Providers of liquidity have an obligation of being direct and transparent in what they are doing with their customers, but it is impossible to tell and police what is actually happening between your institutional client and their customer says Alpha Capital’s CEO, Muhammad Rasoul
Recently we featured an article on CFH and the distribution of demo price feeds into China.
After exhaustive research by our team we concluded that without knowing the context of the fact our research was being done, CFH were able to hold the moral high-line when talking about access to Demo feeds, the provisioning of liquidity, regulatory concerns, and what is ethical and what is not.
This raises the question though, as to what certain brokers are doing in China, and concerns over the responsibilities of the liquidity provider, tech vendor, and ultimately what rests squarely on the shoulders of the brokerage operators inside of the ever-growing Chinese market.
To try to provide some clarity into liquidity, technology, B2B partnerships, actual prime of prime setups we spoke with one of the industry’s most experienced executives, Muhammad Rasoul of Alpha Capital Markets Group.
Mr Rasoul today spoke to FinanceFeeds in order to provide a comprehensive insight into this matter from his highly experienced perspective.
“The prime of prime space is rife with misinformation” he said.
“I think a good filter is actually the name of most firms. If your broker is using “prime” as their brand, that’s usually a good sign they are insecure about something” he continued, further attesting to a matter raised recently by FinanceFeeds.
Mr Rasoul explained that the number of firms that are actually carving out credit with their prime brokerages and direct bank relationships and then re-allocating that to their clients in a true prime of prime fashion is very uncommon.
“Most companies that claim to be prime of primes are just trading on margin with other brokers and then marketing themselves as a POP. It’s hard to tell fact from fiction, but I think if firms misrepresent themselves from inception to their customers it tells you a lot about who you are interacting with” – Muhammad Rasoul, CEO, ACM Group
“Providing liquidity to any broker should always be done on a case by case basis, and after much conversation and discussion learning the brokers needs” said Mr Rasoul.
“That goes for China as well as everywhere else. Almost every broker has a need that is a bit different than the next. Some brokers run a bit of risk, some brokers only make revenues based on mark up, some brokers are looking for someone to manage the risk that they have but don’t have the capital, so they can’t do it on their own balance sheet, there are so many scenarios out there and people throw around the terms A Book and B Book, but really don’t have a grasp on how complex Risk management is” he explained.
“China is no different than any other market, but I would say that the firms there are much more aggressive, and generally less capitalized because of the lack of regulatory rules.”
“Largely due to the lack of ability to gain access to granular, readily available public information, quite often you just don’t know what you are getting, what they are doing with your trade, and how they are making money” said Mr Rasoul.
“Most importantly you have no idea what the capital base is of the company. That is really the main issue. I mean you can read their website information, but it doesn’t really mean anything. This company has 300 million in share capital, this company is backed by a uber billionaire, etc. So much marketing hype but unless they are based in a mature regulatory market I don’t trust any of it” – Muhammad Rasoul, CEO, ACM Group
Mr Rasoul asserts that “Providers of liquidity have an obligation of being direct and transparent in what they are doing with their customers, but it is impossible to tell and police what is actually happening between your institutional client and their customer.”
“This is why regulation is important because you can depend on a certain standard of operation. China however is a dilemma because you don’t have that. You have to be careful about who you are dealing with.”
“Having a conversation around profit sharing, execution costs, margin, credit terms, what type of order flow is going to be coming to the liquidity provider, different commercial structures for different types of order flow, and of course a few other matters of importance” he continued.
“All this is normal, and I don’t think there is any issue ethically with working with your client to figure out what is best for them and what will help them grow into a more successful organization. However when something seems off, or disingenuous you need to be careful.”
“Emerging markets are filled with a minefield of less than reputable operators, high pressure sales groups, organizations that have been shut down in other financial markets and are trying to now move into ours, we all have an obligation to keep our business as clean as possible. In many ways we have seen the risk of not doing this with binary products. The droves of bad binary operators taking advantage of retail clients globally is really the catalyst for why we are all now under such regulatory pressure. It’s not the FX and CFD firms that have caused this” stated Mr Rasoul.
“Personally my opinion is that every broker is going to have different execution needs. This is no different no matter how big you are. You are going to have to setup a clearing structure to support what’s best for your business. I don’t think that means that everyone has to have a prime brokerage or a true prime of prime either” – Muhammad Rasoul, CEO, ACM Group
“You need to have what is going to work for you at a particular point in time and that allows your business to be profitable and comply with regulatory guidelines” advised Mr Rasoul.
“That does not mean you have to have direct access, I think sometimes clients get that confused. You need to make sure that you provide a good trading experience to your clients, execution is quality and consistent, and that, is about your LP and how they operate and conduct themselves, not necessarily their model of operation. Bottom line look for a good relationship, solid regulatory oversight, and consistency. When you find that and your liquidity provider is willing to work with you for the long term there is not much better, even if the headlines spreads are slightly tighter.”
“The situation that arose surrounding brokerages in China asserting that CFH is producing a demo feed is a very interesting case” he said.
“As if the procurement of a demo feed to a broker is some type of collusion to defraud customers. I worry a lot about our space now, there are so many firms that have been setup quickly, market themselves as “pros” but have just enough information about derivatives, making markets, and risk management to be dangerous, not effective or safe, over the long term.”
“Small to mid-size brokers really need to be careful about who they are interacting with these days. The internet can take something smelly and make it smell like a rose very quickly” said Mr Rasoul.
“Getting a brokerage request for a demo feed is standard, getting a request for multiple feeds is standard, using different APIs for the mitigation of different types of risk is standard, emerging market and offshore brokers that are dealing with retail clients providing the best execution to their customers is not, particularly in emerging markets without proper regulatory oversight. I’m conflicted of course, but CFH is one of the cleanest operators I know in the space, they are FCA regulated, the standard they adhere is the highest in the world in my opinion.”
Indeed, in our research and investigation CFH demonstrated a very even, ethical method of conducting business, which is proof that even in the somewhat unpredictable Chinese market you can still get business done….the right way.