Are you missing out on the options rush?
We speak to industry execs about the importance of going multi-asset.
Almost every industry in every sector of business has its ‘Concorde’ moment and its ‘Tesla’ moment. Coined by television journalist Jeremy Clarkson, the Concorde moment represents a situation in which a groundbreaking technology ceases to be, despite clearly being best in class, for reasons that seem hard to understand.
It has taken almost 20 years for the majority of market participants in the retail FX and CFD trading arena to reach their ‘Concorde moment’, which looks to be taking place at the moment.
To understand how this has come about requires a step back in time, to the beginning of the mainstream retail FX business during the mid-2000s when a sudden influx of new brands entered the trading arena from other realms such as affiliate marketing or gaming.
The rise of off-the-shelf solutions which got brokerages started with minimal effort changed the entire scope of retail trading, removed the barriers associated with having to develop and maintain in-house infrastructure and have comprehensive knowledge in algo backtesting, platform development and systems support and allowed young, ambitious sales-led upstarts to enter the market which had until then been dominated by former senior investment bankers and heavyweights such as Interactive Brokers founder Thomas Peterffy or FXCM’s Drew Niv.
Twenty years later, many of what had been upstarts have now become highly prosperous, high profile names in electronic trading. Many more have come and gone, but it remains clear that many of today’s experienced traders got into the market by receiving a call almost two decades ago by a previously unknown company.
FX and CFD brokers reaching the end of their capabilities?
Nowadays, things are somewhat different, and a combination of a far more demanding audience and a barrage of discourse from regulators who have gradually shown their contrition toward CFD products has led to not just a crossroads, but a cul-de-sac.
It is almost as though a degree of complacency has set in, with retail brokers which faced regulatory constraints, such as the Australian and European leverage restrictions that affected the CFD market, simply waiting for the apparent ‘noise’ to die down and then carry on with their existing product range. This is a status quo that has been going on for around 10 years, ever since ASIC first began publicising its own disdain for CFDs.
During the past decade, we have not only witnessed overtly scrutinous regulators such as ASIC in Australia and North America’s NFA and CFTC consistently ramp up what appears to be an ‘anti-CFD’ stance by publishing warnings and court filings against CFD firms, or what Australia’s authorities call ‘margin trading companies’ alongside marketing and leverage restrictions, we have also all had to work through the implementation of MiFID II in Europe, which set out entirely new structures for reporting how trades are executed and how prices are arrived at, among other infrastructural and reporting matters.
Many brokerages have discussed these matters, but ultimately continued with their existing product ranges, which is a demonstration of either inability to adapt due to constraints applied by the very third party platforms which got them such ease of entry into the market, or the idea that somehow these gradual moves die down and business as normal is not disrupted.
Don’t get stuck with an OTC product range
Now, however, there is a new and important direction which is adding much greater weight to the tug of war between regulators and single-asset b-bookers. This year, traders have been moving toward requesting a more diverse range of products from their brokers, and options trading is the most notable.
Options trading is conducted on-exchange, and requires clearing via a central counterparty, therefore is a very different animal to OTC CFD and spot FX trading.
Such is the move toward options trading that many brokerages have rushed to add it to their product ranges recently. There is a clear dichotomy, however. Brokers with their own proprietary front and back end systems have been able to do it without any concern of missing the opportunity to provide this highly valuable diversification away from OTC products.
The aforementioned giant Interactive Brokers added options a while ago, which may not have ruffled many feathers among OTC brokers using platforms such as MetaTrader, as they may well see themselves as operating within a different range.
eToro, one of the largest firms in the OTC industry, recently added options to its range, which should have done more than pique the interest of the MetaTrader brokers.
Surely eToro is a mainstream broker which gets customers who are novices and have responded to an advertisement on the side of a taxi? If so, that puts it in direct competition with the MetaTrader brokers, and adding options and actively marketing it should therefore be taken seriously.
Does it cost the earth?
Not necessarily It may have cost companies such as CMC Markets a fortune to develop their in-house infrastructure only for it to still be CFD-focused, but having a full, multi-asset, multi-market ecosystem does not need to necessarily be cost-prohibitive.
FinanceFeeds spoke to Roman Nalivayko, CEO of TraderEvolution Global, which provides a comprehensive trading environment including back office with multi-asset and multi-market capability regarding the importance for brokers of being able to simply plug into new market data when needed. Mr Nalivayko explained:
“TraderEvolution is known for its versatility. Adding Options to our clients offerings is no exception. The basic steps include connecting to an execution counterparty and adding market data. Management is automated, covering contracts creation, expiration and margin coefficient updates. Then there are typical steps, similar to other instrument types, such as setting the commission and enabling visibility to clients. Adding this instrument doesn’t require any changes on the front-end side; clients will automatically gain access to tools for Options analysis and trading.”
What the brokers say: Don’t get left behind
FinanceFeeds today spoke to Daniel Moczulski, Managing Director of eToro’s UK division, who explained:When brokers spend millions of dollars on advertising their brands, and then offer the same trading experience as other firms, I just feel it’s a missed opportunity. eToro’s market leading, proprietary platform allows us to optimise every aspect of the service for the client, from the way they interact with eToro to the products we offer them. We are in control and decide everything that impacts our clients.”
In terms of retail brokerages which have developed their own platforms and are now equipped to deal with such requests from clients as new market trends appear, FinanceFeeds spoke to Natalia Zaharova, Head of Business Development at FXOpen.
Ms Zaharova explained Natalia Zaharova explained “Investment in your own platform may appear very resource-hungry but it is an essential and fundamental component for running a brokerage which can adapt to market preferences and serve quality, long-standing clients for years.”
“We have the TickTrader platform, and from that we offer shares, equities and indices. Should the demand arise with our clients, many of whom have been with us for a very long time, we would be able to add any market data feed and provide this to clients without having to reinvent the wheel. It should be of concern to brokers who are constrained by their system that traders are now requiring more than just a standard range of ‘one size fits all’ OTC products. The market has moved on and brokers can now invest in their own future.” concluded Ms Zaharova.
Merely b-booking the identical OTC derivatives as other brokers and depending on third-party platforms lacking multi-asset capabilities falls short.
The era of the ‘Concorde moment’ is upon us, underscored by the growing number of brokers diversifying into options trading—a trend that’s likely to extend to all their clientele eventually.
It is clear that the FX market is on the brink of another round of consolidation, primarily fueled by product range constraints that could pose a significant threat to firms which don’t adapt accordingly.