Asia vs the West: IB model, or Prime of Prime?

Asia vs the West: IB model, or Prime of Prime? – FinanceFeeds investigates

FinanceFeeds takes an investigative look at how to provide FX firms in Asia with the best product range and execution, and how the market is evolving from the IB model to full institutional provisioning.

Unlocking the potential in some of the Far East’s newest and rapidly emerging markets has been the focus of many retail brokerages in the West for quite some years now.

It is almost fair to say that those who successfully entered China, and it really is only a handful of companies, have garnered a vast amount of business from large, well organized introducing brokers across the second tier development towns of Shenzhen, Ghangzhou, Zhengzhou and Chengdong among others, with an easily achievable 90,000 lots per month per introducing broker being conducted from plush, sophisticated offices with full facilities ranging from back office administration to portfolio management.

Retail brokerages that dominate in China are FXCM, GAIN Capital, Blackwell Global, FXDD, FxPro, EXNESS, Alpari, BMFN, and Saxo Bank.

These companies have built up longstanding relationships with loyal strategic partners in China, and continue to maintain them in such a way that a market that is completely closed to the outside world has now got its trusted partners, and, living in an environment in which access to information outside of what is available on Baidu, Chinese IBs are keen to stick to what they know and trust, especially after the high profile debacle that prevailed across Chinese news stations with regard to IronFX’s alleged refusal to pay IBs and retail customers which led to even more loyalty to the companies with good track records.

Times have moved on, however

As with any rapidly advancing industry in a highly technological and sophisticated region with a young, willing population that wants to drive itself forward, the times of retail brokerages onboarding Chinese IBs has given way to a time in which institutional liquidity providers and prime brokerages, whether stand alone or dedicated divisions of large international FX firms, are now providing their prime brokerage and liquidity services directly to new brokerages in the Asia Pacific region.

This has spanned from China, and now the focus is on Malaysia, Indonesia, Singapore and Hong Kong.

When looking for a prime brokerage in Britain, Cyprus or North America, regions which are populous with FX brokerages, things are relatively simple in terms of criteria, however counterparty credit risk is now a major concern for Tier 1 banks, which has led to constraints that mean in some cases, there is no credit available and peer to peer hubs are having to be adopted in order to foster greater relationships one rung down the ladder, among prime of primes.

Credit crunches that have blighted the western electronic trading landscape do not hinder the markets in Hong Kong and Singapore, both solvent, crisis-free banking locations, which host Asian and Western banks that provide liquidity via the Equinix Hong Kong and Tokyo locations to Asia’s vast client base.

Never mind IBs – Try full China-focused brokerages with dedicated connectivity

During a meeting in Boston, Massachusetts recently with Yuhan Mo, Head of Operations and Marketing for APAC at Advanced Markets & Fortex, this exact methodology became a discussion point.

“We have a hosting facility at Equinix’s HK3 data center, and can assist with the setting up actual brokerages in the region and help those brokers efficiently expand into China.” said Ms Mo.

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Advanced Markets executive team: Natallia Hunik, Richard Perona, Yuhan Mo, Anya Aratovskaya, and Katya Samardina

“Most traders in China experience platform freeze and latency when operating without this type of technology infrastructure. It’s important to remember that China’s censorship and firewall systems interfere with internet speed within the country, primarily due to the extra layers within the internet between China and the “outside world”. Because most brokers host their servers either in Europe or US, Chinese traders are having hard time getting a stable connection to their brokers trade servers and are often exposed to intermittent price interruptions and loss of trades, especially during volatile economic data releases”, continued Ms. Mo.

“These days, execution speed is more important than ever, as many sophisticated Chinese traders and money managers are using automated trading systems to transact their orders. As a full service provider to FX brokerages, we can provide powerful solutions to these very real problems, allowing firms to build their business on a solid foundation..”

“Normally, a trade order is routed from China to either New York or London due to fact that most bank pricing/liquidity originates at NY4 or LD4 data centers.

Chinese firms are often hosted with second and third tier ISPs and there have been many instances in the past where orders been dropped because of an internet connection time-out or because the connection is either unstable or blocked during important economic news releases.

Our cutting-edge infrastructure overcomes these issues, and we are further adding to our capabilities by implementing an additional dedicated line from Hong Kong’s HK3 to New York’s NY4 datacenter.” – Yuhan Mo, Operations and Marketing for APAC, Advanced Markets & Fortex.

Geoff Last, Director of Institutional Liquidity Sales at Invast Global in Australia is an expert with 39 years experience, and most certainly heralds Australia as a good base for liquidity provision to Asia. “Australia is the perfect base for Prime Services providers targeting Asian firms for a number of reasons. Most importantly, Australia has a very clear, comprehensive and respected regulatory environment” said Mr. Last today.

“The financial services industry in Australia is highly-developed, with well established, sophisticated legal and technological infrastructure. The political, legal and banking regimes in Australia are stable, secure and reliable. In addition, Australia boasts a highly-skilled, multi-cultural society where multilingual staff are plentiful.

The time-zone is perfect for supporting Asian clients – but, regardless, most firms like Invast operate 24 hours. One of the interesting things we have found is that our Institutional clients love doing business with Invast in Australia because it gives them an excuse to travel to Australia to visit us.

We always go out of our way to help them enjoy our beautiful country” – Geoff Last, Director of Institutional Liquidity Sales, Invast Global, Australia.

London carries prestige

Speaking to several institutional counterparties today in London, it is clear that many companies in Asia still look toward London for the basis of their liquidity and execution facilities, and as a result Western firms have established offices in Asia that work with branches of Western Tier 1 banks that are located in financial centers such as Hong Kong and Singapore to serve liquidity to the Asian market.

One particular senior executive explained to FinanceFeeds this morning “The key thing is that a lot of western prime of prime brokers just use their Asia office as a sales hub and London is still the counterparty top the trades. That is important because a UK FCA broker is regarded, i think, as a better counterparty to face.”

James Watson, CEO of ADS Securities London today explained to FinanceFeeds “Our view is that the perfect institutional providers for Asian firms are those that combine both international footprint and local know-how. Access to PBs in Asia has become more costly, demanding huge margin requirements. Brokerages in Asia have an on-the-ground presence, and possess the local know-how.”

“The brokerages with London offices, meanwhile, have the advantage of operating in the largest FX hub in the world, and are protected by one of the most recognized regulatory authorities (FCA) in the world. Firms like ADS Securities who have strong balance sheets, presence in both London and across Asia, have a clear advantage” – James Watson, CEO, ADS Securities London

Speaking to FinanceFeeds this morning, Mattieu Ghanem, Head of Cross Asset Sales & Business Development at ADS Securities said “In Asia there are many more currencies than in Europe or elsewhere in the world, and accordingly, Asian institutions need to trade in their domestic currencies (NDFs).”

“The cost to trade these local instruments and currencies, which are lower in volume than most of the G10 currencies, are often higher, and less accessible. So Asian firms are really looking for partners that are able to leverage their capitalization to offer greater access to LPs and at preferential rates. Because of our global reach, we are able to provide unique liquidity—truly bridging East and West” he concluded.

Marco Baggioli, COO at ADS Securities is a highly experienced industry expert when it comes to prime brokerage and liquidity provision. “My opinion is that the location of the POP provider is much less of importance than their actual capital solidity and access to PB credit lines” he explained to FinanceFeeds today.

“In selecting a POP provider I would first of all question who are the PBs supporting them, hopefully more than one, and their access to credit and liquidity. This helps the client in appreciating the long term commitment to the business and ability to provide sufficiently large NOP lines. Secondly, I would assess whether the POP operates as a pure PB – like ADS does – and offers direct access to third party liquidity as opposed to their aggregated liquidity, which is not a PB service and should not be paid for” – Marco Baggioli, COO, ADS Securities London

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In Hong Kong, there are also other asset classes which are very popular among traders and can act as a diversifying factor, one of which is gold bullion.

Sucden Financial’s ethos echoes this line of thinking.

In a recent meeting in Hong Kong with Raymond Mok,Head of FX and Bullion Development, Sucden Financial (HK) Ltd, FinanceFeeds took a look in detail at what type of brokerages seek liquidity solutions from high quality Western firms these days.

Mr. Mok began by explaining the background of Sucden Financial’s Asia Pacific business. “Sucden Financial HK Limited is licensed by the Securities and Futures Commission (SFC). We focus on B2B business and provide customised solutions to our clients. We have very stable platforms and can provide tailored solutions according to a broker’s need; therefore brokers stay with us through their growth period and beyond.”

“Here in Hong Kong, we have made a very good name for ourselves being a transparent liquidity provider” – Raymond Mok, Sucden Financial (HK) Ltd.

“Hong Kong attracts a lot of capital from all parts of the world, as it is seen as a reputable place to invest.”

“As a result of the more international nature of Hong Kong, we actually get a mix of competition, prospects and customers from the West, however we also get the same mix from China itself” said Mr. Mok.

Hong Kong as an institutional FX base

“Our focus in Hong Kong is on the institutions and the corporate side of things” said Mr. Mok. In China, there are a few private funds that would require access to trade FX outside of the mainland, and Hong Kong is the place where they look to find the liquidity channel.”

Being in Hong Kong, Mr. Mok understands that Sucden Financial HK is able to capitalize on this.

As far as the size of brokers that approach Sucden Financial HK for liquidity solutions in the Asia Pacific region is concerned, Mr. Mok explained that the firm looks for specific parameters when onboarding a brokerage as a corporate client.

“We do look for specifics. “Preferably, we like to see that the firm has a Hong Kong licence. There are a lot of large retail brokerages which by definition have vast client bases, both here and in mainland. We provide a prime-of-prime service with pricing and liquidity that aligns with these brokers” said Mr. Mok.

Bullion is very popular in Hong Kong, therefore keeping a good quality multi-asset solution accommodating both FX and bullion on one platform is important, a matter with which Mr. Mok concurs.

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Raymond Mok, Sucden Financial (HK) Ltd

Indonesia is rapidly becoming a focus

Now, the development of an FX industry within Indonesia itself is beginning to expand, as exemplified by yesterday’s announcement by fintech company Tradeworks, a firm that develops cloud-based software which can be tailored for the individual needs of FX and CFD traders.

Co-founded in Copenhagen, Denmark in 2013 by Mikael Breinholst, former Global Product Manager at Saxo Bank, Tradeworks now has established physical presence in the Asia Pacific region with an office in Singapore, therefore is well positioned to head into burgeoning Far Eastern markets.

Mr. Breinholst explained to FinanceFeeds the sheer magnitude of the Indonesian market

“Indonesia is a very unique market. Although the middle class in Indonesia counts as many as 90 million people there are still a large number of newbies in the market and the sales tactics at some brokers are unfortunately questionable at best” – Mikael Breinholst, CEO, Tradeworks

Monex Investindo Futures is the largest FX firm in Indonesia, its domestic audience representing 35% of all Indonesian business, the rest is held by overseas firms.

Today, FX prime brokerage expert Paul Orford explained why this is important.

“The entire retail industry is trying to corner the SE Asia market, with it being the only growth area left. With LATAM not really living up to the hype, we are seeing huge amounts of energy in this land grab” – Paul Orford

“I think it is only a matter of time before we will see a well capitalised LP / PB who has its background in this region very soon” said Mr. Orford.

Why is this?

Mr. Orford continued to explain “It is the natural evolution of the market, where western retail brokerages first offered regional offices to IB’s in the region, however holding the power and wealth in their hands.”

“What I love about the region now is that they have empowered themselves to open and own their own brokerages and make a massive successes of it.”

“You can see this from such huge names like Monex in Indonesia , who have the largest market share in the largest marklet per capita in Asia. Moreover, you will see many other up and coming names which we will see in the next few years which will have their origins from this region” – Paul Orford

In conclusion, Mr. Orford said “When we see a change in the perspective upon regulation in some of these countries, you will see a new direction in this region. From a clients perspective, nothing will ever beat a local presence which is owned by a company from the same nation.”

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Andrew Saks-McLeod and Paul Orford discuss prime of prime relationships with retail brokers in Limassol, Cyprus

The IB model is still the best way for those who conquered the market early

At FXDD’s offices at 7th World Trade Center in Manhattan, New York, FinanceFeeds met with Lubomir Kaneti, the company’s COO, who was instrumental in forging the partnerships that remain a mainstay of the company’s business today.

“For us, China is a major market” explained Mr. Kaneti. “We operate it on an IB model, as it is against our policy to have an actual call center in China. I do occasionally see companies that try to push that limit and then they find that the Chinese government has no tolerance for it” he said.

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FXDD’s prestigious headquarters at 7th World Trade Center, New York

“Our Chinese IBs work with our office in Malta, however large part of the support is conducted here in New York. As you know, we have no business in the US anymore, therefore the focus is on supporting our international operations which include the Chinese IBs and ensuring that the functionality of their systems and the quality of the trading environment remains as high as possible, as they are very discerning customers.”

Understanding the requirements of Chinese IBs

Through a great deal of research and meetings with IBs in China, FinanceFeeds clearly understands the need for brokers to which said IBs are referring business engage on a personal basis with the IBs by spending time with them, at their offices and listening to their requirements.

Whilst Mr. Kaneti firmly agrees with this, he considers there to be far more to the art of ensuring that a smooth and long term partnership can be fostered. “It is not just a case of traveling to see IBs” he said.

“The IBs have to promote their brand whilst adhering to the very stringent rules in China. They may push the limit here & there and we will call them if we see something not right to ensure that we can help them operate within the appropriate limits across the entire chain. Overall we have been very good to them and that is critical. In China, companies appreciate this kind of very detailed service.”

Clearly the Asia Pacific region is still a very important component in all aspects of the FX industry, however the evolution toward institutional provision to local firms is now in full swing.

Photography copyright FinanceFeeds

#China, #far east, #Hong Kong, #IB, #liquidity, #prime brokerage

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