Case Study: The Cyprus brokerage that gets it right!

The continued ubiquity of the MetaTrader platform is something of an anomaly among retail electronic trading companies, many of which have continued to operate their entire business around the MetaTrader platform and its entirely standard solution despite the absolute necessity of differentiation.

For the past few years, the client bases of retail brokerages have become more sophisticated, and therefore require far more tailored trading systems, and are wise to the affiliate marketing style which is the preserve of many spot FX firms, with those in the know fully understanding that many brokers that are reliant on MetaTrader platforms are able to offer identical products to over 1200 brokerages, all of which are sales-led, and cannot offer live access to global markets.

This has resulted in a major issue for brokers in terms of acquisition of new clients, and in terms of churn, with many novices with small deposits being called by numerous almost identical companies offering the same almost identical product ranges and no access to global markets outside the closed system dictated by MetaQuotes.

The platform monopoly may well be at its legacy software orientated nadir, however apart from a will to finally move brokerages onto the newer (although still hardly a spring chicken) MetaTrader 5 platform, there has to be far more than meets the eye.

Until now, MetaQuotes has had something of a stranglehold on a market that was largely empowered by its own easy-to-set-up third party solution, that being smaller brokerages in peripheral regions to the main financial centers of the world, whose owners do not wish to invest in research and development or in house support, and simply want to advertise, and sell to retail traders.

A communication by the Financial Conduct Authority (FCA) two years ago, itself under great pressure from ESMA to mitigate exposure to negative client balances by providing every broker with a market maker’s license requiring brokers to set aside 730,000 Euros in regulatory capital, as opposed to the non-dealing desk license that requires 125,000 Euros in regulatory capital thus showing ESMA’s apparent lack of thought in that by doing this, it encourages the non-transferral of trades to a live market, margin us under the microscope too.

In its assessment, the FCA found that in conditions of standard market volatility, a client is likely to make a loss due to automatic margin closeouts set by the brokerage firm. The FCA considers this to be an issue because brokerages typically set their margin closeouts at 50% of the initial margin posted, with a leverage ratio of 500:1, a 0.1% fluctuation in the price of an instrument is all that would be required to trigger an automatic close out of the client’s position.

Career civil servants in mainland Europe may be about as au fait with sophisticated electronic trading solutions in developed financial markets centers such as London, New York, or Chicago as an eskimo is with a bathing suit, this ruling demonstrating the perceived safety of client assets being created at the expense of brokers having any reason to trade in a live environment – in layman’s terms, it encourages the B-book.
This means that now, with a more discerning client base and a regulatory move against the CFD business, the ability to serve established customers is vital.

Today, FinanceFeeds spoke to Bassel Ibrahim, Chairman of X Spot, which is a very interesting company indeed in that it is licensed by CySec, and has its main operational office in Cyprus, yet is the only firm there offering global market access and doing things very differently; hence it has gained a very high quality and sustainable client base.

Mr. Ibrahim is of the same opinion as FinanceFeeds, in that in order to further the cause of the electronic trading industry, a full multi-asset solution to give traders and investors access to global markets is vital.

“Our company follows the ethos of an investment company in FinTech, and is a mix between traditional wealth management and digital wealth management, and the company has three divisions, one of which is centered around private wealth management which have a team of researchers and more than twenty portfolio managers all from banking backgrounds” said Mr. Ibrahim.

“We have another division which is called SmartWealth, and this division is 100% centered on wealth management. We built our own system and connected to all global markets via the TraderEvolution Global platform for execution on multi-asset markets” explained Mr. Ibrahim.

“Our trading environment is also connected with exchanges for market data and evolution, whilst we have our own back office and robo advisory systems. We integrated all of this topography with the TraderEvolution Global platform, and we use their back office to upgrade the instruments and execution fees as we operate” said Mr. Ibrahim.

“TraderEvolution Global is a very good platform in terms of providing multi-asset execution. We offer access to more than 25 exchanges across Europe and the United States, from cash equities to ETFs, to funds and hedge funds to bonds. We used to offer CFDs and FX which were OTC derivatives, however, we have now stopped offering OTC products, and are moving toward listed products only” said Mr. Ibrahim.

“We have our own brokerage environment and our client base is our own intellectual property, and our licensed operations are based in Cyprus and in Athens, Greece. The Cyprus operator is regulated by CySec, and the Athens division regulated by the Financial Committee for Financial Services in Athens” said Mr. Ibrahim.

“When looking to structure our business in this manner, we scanned the whole market, conducted a lot of research platforms available, and almost all of them focus on FX and CFDs. There are only a small number of platforms that offer multi-asset solutions. TraderEvolution Global is the most user friendly, whereas others are less user friendly and emulate MetaTrader in that they are closed OTC platforms, offering a narrow range of products and are all based on affiliate marketing models, which is not the future and not how we operate” said Mr. Ibrahim.

“When looking at how X Spot differs from many OTC firms, of which there is a huge numberin the overall electronic trading market, we decided to immediately stick to a wealth management background. We decided not to copy the model of so many retail brokerages, and chose to eschew the market making model. We wanted access to real markets and to offer a diversified and different product range.” explained Mr. Ibrahim.

“Banks are charging too many fees, and therefore the banks are losing money for their clients due to expensive fees. We charge a management fee of 0.75% and with all fees included, the cost to clients remains just 1%, therefore we reduce the cost of wealth management, and we depend on technology to determine overall costs. Because of this, we can reduce the cost of trading by a significant amount” explained Mr. Ibrahim.
Mr. Ibrahim agrees that many brokerages in Cyprus are effectively white labels of the same platform, and offer almost identical products to each other, therefore it is becoming increasingly difficult to attract new clients and sustain the business.

Being an affiliate of a standard off the shelf retail platform means that the acquisition of clients is extremely expensive, and the lifetime value of many clients is short, hence in some cases losses are sustained by brokers as the affiliate marketing method is a very difficult model to sustain.

“Many firms offering the same platform as each other have to offer shares in US companies, and similar instruments to try to diversify their range, but the cost for firms with a closed off the shelf platform is very high, as is adding genuine market data, and a prime brokerage agreement. Reporting is also expensive. When many brokerages find out that the expenses are really high, they often stick to the market-making model, so instead only firms with enough capital will go down the multi-asset route” said Mr. Ibrahim.

“We are very different from other firms, and our focus is on digital wealth management. We offer investment accounts to private individuals to invest on behalf of their children and have these portfolios managed, for example. We are the only company in Cyprus who can do this, and even across the European Union, there are only 6 companies in Germany and one in France that we know of” he said.

“As far as our front end platform is concerned, we need the flexibility and focus on multi-asset global markets provided by the TraderEvolution Global platform. We believe that just offering OTC FX is not sustainable for those wanting to provide access to diversified markets. When you go to TraderEvolution and see the back end, it is clear that it is built for this type of business. You can find all the different types of dividends offered, and how to split all the stocks. This is not available on MetaTrader. Retail trading and investment these days is not just a case of offering buy/sell functionality, it is a case of providing a proper investment solution, and we wanted a platform for investment, not just trading” said Mr. Ibrahim.

“On this basis, TraderEvolution Global is the appropriate platform for investment products and all the functions needed for stocks, bonds, ETFs, funds which is vital to businesses that wish to offer comprehensive market access. The platform also adds new features every month and is constantly being update” he said.

“We don’t believe in affiliate marketing which is a common model among many retail firms,” said Mr. Ibrahim. “We don’t do that. We depend a lot on content and have articles that are focused on each market. For example, in Greece, we are on the radio and television, and in other markets, we rely on analysts and portfolio managers which all provide very good public relations. Our average age of trader is 40 to 50 years old with a very established background in the markets and diversified portfolios.”

“We also operate with referrals from clients, and grow our portfolio via this method, and our clients are experienced investors with portfolios ranging from deposits of a minimum of $100,000 into the millions” explained Mr. Ibrahim.

“As an entity, we have 25 people in the customer-facing office in Cyprus. We are preparing to open our office in Europe, which will be open in summer 2021 and also another one for the EMEA region this year” concluded Mr. Ibrahim.

You can turn an object into another object. But you can convert energy from one type of energy into another, and by converting oil into heat energy, the raw material has evaporated, therefore control of resources is a massive part of keeping oil at any value – look at what the OPEC countries have done over the years every time there is conflict. Ration it and hold everyone to ransom. However this time, they cannot, as the whole world is in the same situation for the first time in political history.

This is another area of platform flexibility that must be considered in today’s extremely different trading environment to the trading environment that existed a few years ago, and certainly pre-volatility caused by the entire world’s markets since March 2020.

One particular trader, called John, who is based in London whom FinanceFeeds spoke to highlighted the problems associated with the current retail electronic trading environment based on the MetaTrader platform. He said “Until Covid shone the light of harsh economic reality on shale oil costs (breakeven estimated at $48+), the US was beginning to demonstrate oil self-sufficiency which was not what the Saudi’s wanted to see. The Saudi’s are now, very understandably, turning their attention to their biggest customer, China” he said.

“As oil is currently denominated in US$, any oil importing company needs to keep US$ reserves (as they do for dealing with any US$ denominated commodities contract). The petrodollar has supported the US$ as a global reserve currency since the 1940’s” said John.

“If the petroyuan begins to dominate, the argument for Yuan as the reserve currency will grow (albeit communism/lack of transparency) is a barrier to global acceptance). Post the Covid recession/depression it remains to be seen who emerges the stronger and the sooner. Yuan’s claim to the reserve currency crown is growing stronger. Sterling had it for two centuries; the US$ for much of a century. The Euro nations probably need to restructure the EU concept (for long term sustainability) before pitching their hat into the mix. It remains to be seen who the baton passes to next” concluded John.

He may well have a point. I think that by aligning the currency with a consumable product, China can break down the borders by stealth, yet still control its own internal capital flows.

Further comment related to the actual functionality of trading platforms and infrastructure rather than just the market possibilities.
Talk here in London among institutional liquidity providers has amassed, focusing on MetaTrader 4 (and some other platforms) inability to negatively price oil, clearly demonstrating that nobody ever even considered that oil could go past zero value.

“I think it is worth clarifying to retail brokers just how scared they should be about a negative Oil price. Many retail brokers seem to largely be asleep to it, and it’s a total disaster area if it happens again” said our intrepid insider.

“Interactive Brokers lost $88 million on oil trading, you would have thought that this would have woken most people up,” he said.

“The market value and concentrating on market dynamics due to the oil price fall is one thing, but this is very specific to retail brokers because if the oil price goes into a negative value, MetaTrader 4 cannot handle it, so MetaTrader 4 will cut all clients at $0, but the broker could be filled on their hedge at, for example, $20 which could result in tens of millions of losses. Many are asleep at the wheel because the price has gone up, but it will be back down at those levels at the time of expiry” he said.

Multi-asset trading is vital to the diversification of our industry and in order to bring products that interest highly sophisticated traders into the retail electronic trading fold and to elevate the standards of client bases, and the industry’s remit as a whole, however, it certainly seems clear that finite commodities and company futures are tangible assets, whereas oil doesn’t just go up in smoke as a consumer energy product, but has political connotations too.