Is your broker really multi-asset?

By Richard Elston, Head of Institutional at CMC Markets, who will be looking forward to meeting the senior leaders of the global multi-asset electronic trading industry this evening at the FinanceFeeds London Cup FX Industry Networking Event, which will take place at EIGHT MOORGATE members club in the City of London.

Broadly speaking, the first decade of this century saw online foreign exchange brokerage come of age.

Accessible, standardised platforms like MetaTrader’s MT4 along with advances in the proprietary trading platforms from bigger brokers made this a hugely competitive space, where attempts to compete on speed of execution or tight spreads essentially became meaningless. Both of these claims are difficult to quantify, which in turn left many brokers looking for new avenues to pursue.

Yes, the liquidity that’s available for major forex pairs, plus the comparatively low volatility makes Foreign Exchange an ideal instrument for the sophisticated trader, but it was clear that these market participants wanted more – and brokers eager for an edge were looking for differentiators, too.

A quick route to achieving this was to add more asset types. Bullion was an easy bolt on with gold and silver already trading on the same spot terms as currencies, but what about indices, soft commodities and even individual equities or treasuries?

This all sounds like an attractive proposition, but on the face of it, good liquidity – especially in the derivatives market – is far harder to find than we see with G10 currencies.

There’s the choice for a smaller broker to find a price feed, assume all the risk and hope that their pockets are deeper than those of the trader on the other side, or otherwise these smaller players are left looking to hedge all of their exposure into the physical underlying market – the former does nothing to help mitigate risk, whilst neither make for a seamless dealing propositions, either.

Larger brokers like CMC Markets already have a significant pool of in-house liquidity from their own clients who have been trading single stock or equity index CFDs for the last couple of decades.

This puts such larger providers in an ideal position to harness their organic liquidity and provide a white label solution for a wide range of CFD instruments as well as Forex – but a critical question to ask is just how robust the multi-asset proposition actually is.

When choosing a broker to partner with, it’s vital to look beyond the headline array of products on offer and any singular defined cost in the form of spread. The actual cost of trading is heavily influenced by both the available liquidity and the speed of execution, together delivering a high quality trading experience.

What this means is that advertised lower trading costs may well be indicative of better liquidity, or conversely hinting at the prospect of a worse trading experience.

A discounted spread to the underlying price is irrelevant if you cannot get the trade done efficiently or a series of split fills mean that the derived price to fill an order completely ends up exceeding that of the headline price initially offered.

If obtaining meaningful multi-asset flow is seen as a priority for growth, the single most important point to question is arguably just how much volume will be available across each of the assets.

Broker transparency can certainly provide reassurance here, which again is why working with an established and reputable counterparty has advantages, but without this clarity it’s going to be difficult to ascertain the likelihood of instant execution – and with this, the true trading costs involved.

Richard Elston looks forward to meeting you this evening at the FinanceFeeds London Cup FX Industry Networking Event at EIGHT MOORGATE, 1 Dysart Lane, London EC2, from 6.30pm