Saudi Arabia is not the usual destination for brokers to connect their MetaTrader platforms, however with new accreditation and low entry barriers, an emerging exchange in the Gulf could follow the steps made by DGCX for FX firms wishing to diversify the products offered on MetaTrader without the massive clearing and membership costs of established venues
The metaphorical tug of war that prevails between the necessity for similarly positioned MetaTrader 4 and MetaTrader 5 retail FX brokerages’ need to diversify their product range and the prohibitive cost of going down a true multi-asset route has created something of a stalemate.
There are over 1230 active MetaTrader licenses in current operation, many of which are white label solutions which connect to retail providers, offering an almost identical trading environment and user experience to each other.
Whilst it is certainly the case that some of the smaller white label retail brokerages are quite happy to retain a sales-led model in which the cost of operating a completely off-the-shelf solution from MetaQuotes involves a monthly service fee and a $5000 white label license on a one off basis, and then purchasing leads to convert retail customers, there are a number of firms that are in need of expanding their remit and increasing their presence, the most pondered method being as to how to offer varied products that are not offered by peers.
The latter method poses a conundrum, largely because whilst many executives in the retail FX sector realize that offering a multi-asset solution is a proven means of engaging higher net worth clients and entering different geographical regions whilst taking business away from traditional exchanges and spreading risk away from volatile spot FX, exchange clearing fees are prohibitively expensive and obtaining liquidity from genuine sources very difficult for those without a very large balance sheet.
Of course, the ideal situation would be for retail brokerages to connect to major executing venues in commodities and equities trading nerve centers such as Chicago, Sydney and London, however the cost of exchange membership and clearing fees would render it a non-proposition, and the very powerful lobby groups would likely react very severely to another attempt by the highly advanced and fast moving retail electronic trading sector to gain from modernizing the experience for exchange members.
What about the emerging markets, however?
Most certainly, the mere thought of conducting any business in the Middle East, especially the Gulf states, is enough to strike fear into the heart of even the most seasoned FX industry professional.
Maybe in the OTC sector, that is the case. An environment in which contracts aren’t worth the paper they are written on, and a litany of institutional firms making off with client money, having never had a direct market access relationship in place, is an environment with zero transparency and enough history to make your teeth itch.
However, the same is not the case for emerging executing venues in the region, a matter that has been proven by the rise to prominence of the Dubai Gold and Commodities Exchange (DGCX), which today leads the entire world in volume for the Indian Rupee futures contract, and has over 11 MetaTrader 5 brokerages connected to it, offering a range of OTC and exchange-traded asset classes.
ther venues in the region are garnering interest. DGCX is very poignant as a choice, as it hosts over 35% of all global exchange traded Indian rupee trading activity.
PMEX, which is an acronym for Pakistan Mercantile Exchange, now has ACM Gold’s MetaTrader 5 platform connected to its execution facility, which is a very unusual venue indeed. ACM Gold is one of South Africa’s most prominent brokers, however it was founded by Pakistani national Irfan Pardesi, and had garnered substantial client traffic from the Indian Subcontinent.
Indeed, in Western markets, exchange traded derivatives are often reserved for the highly capitalized global electronic market places of Chicago, however in regions with emerging exchanges, MetaTrader 5 appears to be in favor at the moment.
But what about Saudi Arabia? Surely that is an oil-only commodities market and indeed an oil-only national economy, with strict entry barriers and an unsophisticated business methodology?
This summer, Tadawul, the Saudi Arabian stock exchange managed to become an entry on the MSCI’s Emerging Market Index Watch List.
Yes, Saudi Arabia may well be extremely far behind in terms of business sophistication and commercial society, but it is the richest nation in the world per capita and has a very solid commodities trading base.
Whilst modernity is not a phenomenon often associated with Saudi Arabia, Tadawul and the Capital Market Authority (CMA) have undertaken massive market reforms as part of the Kingdom of Saudi Arabia’s Vision 2030 economic transformation program, which in part seeks to bring the Saudi market into alignment with its emerging and developed market peers and gain recognition for the country as an indexed emerging market.
Saudi Arabia’s addition to the MSCI Watch List is an important milestone for Tadawul, and reflects the Kingdom’s significant progress in capital market reform in support of Vision 2030,” said Sarah Al Suhaimi, Chairperson of Tadawul. “Potential inclusion in MSCI’s Emerging Market Index signals to international investors that the country’s capital market has attained greater maturity in terms of efficiency, governance and regulatory framework.”
Unlike established exchanges in developed financial centers such as London and New York, there is always a risk that doing business by connecting a retail platform to Saudi Arabian exchange infrastructure could result in increased fees all of a sudden, an example being last year’s disussions by the Royal family which looked at increasing the trading fees by a staggering 60% in order to prepare the stock exchange for an IPO.
In May last year, Saudia Arabia’s Capital Markets Regulator (CMA)stated that it may increase the trading cost to 0.025 per cent from the current 0.018 per cent. The new fees, which are split equally between the regulator and the exchange, could well have been put into place by the end of 2016, but of course did not materialize. This kind of drama would never occur in a Western nation.
Integration companies which connect retail platforms to the live market are at the absolute forefront of the evolutionary process of trading platforms and the retail trading environment.
Not the liquidity firms, not the institutional FX giants, not London’s Tier 1 interbank FX dealers, not the brokerages themselves and not the large corporate belt-and-braces exchanges of Chicago. The ability to enhance and further the trading environment lies almost inextricably with the bridge and integration providers, and that can be narrowed down to three companies, those being Gold-i, oneZero and PrimeXM.
In Chicago, the heart of the exchange traded futures sector, I met with Ryan Hansen, President of Tradovate who explained how the capitalization of futures platforms that are aimed at retail traders can be monetized. Mr. Hansen explained “We don’t charge a trade commission nor do we operate on a cost per million basis. Instead, we charge a monthly membership fee, rather like online portals such as Amazon Prime or Netflix.”
“There used to be a reason that this was done differently in the past, as used by firms that operate a commission model. The old way of doing business where a human touched every aspect of an order at multiple stages is no longer relevant, it went through a process in which a customer called a broker, then the broker called the trade desk, then the trade desk called the trading floor, the trading floor then transacted the order potentially with a market maker. The trade was then reported back. This required a lot of manual work” explained Mr. Hansen.
“With electronic trading, the costs created by the manual element are no longer the case.”
“For example, 1,000 contracts could be executed, or just 1 contract could be executed, and there would be no extra work for either scenario.
“Traditional brokers charge a commission on every single contract. What we are providing is a means by which we impact value the most for customers. We therefore charge a membership fee that covers the technology cost and the brokerage in one.”
In terms of connectivity to venues, Mr. Hansen confirmed that Tradovate is connected to CME Group (which includes CME, CBOT, NYMEX and COMEX), ICE US & Europe, and Eurex derivatives exchange.
With this in mind, the question began to surface among industry innovators as to how this model can be incorporated into MetaTrader 4, thus making matters very cheap and very effective for retail brokers wanting to attract a longer term client base with higher deposits and much less risk.
This is now very much in effect.
The dynamic began with MetaQuotes having gained substantial traction among emerging exchanges in the Middle East such as DGCX (Dubai Gold and Commodities Exchange) which now has 10 firms connected to its executing venue, using MetaTrader 5 to execute futures contracts, mainly on the aforementioned Indian Rupee.
That is all very well, however DGCX cannot be compared to the institutional electronic venues of Chicago such as CME and ICE.
However nowadays, things are changing because for the very first time ever, with the assistance of highly advanced integration technology from oneZero, DirectFX has connected to futures exchanges and is offering a US futures trading facility which is actually integrated within MetaTrader 4.
Bearing all of this in mind, whilst offering assets listed on a Saudi Arabian exchange may not be as prestigious as doing so on LSE or CME, it is still a very good method of very reasonably entering a diversified market and attracting new customers.
The MCSI accreditation clearly demonstrates this. “We must continue to make efforts to further strengthen the market through reforms and build investor confidence so that we may maximize our position in 2018 to be formally listed alongside other global markets in MSCI’s Emerging Market Index.”
Al Hussan continued: “With anticipated MSCI index inclusion now one step closer and a number of other favorable dynamics taking place in the Saudi market, Saudi Arabia’s ongoing economic transformation through diversification and privatization and favorable demographics for sustainable growth makes it a uniquely attractive emerging market.”
Saudi Arabia, which opened its market to international investors in June 2015 through its Qualified Foreign Investor (QFI) program, has to date registered more than $ 5.48 billion worth of investable assets. The value of QFI holdings increased more than 3.5 times during Q1 of 2017, while value traded on the Exchange increased by 19.9 percent month-over-month in May 2017.