As investors pour in millions to back 4 new UK funds, a multi-asset MetaTrader is the way forward

Thinking long term, and through the mind of a company that intends to  rival the large asset management firms in key regions with mininum investment amounts of $100,000 is the key to sustainability, whereas running a brokerage as though it was a lead buying and lead churning affiliate marketing exercise is not.

There has been a distinct amount of dialog for a relatively lengthy period of time within the OTC electronic trading sector that the current structure within the market has created an environment in which margins are very tight for most brokerages, and the relative lack of differentiation, especially among firms offering white labeled MetaTrader 4 platforms – about 85% of the entire retail sector.

These factors have created an environment which is not only fiercely competitive, but means that the cost of acquiring new clients in some cases outweighs the profit attained by a brokerage from those particular clients.

There are various reasons for this status quo, one of the major ones being that many small to medium sized retail FX brokerages do not invest in their own trading environment, or intellectual property, as leasing an entire environment from MetaQuotes means that in marketing and sales-driven brokerages, the most important intrinsic value of a brokerage remains on MetaQuotes’ server.

This is likely to be a very strong reason as to why not one MetaTrader based brokerage has been able to list its corporate stock on a public exchange despite the enormity of some of the larger MetaTrader based brokerages that are in some case producing revenues far in excess of the large publicly listed firms of New York and London, and is equally a possible reason why no experienced venture capital entities ever invest in FX brokerages.

Whilst many participants in retail FX have long since resigned themselves to the line of thinking that no investors back any electronic trading of any kind, the actual reality is that they do, and they do so in large sums, but not in OTC retail FX.

For this reason, a further case is made for brokerages to offer multi-asset trading environments, and in many cases, absolutely no structural changes would be required, such is the level of advancement of available connectivity solution to allow MetaTrader 4 and 5 to connect to funds, derivatives exchanges and global executing venues whilst maintaining an OTC environment on the same platform.

This week, four new very large investment trusts poured into the British market, commencing from a very high capital base, which is something rarely achieved by OTC brokerages who have to often bootstrap their businesses and rely on outsourced third party infrastructure.

The four new funds are going to be launched by well recognized major asset managers and will head onto the market in the form of new investment trusts, between them raising upwards of £1 billion from investors at the outset. Shares in the funds will trade on the London Stock Exchange and the aim will be to make money for long-term investors – and, of course, the managers themselves.

Fellow city stalwart Mark Mobius, one of the architects of Britain’s very first emerging markets trust in 1989 which he managed until 2015, has also launched a new fund.

The new trust has ambitious targets – annual long-term returns of between 12 and 15 per cent from a portfolio of between 20 and 30 emerging market companies. While some may say Mobius is a bit long in the tooth at 82 years of age, he has brought two emerging markets specialists with him from asset manager Franklin Templeton (where he was when launching said emerging marekts trust 29 years ago) – Carlos Hardenberg and Grzegorz Konieczny.

For Joe Bauernfreund, the Far East holds his opportunity, as his firm, Asset Value Investors (AVI) looks to raise £100million for this trust that will invest in a tight portfolio of Japanese companies.

Although Asset is not a household name, it manages an established investment trust – the £1billion global British Empire. This has outperformed peers over the past three years – a return of 76 per cent against 69 per cent for the average global growth trust – but underperformed over five.

The trust’s annual management charge is one per cent and the launch’s closing date is October 18 with share dealings commencing five days later. The trust is likely to pay a dividend although there is no commitment to dividend growth.

Brian Dennehy, director of investment fund scrutineer FundExpert, believes Japanese smaller companies offer investors the potential for attractive long term returns. Many companies, he says, are ‘undervalued and under-researched’. But rather than take a gamble on a new trust, he suggests investors should look at established funds. These include Baillie Gifford Japanese Smaller Companies and M&G Japan Smaller Companies.

Lastly, Merian Chyrisalis is launching a new fund managed by Richard Watts and Nick Williamson, which will be operated by Merian Global Investors – Old Mutual Global Investors as was – and invest in UK unquoted companies. It will hope to make money as the businesses it buys move from private ownership through to a listing on the UK stock market.

The managers, Richard Watts and Nick Williamson, are established investors in small and medium-sized listed UK companies.

For example, over the past five years, Watts has delivered a 103 per cent return at the helm of fund Old Mutual UK Mid Cap – a performance only beaten by three funds in its UK all companies peer group.

Investing in unquoted companies is not their speciality, but the duo insist they are tooled up to spot businesses that will successfully make the transition from private to shareholder ownership. Merian Global Investors is led by respected investment manager Richard Buxton.

It is perhaps a missed opportunity that many retail brokerages see that sector as external, because equities, stocks and futures on a managed basis suit the functionality of most modern trading platforms – including MetaTrader – very well indeed and attract a far higher value and longer lasting customer base.

The ability for these fund managers to pull in talent from the top Tier 1 banks on the launch of these funds and attract vast venture capital funding as well as investor input totaling tens of million from the outset as a new, unproven managed fund, shows the total confidence in that sector, whereas no OTC firm is able to do that from the outset.

Companies with proprietary platforms do indeed envisage this as important, IG Group has its own retail stockbroking platform, and Saxo Bank and Swissquote both concentrate very heavily on multi-asset trading environments.

During a recent meeting at Swissquote’s head office in Gland, Switzerland, FinanceFeeds looked closely at this.

Expanding on the execution methodology, Jurg Schwab, Head of Trading, Director and member of the senior management at Swissquote explained “Swissquote is a direct member of Euroclear, and it is very rare in the electronic trading industry to have direct access to stocks. We also have a dedicated bond platform, which executes on an OTC basis. All trades are cleared onsite” he said.

“Switzerland is one of the few countries where bonds are listed on exchange, however for global markets we do it on an OTC basis, whereas we are a full member of Eurex for trading and clearing, this being a USP in Switzerland” Jurg Schwab, Director and Head of Trading, Swissquote Bank SA

“We specialize in providing online direct access for customers, therefore we do not differentiate between trading option on US stocks such as Apple or on Swiss stock and the trading experience should be equally accurate for both, as the margin is all calculated in a fraction of a second” he said.

“We also have a well recognized OTC platform called SwissDOTS. The name is derived from a contraction of “Derivative OTC System”. We currently work with five partners which offer over 80,000 leveraged products. Comparing this to all products traded on SIX, there are around 25,000, hence SwissDOTS users can access three times more products than SIX, and the opening hours are from 8.00 am till 10.00 pm, so therefore traders wishing to trade after the hours that other venue may close trading for the day can continue to trade derivatives on SwissDOTS”Jurg Schwab, Director and Head of Trading, Swissquote Bank SA

“EUREX is the biggest one, where we provide US on-market products, and then we provide warrants on SIX, then SwissDOTS OTC, followed in size by the London live market and the Asian market. I put every thing together because we have less volumes on the others than on some, however derivatives are a mainstay of the business” he explained.

“During the founding of Swissquote, listed derivatives were the backbone of the company. The warrants that we provide are mostly indexes, equity, bonds, commodities and realestate but the main underlyings behind the warrants are indices and equities, with a global customer base. The majority of the customers for listed products are in Switzerland, we dont actively seek overseas firms but we do have 300,000 customers globally in trading” said Mr Schwab.

“Everyone has access to all the products on one single platform, incuding our entire securities business, and credit facilities but also traditional FX. For leveraged OTC margin FX, we also provide our own proprietary Advanced Trader FX platform, or MT4 and MT5” he said.

Saxo Bank has also branched in that direction, having built relationships across the Asia Pacific region with hedge fund operators, as reported in detail by FinanceFeeds during a private event in Hong Kong.

Hargreaves Lansdown, Britain’s largest financial services company whose CFD division, HL Markets, is a white label solution provided by IG Group, is a firm with its own multi-asset investment platform, Vantage which has been demonstrated to FinanceFeeds during a visit to the firm’s Bristol head office.

To endorse this direction further, Hargreaves Lansdown’s senior analyst Laith Khalaf said today “The trust will use an investment process which has served Fundsmith Equity well – identifying quality companies with good growth prospects, trading at a reasonable price” referring to Mark Smith’s new initiative.

The technology already exists with which to provide multi asset access to retail brokerages, CQG offers a system that integrates derivatives exchanges with MetaTrader and allows OTC instruments to be traded on the same platform, as does oneZero.

All trading platforms have advanced portfolio management systems for managed accounts, MAMs for short – and are in proven use all over the world for many years. These would easily be able to operate such funds.

Thinking long term, and through the mind of a company that intends to  rival the large asset management firms in key regions with mininum investment amounts of $100,000 is the key to sustainability, whereas running a brokerage as though it was a lead buying and lead churning affiliate marketing exercise is not.

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