The efficient brokerage: Integrated prime of prime, risk and dealing – On site report from Grand Rapids, Michigan
At the offices of FX and OTC risk management specialist IS Risk Analytics, Managing Director Jeff Wilkins delves deep into how to structure the entire execution model of a retail brokerage, elaborates on unique solutions that empower brokerages large, medium and small, and looks to the future with a comprehensive analysis of our industry’s direction.
The Midwestern winter reliably provides a contrast of blue skies and picturesque pure white snow.
However, whilst this image may well be associated with Chicago’s listed derivatives vendors and technology providers on Michigan Avenue and State Street, just a three-hour journey around Lake Michigan’s shoreline is the city of Grand Rapids, which over the years has become a nerve center for intelligent solutions and OTC derivatives industry leadership.
Grand Rapids has become synonymous with high standards of education in sciences, its local populace being contributors to many highly advanced industry sectors with a focus on R&D.
The city is home to various medical, life sciences and food technology firms including Amway and Spectrum Health, which have access to alumni from nearby world-class universities offering specialisations in physics and applied mathematics.
Further testimony to the academic ethos that drives tomorrow’s thought leadership is the Secchia Center medical education building, a $90 million, seven-story, 180,000-square-foot campus.
Indeed, FX order execution and risk management are exacting sciences, and Grand Rapids has been host to large and renowned companies, a notable example being GFT, prior to its acquisition by GAIN Capital in 2013.
There’s a growing need for retail FX brokerages to refine their services and execute trades in an increasingly more accurate fashion.
This is due to client expectations having evolved, regulatory stipulations that extend to trading infrastructure such as Europe’s MiFID II directive, and a need to continually strive to outpace vast competition with similar value propositions. It is increasingly vital to concentrate on sales and customer relations, the key tenets of retail brokerage, whilst making sure the technical aspect of trade execution is in good hands.
There are methods that can achieve this, however a unique and highly comprehensive solution can be found right here in Grand Rapids, led by worldwide renowned OTC derivatives technology, order execution and risk management expert, Jeff Wilkins.
In January last year, the assets of long-standing risk management specialist ThinkLiquidity were acquired by British Prime of Prime brokerage, IS Prime.
This created a unique combination that represents an entire end-to-end execution solution for the institutional market, extending from IS Prime’s Tier 1 liquidity and standing as a genuine Prime of Prime brokerage operated by Goldman Sachs and Sucden Financial veterans and FX industry senior figures Jonathan Brewer and Raj Sitlani, right through the infrastructural spectrum to a completely managed risk management solution and dealing facility.
ThinkLiquidity has been transformed into IS Risk Analytics and now operates within the ISAM Capital Markets group of companies (IS Prime, IS Prime Hong Kong and IS Risk Analytics).
Here today in Grand Rapids, Michigan, Jeff Wilkins, Managing Director of IS Risk Analytics elaborated in detail on the company’s unique standing and its specific value proposition to retail brokerages.
“Recently, I was in a discussion panel in London, where I used the phrase ‘insurance policy’ to define our risk management solution, but our services can be best described as complementary, especially for existing risk teams within a broker” said Mr. Wilkins.
“The need for such a solution exists within every single broker in some shape or form. When working with a new customer, our impact can be immediate, but it always feels like it takes a month or so post-implementation for the broker to feel completely comfortable.
It is at that point where the true momentum takes place. Internal teams can provide colour on important variables such as analytics or trends within their business. A good example being a toxic IB whose business model is designed to take advantage of a broker’s pricing and commercial terms.
“In a circumstance such as this, we can trace the footprint that it leaves and its various IP addresses that are coming from specific regions. The internal team can assist with knowledge of that particular IB’s background” said Mr Wilkins on this subject.
“One particular area in which this often occurs is south of Shanghai. There seems to be an evolving pocket of traders whose sole purpose is to exploit brokers. We have technology that mitigates this type of activity, and a team that provides full support and detection” he explained.
“With IS Risk Analytics services in place, brokers can focus on sales and marketing, We can provide risk management, or liquidity through our group company IS Prime, a bridge, or hosting, making up pretty much everything that is required for proper execution, but we can bundle our services according to requirements, which is a serious value add for retail brokers. Ultimately, they can reduce their overhead costs and have a single point of contact” – Jeff Wilkins, Managing Director, IS Risk Analytics
Jeff’s experience in risk management stands out in this industry. He spent six years (between 2005 and 2011) at GFT as Manager of Global Risk Management before co-founding ThinkLiquidity in 2012.
The subject of the firm’s solitary standing in this particular sector is of importance.
“There have been some imitators since we started, some of which are risk consultants or companies that try to provide an outsourced service, however in most of these cases they ultimately come at it from a manual trading perspective, whereas everything we do is very systematic, even more so since the acquisition, as ISAM is a systematic hedge fund group” said Mr. Wilkins.
“This systematic approach has led to a highly scalable operation. On the onboarding side, our pipeline is very full indeed” he explained.
Providing value to brokerages is vital in today’s highly competitive sector in which the very nature of very similar products via third party platforms have created a race to zero in terms of spread, commission and subsequently profit margin.
FinanceFeeds can clearly note that not one MetaTrader 4-based brokerage, no matter how large or market dominating, has been able to list its stock on a public exchange, and in our opinion that is because brokers using third party platforms have very little intellectual property as their client base and revenue generator is hosted on MetaQuotes’ platform.
There is very much a dichotomy in system ethos on the broker side, with large companies with their own completely proprietary systems which are listed on public exchanges such as IG Group, CMC Markets or Swissquote, and specialists with their own trading environments that are privately held such as Saxo Bank at a contrast to smaller brokers with third party solutions.
Unlike the large firms, many smaller brokerages will not get involved in technology R&D, deployment, the cost of doing so and the subsequent support required to operate a proprietary platform. They need to understand risk management yet this is not in any aspect of their trading systems.
“If you classify brokers as large, medium or small, the large companies understand and fully appreciate the service we offer, some of the value propositions we provide them with as a bundle package, and therefore the cost saving is obvious. They don’t need too much education about what we do” explained Mr. Wilkins.
“With regard to many medium sized brokers, quite often there can be a battle between internal and external teams. We are not there to take over, we are there to forensically examine their book and optimize their flow, and with a Prime of Prime offering from IS Prime, this can be done in a modular and very practical fashion” – Jeff Wilkins, Managing Director, IS Risk Analytics
“We have the full end-to-end solution. We realize that not every broker is the same and not every broker is going to have the same problem or same needs. However there is not a single broker that could not benefit from our service. The largest brokers in the world come to us. They have 24 hour teams and full in house expertise, but they still use our service” said Mr. Wilkins.
In terms of order flow and execution, Mr. Wilkins divulged how broker trades are executed either internally or at the Liquidity Provider. “When brokers operate a B-book, they are usually sending 95% of flow to their B book, and the remaining 5% to their Liquidity Provider. In some cases we have picked up flow that should not be B-booked.”
“With smaller brokers, it depends on the level of seriousness with which they run their businesses. We tend not to work with the very small ones. However, if small brokerages are good, we can get them to the next level. Our services enable them to focus on nothing but sales and marketing so that they can focus on building their own business. This helps them progress and grow and this leads to absolute loyalty” said Mr. Wilkins.
“In the cases of firms that do not have their own intellectual property in terms of the platform, their edge is moving their business ahead without having to get involved in risk, order flow and execution” concurred Mr. Wilkins.
“We sign up firms for risk solutions, and we then go over a full analytics pack with the CEO, and continue to provide support via meetings on an ongoing basis. The risk teams within brokerages often get very involved in those meetings and in the end we find that the C-level executives no longer need to attend as the activity becomes self-supporting between the risk teams and IS Risk Analytics” said Mr. Wilkins.
Mr. Wilkins confirmed that even from a risk standpoint, IS Risk Analytics does not go to everyone with a standard solution. “The issue could be a server in the wrong location and some arbitrage that is coming in, so sometimes it is a technology specific problem and not a brokerage risk problem so we look at every case from a broad spectrum” he said.
Moving onto the current disruption that has created some substantial disorder in the retail sector, yet has many apparently sensible people becoming increasingly fascinated with it, often to an unprecedented level, that being the elephant in the room which is cryptocurrency.
FinanceFeeds believes that from a risk standpoint, there is no pricing or liquidity from central providers so the only way is either B book with no leverage, or on exchange, otherwise the risk to brokerage’s is far too high.
Mr Wilkins stated “I fight with myself on it too. Cryptocurrencies are a viable product, blockchain is here to stay, in one form or another, and it is definitely part of the financial technology sector that will not go away. The trouble is that the characters that are starting to get into cryptocurrencies are the same people who were in binary options and this needs to be addressed” said Mr Wilkins.
“In most cases, providing cryptocurrency trading to brokerages is simply a price feed, and brokers are putting it up, and hoping for the best” said Mr Wilkins.
“They have been salivating over the volatility and are absolutely obsessive – but remember that for every two thousand sellers there is one buyer. From a liquidity standpoint it will always have challenges compared to what we know and love which is FX and equities. It is not the same animal.” – Jeff Wilkins, Managing Director, IS Risk Analytics
“In my opinion, there is hope that some good firms can come in, and that the authorities and competition worldwide can get rid of less reputable players. Once that is in place, the firms operating will hopefully make sure they have liquidity outlets that they can use to offload the risk. We can then help them optimize their book, and of course it is hoped that they don’t get too greedy in what they are offering” said Mr. Wilkins in a very refreshing viewpoint.
“They could offer inverted spreads, 5000:1 leverage, and bring 50,000 accounts tomorrow, but that does not make them a great sales organization, it just means that they have a backwards offering and want to take advantage” he quite rightly explained.
“From a liquidity provision perspective, the dust is still settling from the sudden ramp up in popularity seen last year. Some exchanges are now credible, and there is an OTC cryptocurrency exchange using our risk system that is performing well, but I still have mixed feelings on cryptocurrencies overall” concurred Mr. Wilkins.
The recent series of meetings between Chicago’s largest electronic derivatives exchanges and FinanceFeeds raised an important matter that FinanceFeeds has been trumpeting for quite some time, that being the glaring viability of approaching the derivatives exchanges so that retail brokerages can provide a multi-asset product range via US exchanges, alongside their OTC products on the same platform.
Here’s to a high quality 2018
Mr. Wilkins considers that this is absolutely the right way to go. “The market can certainly grow here in America” he said. “It only stopped on the retail OTC side because many overseas brokerages could not remain compliant and did not have the wherewithal or resources to remain in this market. Now there is room for three or four good quality firms to attract America’s very high quality customer base” he said.
Concurring with FinanceFeeds’ perspective, IG Group fits this bill perfectly. Just recently, FinanceFeeds exclusively reported that IG Group is heading to the heartlands of Chicago once again to offer North American customers its multi-asset range, having applied for a FDM/RFED license from the National Futures Association.
“IG Group is welcome back to America with open arms” said Mr. Wilkins. Indeed, should more brokerages follow suit, IS Risk Analytics is well positioned to work with them in the United States.
“We are in a very good position to further support high quality businesses” said Mr. Wilkins. Going back to the advent of our acquisition, we realized it was time to sell and generate a very comprehensive range of services under one company, which was basically triggered by Jonathan Brewer, Raj Sitlani and myself talking” he said.
“We had conversations with several companies, but ultimately it was about IS Prime and its provenance along with its leadership by Jonathan Brewer and Raj Sitlani who are both former senior Goldman Sachs and Sucden Financial executives and long term institutional FX senior figures. This provides us with a top to bottom management structure that is sophisticated and whose DNA is to do things the way they should be done. ISAM Capital Markets Group comprises an exciting combined set of talents” said Mr. Wilkins.
It can be noted that very few new Tier 1 bank relationships have been extended to Prime of Prime brokerages that have only recently entered the market. FinanceFeeds can think of none at all, and similarly no entrance of new Prime of Primes. However, IS Prime’s hedge fund background and strong relationships with every institution in London created a good quality environment in which forging genuine liquidity partnerships was very straight forward, and which led to a substantial last year.
IS Risk Analytics is registered in the US with the NFA. That is fine provenance in itself and shows the level of seriousness in how the ISAM Capital Markets group operates.