexibility of our Hub solution, alongside the execution and clearing facilities provided by our partners in this project, represents a unique value proposition for retail brokers.”, said oneZero’s Mr. Ralich yesterday.
Will this reopen the debate as to whether FX will go onto exchanges?
Last year, a lot of discussions took place regarding the possibility of FX going onto exchanges. Many industry executives considered this a possibility, however the cost of membership and clearing fees would run into millions of dollars per year, and render the whole aspect not viable for retail FX firms.
Last year, whilst in Chicago, I considered that there may be a possibility of some of the exchange technology companies in the Windy City making dedicated virtual exchanges available purely for FX, in which prices could be centrally recorded for reporting purposes and no counterparty could be taken by a retail brokerage, such as a bilateral system operating at a fraction of the cost of a major electronic venue.
This has not happened as yet, however with Tradovate now providing a commission-free exchange-connected futures platform, the foray may well be here.
On this subject, Ryan Hansen, President of Tradovate explained to me “There has been a pull from constituents that are central clearing components to adopt an exchange-traded methodology for retail electronic trading firms, however it is not certain whether it will pull through or not. It would have a negative impact on the FX brokers due to the costs if this were to happen.”
“Futures trading on a retail electronic platform via exchanges is sustainable as the average deposit in futures is much higher than that of the average FX trader” said Mr. Hansen.
“This is because with futures contracts there is not a smaller sized component like there is in FX with its mini or micro lots. The margin requirements therefore necessitate a higher account size” – Ryan Hansen, President, Tradovate
“I am of the belief that exchanges provide a valuable service. Does it warrant what they charge? That is an interesting question. We need to hear more from traders on this. Currently we do hear a lot from traders on this subject, and in doing so we hear both sides of this, from the customers and the exchanges with regard to fees” he said.
Attractive to OTC traders due to spreads and ability to view limit order book on exchanges
This addresses the brokerage side of the equation which is typically over half the fees that would incur on transaction cost is now eliminated. The membership fee provides a fixed cost for unlimited, commission-free transactions per month.
“We want to reduce the cost for active traders” – Ryan Hansen, President, Tradovate
“As far as the existing market is concerned, we want to provide active futures traders a means by which they can reduce cost” said Mr. Hansen.
“OTC FX trading is quite different. Exchanges like the CME have FX futures, which we offer in full and mini and micro lot sizes. We would love to have people who currently operate in the OTC space that maybe want to trade on exchanges. In America, futures trading is very popular popular and we can extend this to a wide audience.”
Compared to OTC futures contracts, in particular CFDs, the spread is tighter on exchange-traded futures, and also the trader can see the limit order book because some exchanges provide depth of market up to 20 price levels. CFDs, being OTC, have wider spread and the trader cannot see the depth of market.
Innovation is what Chicago’s leaders are all about
Here in Chicago, just a few hours before the FinWeek financial technology conference begins, it is fitting to see Tradovate’s innovative ethos.
Mr. Hansen said “Now that our new solution is live, we are offering trials, and have had a tremendous response so far. The mobile apps are now ready, with the Android application live already, and the iOS application being launched very soon, we have further innovations in the works.”
”We are looking to hear feedback as to what features need to be further developed on the platform. We have been in the space for over 15 years, and have constantly collected data that helps us design what customers want” – Ryan Hansen, President, Tradovate.
Quite clearly, this is the first step toward redressing the issue of low margins, low lifetime value and high acquisition costs compared to deposit amounts, which is a welcome innovation indeed, and in my opinion, a vital one.
Featured photograph: Michigan Avenue, Chicago. Home to the world’s largest futures exchanges. All photography copyright FinanceFeeds
#mt4, #platform, #US futures