Think of an IB that trades up to 90,000 lots per month. In Zhengzhou, this is normal – Investigation direct from China

Many FX dealers dream of finding just one IB which manages client funds with such vigor that 40,000 lots per month are traded.

However, here in Zhengzhou, a city of 10 million people in the Henan province of China, approximately 5 large introducing brokers are referring business to large FX brokerages overseas.

Today, FinanceFeeds looked closely at the method by which an FX firm should approach an IB based in what could be deemed as ‘real China’, away from Shanghai which is increasingly populated by western FX brokerages, and plays host to FX industry conferences with participants from around the world.

Zhengzhou is a one and a half hour flight from Shanghai, and is a burgeoning financial center, as well as being the provincial capital. Its location is indeed prime for IBs wishing to tap into the young ‘new money’ in the province, of which there is a tremendous amount, however western brokers wishing to approach these established IBs in this region should bear in mind a few caveats.

How to engage the IB, and address the many reservations

Meeting with a very young CEO of an introducing brokerage which provides direct retail business to FXCM and Blackwell Global but also, rather unusually, has its own dealing platform for retail customers in addition, FinanceFeeds noted that once a deal is cemented and the infrastructure is in place and has been proven to be accepted as reliable by the IB in terms of being able to process client payments to send funds directly to the broker (ie getting the money out of China directly to a brokerage’s client funds account), reliability of withdrawals and security of funds are still right at the top of the list, due to the lack of transparency created by the ISP blocks imposed by the Chinese government.

Many end users do not know or have any regard as to which brokerage is actually providing the FX dealing service, which execution model is being used, or where the payment gateway is sending their funds, as they are totally reliant on the IB for all customer facing and trading matters.

In the provincial regions, a particular ritual takes place among IBs when meeting a new brokerage for the first time. Specifically, politeness, manners and a poker-face which does not leave a residual feel as to whether a deal can proceed or not are the order of the day.

Meetings are never conducted in meeting rooms or in front of presentations which show the company’s trading prowess, commercial performance or business model, but instead in often palatial offices several floors above the Yellow River, on a luxurious sofa with an elegant wood and marble table with built in tea-making equipment. There is always more than three representatives of the company, however only the CEO or owner marks out his position, the others remaining modest and providing a constant flow of fresh tea in traditional Chinese cups which can be sipped, however there is much more to this than straight forward politeness.

The quiet scrutiny which brokers must undergo is almost uniform throughout the entire provincial IB business here in China. Those serving tea during the meeting are often senior executives and part owners with a strong vested interest in the business, who are there as a second an third pair of eyes and ears, ensuring that all is above board, as the fear of not placing the clients’ funds with a reputable brokerage is of great concern to such entities.

What’s the bottom line?

Yesterday, FinanceFeeds reported from Shenzhen, in Southern China, on the Hong Kong border, where the result of researching IBs and money managers in the area was that a company with approximately 10 to 15 staff which provides direct IB business with no portfolio management takes approximately $8 million in deposits per year, and is remunerated at a value of between $600,000 to $1 million per year in IB commissions.

In Zhengzhou, things are somewhat larger, and portfolio management is far more commonplace. The remarkable figure is the amount of lots that are being completed by trading desks in the City. Some small offices are producing between 50,000 and 90,000 lots per year which is sizable order flow by any international standard, let alone from once-rural provinces in the People’s Republic.

Bearing in mind the shrewd and considered nature of IBs in Chinese provinces, it is not easy to gain that business. Many will have discussions between themselves afterwards and remain loyal to their existing providers, which can be a barrier to brokers without a large capital dedication toward travel to actually visit these companies and build up a solid relationship, which could mean several trips from Cyprus, UK, or Australia to China with an interpreter with industry knowledge before any deal is signed, let alone commencement of order flow.

For those who have invested the resources and effort in local presence, and taken the time to understand how to work closely with Chinese IBs, and look beyond the shining lights of The Bund at Shanghai, no matter how spectacular it is, the results have indeed spoken for themselves.

This is a land of absolute boundless opportunity – turning the opportunity into reality, however, is a deal harder.