There is an evolution within the OTC derivatives sector, and it is most evident that the most recognized FX service providers and institutional vendors are maintaining their remit to continue an evolutionary stance which has marked the OTC sector out as an innovator across all aspects of this business. We speak to those at the very top on what the important components of the business will focus on this year.
As 2017 drew to a close, it gave way to a new era for the electronic trading industry, in which dynamics that would have never been considered due to their inexistence and irrelevance just a year ago have now become major features across several sectors.
From prime of prime brokerage to technological development and market integration, every aspect of the business faces very new requirements this year, ranging from the all-encompassing MiFID II regulatory infrastructure directive in Europe, to the demand for virtual currency trading facilities and price feeds, the focus has moved from the difficulties in obtaining counterparty credit by OTC firms last year to conforming to new requirements.
At the end of last year, FinanceFeeds concurred that 2018 will be excellent for the established and high quality companies.
It is our view that 2018 will be a year of growth and for their prestige and ability to shine. Conversely, it will be a year which will show the low end exactly where to go, and will expose the danger of follies such as ICOs, and various crypto-bandwagonism which is not part of this industry.
We have examined each sector of the business, and what to look out for in 2018, and this week spoke to a select group of senior FX industry professionals across all sectors, all of whom are widely renowned leaders from institutional prime of prime brokerages to specialist FX platform integration companies.
Here is the view from the top on what to expect in 2018.
Jonathan Brewer, Managing Partner, IS Prime
In terms of the industry, the key challenges for the year ahead relate to cryptocurrencies, volatility, regulation and Brexit. In terms of IS Prime, our biggest challenge is to distribute our products into new regions. We have been very successful in those regions where we are currently established but we are keen to break new ground and maximise global growth opportunities.
The big question is: are cryptocurrencies here to stay or will the bubble completely burst? If they stay, will flow migrate away from FX and CFDs to cryptos? And what will happen with Cryptocurrency Futures?
When it comes to trading, brokers need to consider what risk model to run (does the counterparty and security of funds risk associated with hedging outweigh the market risk of simply internalising?). IS Prime has a sustainable Bitcoin offering. We kept pricing clients even when others were backing away, and we will continue to do so for clients with whom we have a strategic relationship.
Hopefully this year will bring some volatility back into the market, after a relatively boring 2017. If volatility remains relatively stagnant, it will remain challenging for the whole market to generate particularly exciting volumes.
Although we’ve been operating in a somewhat challenging market over the last year, we are very pleased with IS Prime’s performance and see no reason why our growth isn’t set to continue.
We had our second biggest day ever on Wednesday, with a quarter of this volume from clients we have on-boarded over the last couple of months. We also had a record day on Index Swaps. We believe we were the fastest growing Prime of Prime in the industry over our last financial year and we are feeling very optimistic about our continued growth as a market leader in 2018.
2018 is likely to see increased scrutiny from regulators, with the obvious challenges that this brings. Much of this, particularly in Europe, might fall on our clients, but this naturally also affects our tier of the market. Will the regulators in Europe over regulate, and thereby drive clients into the arms of unregulated offshore brokers?
This might represent a great opportunity or a great threat to all businesses and countries in Europe. Navigating possibly choppy waters will doubtless be a challenge for this year across all business sectors.
Tom Higgins, CEO, Gold-i
“The cryptocurrency market will continue to evolve. There will be greater opportunities for brokers as the market becomes more two-sided. I believe the Futures Exchanges will extend their offering to a wider range of cryptocurrencies and ultimately, that some of the larger physical or equity exchanges will acquire some of the Cryptocurrency Exchanges. In terms of challenges in 2018 – I think that ICOs will have a bumpy ride.
In other aspects of the market, I believe there will be greater adoption of MetaTrader 5 and we will see more asset classes being traded in MT5 including cryptocurrencies. There will also be more demand for risk management tools in liquidity management software. This is where there’s a real opportunity for Gold-i, with our Insight feature in Matrix, our Liquidity Management platform.
For Gold-i, the main focus in 2018 is on global expansion, particularly building on our presence in Asia. We also believe our Crypto Switch will be in high demand as brokers increasingly seek to offer cryptocurrencies based on the Futures and CFD markets.”
Matthew Maloney, CEO, CFH Clearing
“The increasing burden of regulatory requirements in top jurisdictions creates a significant opportunity for firms such as CFH. We have the scale and ability to ensure that our processes and systems are fit for purpose in this new world.
There’s a continuing flight to quality and security and this is a trend that looks set to continue. CFH, as part of a listed $4bn market capitalisation group, is ideally placed to help clients grow in this more regulated environment.
We are feeling very positive about 2018 – we have sufficient depth in the organisation to tailor our products and services to meet clients’ needs on a global basis.
There will no doubt be an increasing demand for a wider range of asset classes in 2018. We will continued to evolve our liquidity offering, with pools of liquidity in London, Tokyo and New York. This creates more opportunity to serve our growing global client base.”
Ramy Soliman, CEO, Stater Global Markets
“Stater Global Markets launched in October 2016 and we spent most of 2017 building the business, creating solid foundations and carving a niche for ourselves as a credible, institutional Prime of Prime brokerage with a high quality offering.
We were keen to differentiate ourselves- and added Exchange Traded Futures to our portfolio in addition to Spot FX, Precious Metals and CFDs. I believe this set us apart from our peers.
As we continue to evolve, we have been looking at how we can add further value to our institutional clients and continue to differentiate in the market – and this is why I am so excited about the recent announcement that our owner, Stater Blockchain is planning to acquire London-based blockchain technology company Hashcove and the subsequent announcement about Long Blockchain – a Nasdaq listed organisation – issuing a letter of intent to merge with Stater Blockchain.
Stater Global Markets’ clients will be able to reap the benefits of the blockchain and digital currency technology solutions which Stater Blockchain develops. 2018 will be a transformational year for the business.
Andrew Saks-McLeod, CEO, FinanceFeeds
There is indeed an evolution within the OTC derivatives sector, and it is most evident that the most recognized retail FX vendors and service providers along with the specialist institutional electronic trading vendors in the OTC sector are maintaining their remit to continue an evolutionary stance which has marked the OTC sector out as an innovator across all aspects of this business.
So much so that the listed derivatives firms have more than once demonstrated concern over inability to compete on a global retail market basis.
It is FinanceFeeds steadfast notion that the FX industry’s retail sector should not be about cheap licensing in improper jurisdictions and low entry points for small sales-led white labels. It should be about sustainable and well organized business practice and economies of scale that represent proper infrastructure and long termism.
This is where the dichotomy between the sustainable representatives of good quality for the year ahead will substantially differentiate themselves from those which did not invest resources in building a good quality commercial environment.
The number of smaller companies generating overtly marketing-led claims of listing on premium stock exchanges has dwindled to absolutely zero, largely because enough time has passed between the blustery PR propaganda issued by those wishing to create a large scale level of media attention, whilst attract cash-ready second rate investors and the resultant non-listings that this is no longer a plausible means of pulling the IPO-infused wool over the eyes of investors and prospective customers.
Meanwhile, publicly listed mainstays in the retail sector, those being IG Group, CMC Markets, GAIN Capital, and Interactive Brokers (still a retail broker despite their larger minimum deposits and focus on Eligible Contract Participant (ECP) business) have not only retained their evergreen and high quality business model regardless of changes that have affected smaller firms, but have built and are continuing to build on important components to lead them forward.
The implementation of MiFID II in January will see a lot of these smaller firms off, or at least make them head to offshore jurisdictions and the rest will fold and do something else, especially bearing in mind that most of the retail clients of these firms are not based in Europe, but are in Indonesia, Vietnam, Thailand and other regions which are not covered by large financial markets participants or strong regulators.
Comparing this to the UK, which has a very well organized financial markets economy and whose retail FX firms can claim legitimately that 50% of their clients are on domestic territory, the difference is clear.
Cyprus is becoming a funds and family office area but there are at least 80 small brokers that will either metamorphacize (showing their lack of commitment to proper infrastructure) or will move on completely. Binary options crooks have adopted the buzzword ‘crypto’ for everything and all of this is worthless, and not helped by an inept regulatory environment and slack business acumen across the small firms in the region that have been allowed to misuse the European regulatory banner and then onboard clients via the Marshall Islands and St Vincent or the Seychelles.
Among that sector, the only companies that have a good future are larger and established firms like FXPro, and easyMarkets as they know their market and are well organized and large in scale. It is a different market to the British and American firms though, but still a very sustainable one, and soon they will have much less ‘baggage’ around them so will be able to work steadily without affectation by small chancers being established by even less than reputable lawyers and consultancies.
On this basis, the good and the strong will flourish, and will evolve their existing very stable businesses into new areas for technological development to support new asset classes as the OTC multi-asset drive continues as detailed by the esteemed professionals in their viewpoints today, and as other areas such as Cyprus moves its remit toward funds and family offices.
Thus, onward and upward for the pedigree companies, as 2018 will be a year of aspects to look out for in terms of new developments that will lead the entire business forward.