British spot FX and Chinese customer funds being sent abroad. Sound like an anomaly? Read on!
Chinese clients are very astute when it comes to understanding of execution model. Some companies are prepared to forego the massive volume opportunities that come from non-Chinese companies that invest in complete Chinese infrastructure in order to provide clients with a Western trading environment
Britain’s longstanding and very highly developed retail electronic trading sector is not, and has never been, associated with spot FX.
The MetaTrader 4 platform, which is ubiquitous across the entire world, is notable in the UK by its absence.
Large, publicly listed CFD providers whose entire commercial structure from CEO to sales staff are highly knowledgeable industry professionals whose careers are often garnished with Tier 1 internships, leadership positions and unerring commitment from post graduate stage right the way to senior executive status.
Britain’s electronic trading giants are masters of their own marketplace, with a huge and loyal domestic market customer base.
Here to stay and flourish, and lead by example and innovation certainly describes Britain’s brokerages.
China, by contrast is a MetaTrader 4 bonanza.
Whilst its trading platform of choice is aligned with the rest of the world compared to Britain’s bespoke and proprietary CFD and spread betting platforms, there are idiosyncrasies that stand China out in this industry, one being the internet firewall and capital control laws, which last week were stepped up as the Chinese government introduced a new law in which customers wanting to send funds overseas for will have to sign and declare the purpose of the transfer, and if the purpose is for trading derivatives or securities, the bank – owned by the government of course – will not permit the transfer.
This led to confirming FinanceFeeds perspective that firms with no presence in China will no longer be able to attract Chinese business by transferring funds abroad.
Two anomalies, which appear not to have a modicum of commonality, then…
Actually, quite the contrary.
A firm that combines these two and considers it to be a great advantage is Britain’s INFINOX, which was established in London in 2009 as Go Markets, before undergoing a rebrand in 2011, thus adopting its current nomenclature.
INFINOX Head of Asia Pacific Kevin Wang spoke today to FinanceFeeds at the annual FX industry conference hosted by YOCA in conjunction with FinanceFeeds, explaining that the company has now established operations in China, employing 30 staff, yet the brokerage itself, including handling of client assets and trade execution, takes place in London.
This means that a British firm is circumventing both traditions, with Mr. Wang explaining how this benefits Chinese customers.
“We established our operations in China in August 2016” Mr. Wang explained to FinanceFeeds.
“In order to do so, we cooperated with the British head office, which helped us form the marketing strategy for China which has been in the making for the last two years” said Mr. Wang.
This is a very interesting differential between a British company, and the complete, and in most cases essential, location of all operations in China.
The reason for this is the stipulation by the Financial Conduct Authority (FCA), which regulates INFINOX, that all client funds must be kept in a bank account that can be supervised by the regulator (ie in Britain rather than China), and that trade execution takes place in London.
Mr. Wang maintains that the FCA regulation, as well as the highly trusted British business environment in which brokerages are renowned for their commitment to good professional conduct and the perceived strength of British banks for holding client funds are more than enough to counter any reason to go mainstream and have a completely separate Chinese entity.
“We actually major on spot FX, providing the MetaTrader 4 platform to clients, from which they can also trade indices and commodities” said Mr. Wang.
“With regard to credibility, approximately 5% of clients in this market are professional clients, which does not seem like many but they are good quality customers. These customers expect high levels of customer protection and are very knowledgeable with regard to how FX trading is conducted. It is very hard to gain the business of such customers unless they have very strong assurance from their broker that their funds and profits are safe. For example, Britain has the Financial Services Compensation Service (FSCS) which provides a £50,000 bond in case of company failure. This is important to high level Chinese investors”.
Of course, many Chinese investors have more than £50,000 under management by their brokerage, but there is nowehere in mainland China that will provide any recourse whatsoever should a firm collapse.
“For this reason, INFINOX is a British entity that holds its funds in a client account at a British bank” said Mr. Wang.
Whilst the rationale is clear, and laudible, this runs counter to all of the general sentiment and research into Chinese FX business, as localization right down to the nuts and bolts of a server are vital in China.
When asked about this by FinanceFeeds, Mr. Wang said “Localization is necessary in China, that is true, however our localization focuses mainly on education for retail clients, whereas all the brokerage aspect is in London.”
This does present a difficulty in that clients will have much more barriers when funding their trading accounts due to the new rulings by the Peoples Bank of China and SAFE, the Chinese FX regulator on preventing overseas payments direct to securities or derivatives firms, whereas internal firms can accept deposits without restriction.
Mr. Wang said on this subject “It is most certainly not convenient for us having to adhere to new rules, however anyone wishing to transfer client funds from a Chinese entity of a brokerage, or representative office, into a British parent company will have to do so via a third party.”
“We cannot allow local clients to transfer to a local bank because of FCA rules on client assets. The clients have to transfer to British bank. If transferring to local bank in the way that Chinese brokerages or Western brokerages that have a full Chinese venture do, a lot more business is possible because there are no restrictions on capital flow, however from our point of view, the FCA regulation is paramount to attract a good client base as it is highly recognized” – Kevin Wang, Head of Asia Pacific, INFINOX
Mr. Wang said that the new capital control laws are infliuening the whole industry especially the internal brokers in China. They need to have the correct channel to transfer the funds on time securely if working with overseas entities.
Reiterating the veiw that Chinese customers are insistent on having access to genuine market liquidity, Mr. Wang explained that INFINOX has prime brokerage agreements with two Tier 1 banks, as well as aggregated feeds from major non-bank electronic communication networks including FXall, Currenex, and EBS.
These are features which will be of vital importance in future as Chinese customers are highly enlightened when it comes to where their trades are being executed, and are intolerant of warehouse brokerages purporting to be able to execute in a live market, once again highlighting the attactiveness of operating with overseas companies with good provenance.
There is no doubt that complete localization is the only way to sustain and grow an economy of scale in China, however in INFINOX’s case, a niche market of working with high net worth customers may well demonstrate a value proposition that will gain it favor.
Optimism describes the Chinese executives’ approach toward the future. Mr. Wang’s enthusiasm and professional flair bears this out.
Concluding, he said “The Chinese market is now looking very good and I am very optimistic about a good future of expansion and development for the entire FX industry here. Here, nobody wonders if it will come to an end anymore, and Chinese FX businesses are innovating to the point of enabling us to provide Chinese services to overseas firms. When the market is ready, we will have the market share so we can get liquidity providers and top level infrastrcuture to address those new markets properly.”