Belgium became the first nation in the world to completely outlaw FX, CFDs and binary options. We take a look at how this will affect the FX industry and how the high quality firms will prosper via good ethics to ensure favor with the regulators in jurisdictions that matter
On Saturday, FinanceFeeds broke the news that Belgium’s MFSA has taken the drastic and unprecedented step of banning all leveraged FX, CFD and binary options products, including their sales and distribution, from the country in a complete and sweeping eradication of the retail electronic trading industry from its shores.
This is the very first example of a blanket ban on the trading, sales and provision of all electronically traded leveraged OTC derivatives on a national scale, and has been driven by the nefarious activity of binary options brands and the platform/market making providers that they use, as well as unregulated firms purporting to be FX brokerages when in reality they operate in a way in which no connection to a live market exists, and survive from the deposits made by clients – an activity which is highly illegal in the vast majority of regions.
Whilst the blanket ban by Belgium’s authorities has come about as the ‘last straw’ in order to protect customers from binary options fraudsters, as well as low-end firms from unregulated offshore jurisdictions, the effect is that this has now set a precedent that could easily be followed by other national regulators (probably France next) and actually whilst eradicating the con-men from their lands, the unfortunate byproduct is that the vast majority of the real industry participants, those with top quality execution, and run by the most highly experienced industry leaders in London, Sydney, New York and Limassol, along with the top quality prime brokerages that provide the best access to direct market liquidity and the integration firms that connect platforms to the live market, are made to suffer as a result of the lack of business ethic by those who are not really part of this industry.
Today, FinanceFeeds spoke to several highly respected FX industry leaders in order to gain their perspective on this, and how we, the real mainstream FX industry, can ensure a clear future for the best firms and maintain a good environment globally.
Speaking to FinanceFeeds this morning in London, Francois Nembrini, Global Head of Sales & Liquidity Management at Quantic Asset Management said “I would say that it is part of the general trend by regulators to restrict OTC trading. Whatever the structure of OTC firms, I believe regulators are pushing the retail business to exchanges step by step.”
“The trend is especially clear in the USA for instance where the CME FX volumes keep on growing while there is only 3 OTC firms left. I would not be surprised if the OTC retail industry disappears altogether under its current format in the years ahead” – Francois Nembrini Global Head of Sales & Liquidity Management Quantic Asset Management
Meir Velenski, CEO of Velenski Financial, a senior industry professional with over 25 years of international electronic trading experience, today explained to FinanceFeeds “If Belgium was as good and reactive toward its own domestic economic and security issues as it is now being toward the CFD and FX, markets, then such policies would perhaps serve the public somewhat better.”
“Secondly” continued Mr. Velenski, “The focus that the Belgian regulatory authorities have taken by categorically wiping out hundreds of millions of dollars worth of potential legitimate international trade with Belgium is causing collateral damage when the world is looking for minimal collateral damage with regard to politics, economy and world business”.
“Thus, Belgium’s policy is at odds with the global drive toward causing minimal collateral damage which is a cornerstone of business ethic and leadership in the developed world.” – Meir Velenski, CEO, Velenski Financial.
Looking toward other good quality jurisdictions that have successfully rooted out nefarious companies and engendered a very good reputation for quality regulatory structure, for example Australia, a nation in which the national regulator, ASIC, has an automated surveillance system that ensures real time monitoring of all FX and CFD firms, thus ensuring that the good companies prosper.
Today, Australia is a shining example of a region in which the FX firms that operate there are of the very highest quality.
On this point, Mr. Velenski stated “Would it not be wise to implement systems that monitor the activities of brokerages, rather than ban them all completely, therefore ensuring that the good quality firms prevail and serve the Belgian customers with good products. They could do well to copy the Australian model. The global economy is suffering to the degree in which people want flow of money, not to restrict it.”
“Global liquidity shortages are presently the main cause of global economic slowdown, and Belgium is doing the opposite to what is economically sensible by restricting the flow of money in Europe, therefore this draconian measure is affecting everyone” – Meir Velenski, CEO, Velenski Financial.
“At a time when banks are introducing flows of capital to sustain markets, Belgium has decided to counteract this which will result in more liquidity difficulties long and short term” concluded Mr. Velenski
From the perspective of an introducing broker, this dynamic and its potential expansion is also a consideration. Justin Hertzberg, CEO of ForestPark FX in Boca Raton, Florida, an NFA and CFTC regulated introducing broker, explained to FinanceFeeds today “While I was not privy to the Belgian regulator’s decision making process in banning all OTC FX and Binary Options trading, I imagine it was the unregulated and unscrupulous FX and binary options broker that let to this ruling. 10 years ago, the pie for online, OTC trading was expanding at a rapid pace.”
“Today that has slowed to a crawl. The regulated firms can’t afford to sit idly by and allow the criminal element in our industry to force sovereign regulators to make knee-jerk, sweeping reform that slams the door in our faces. I’m not sure of an easy fix or solution to this issue, but I would start by requiring every OTC binary options broker to be regulated in at least the jurisdiction in which they operate” – Justin Hertzberg, CEO, ForestPark FX
It also could be that a blanket ban is against MiFID rulings, and should a broker conduct a lawsuit against the MFSA, it may be upheld.
This reopens the same discussion that continues to permeate the boardrooms of the FX industry’s senior leaders, that being whether FX will go on exchange or not.
Perspectives vary tremendously on whether this may occur as a result of regulatory force – it certainly will not be down to choice.
It is hard for many leaders in this industry (outside of Chicago) to comprehend a situation in which compulsory execution on exchanges would be required.
FinanceFeeds has explored the notion that should this occur, it would not be conducted in the same way that large venues interact with their commercial clients because the exchange membership and clearing fees on major venues such as ICE, NASDAQ or CME would run be prohibitive as margins are already very narrow among many retail firms without being subjected to membership fees of over 500,000 and vast monthly clearing and reporting fees.
Instead, a ‘virtual exchange’ could be used, deployable in the same vicinity of the retail firm connected to it, operated by a large company such as one of the aforementioned exchanges – these are, after all, market infrastructure technology providers and the development of something cost-effective and infrastructure-light would not be outside the realms of reasonably priced development and operating costs.
Whilst infrastructure would require complete re-engineering, this method would eradicate all bucket shops and binary options firms whose non-connectivity to price feeds and profit/loss execution model has led to Belgium’s blanket ban on OTC FX, CFDs and binary options.
In June last year, Marc Spaelti, COO at Dukascopy Bank SA discussed this with Andrew Saks-McLeod 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.”
That is absolutely correct indeed, however it relies on the onus with regard to best practice being on the brokerages.
As MetaTrader continues to head toward futures exchanges, integration and best execution is the key to good OTC business
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.
These companies enable the entire retail market infrastructure to operate between the liquidity firms, the institutional FX giants, an London’s Tier 1 interbank FX dealers.
The good quality brokerages across the world are reliant on such firms, in the same way that the large corporate belt-and-braces exchanges of Chicago depend on their own connectivity technology and dedicated institutional futures platforms. 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.
Andrew Ralich, CEO of oneZero recently highlighted to me in a meeting in May this year 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, FinanceFeeds spoke to more executives 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.”
Indeed, other asset classes are continually being integrated into retail trading platforms, notably MT4 which means that retail traders can access exchange listed commodities without having to pay vast membership fees.
“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
One good thing that can be taken from Belgium’s all-encompassing ban of all leveraged OTC derivative products is that the good quality components of this industry, those being the top quality brokerages, the technology providers, integrators and liquidity firms have the comprehensive market understanding and wherewithal to adapt and evolve the trading environment so that it prevents any regulatory question as to the means by which execution takes place, whereas the nefarious firms do not. There is a huge difference between the firms that we know and love, and those who are operated by upstarts who cut their teeth in the gambling and affiliate lead buying businesses.
Onwards and upwards indeed, especially for the upper echelons of the brokerage industry.