Exchanges ramp up the OTC rivalry: Why dont you fight back?

It has been clear for quite some time now that the listed derivatives sector has been directing considerable effort toward attracting traders that would ordinarily utilize OTC brokerages.

This onslaught has been made clear by various attempts at lobbying the regulators in order to create strict clampdowns on the way OTC derivatives are sold to clients in order to make their business more difficult to operate, large scale mergers and acquisitions of OTC firms by exchange operators and launches of new products aimed directly at retail traders.

As summer drew to a close this year, CME Group began to further its remit on this basis by launching Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures which are 1/10th the size of their E-mini options counterparts.

Since then, traders have certainly viewed these as a credible instrument, having reported that as of yesterday evening (December 10), 500,000 options on its Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures contracts have traded since launch on August 31.

Since the launch of these new options on our Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures contracts, we have seen robust interest and participation from a broad range of clients and active traders,” said Tim McCourt, CME Group Global Head of Equity Index and Alternative Investment Products. “Working with the broker community, we will continue to educate sophisticated active traders on the benefits of using Micro options to manage risk and take advantage of the unparalleled liquidity, margin efficiencies and round-the-clock access to our markets.”

“At Interactive Brokers, we have a long history of providing options on our trading platforms and we added Micro E-mini Equity options on the very first day of trading,” said Steve Sanders, Interactive Brokers EVP of marketing and product development.

“Together with their Micro futures counterparts, these new micro options can be valuable tools that both sophisticated, individual traders or institutional investors can use for their hedging or trading needs” he said.

“These micro options give customers another tool for accessing liquid equity index futures markets with even more precision and efficiency,” said Daniel Ryba, Executive Director of futures at E*TRADE Financial. “Building on the success of the micro futures, these smaller options offer sophisticated traders additional versatility and granularity to manage event risk, and we are excited to see interest in them continue to grow.”

“Options on Micro E-minis are opening the door for many ways to trade volatile markets, translating to more accessibility within the new market reality,” said Sarah Potter, Chief Education Officer, TradeStation Group.

“We have seen strong interest from sophisticated investors in the Micro E-Mini products, and today’s milestone reflects the growing role that Micro E-mini options can play in lowering the barrier to entry for self-directed active traders looking to diversify their overall portfolio with options,” said J.B. Mackenzie, Managing Director at TD Ameritrade Futures and Forex, LLC. “Micro E-Mini options can provide active investors with the ability to utilize options strategies at a smaller size to better manage market exposure in their investment portfolios” said Ms Potter.

Options on the Micro E-mini S&P 500 and Micro E-mini Nasdaq-100 futures are 1/10th the size of their E-mini options counterparts. The smaller size allows active traders of all sizes to more nimbly execute equity trading strategies, scale index exposure up or down or hedge existing equity portfolio positions.

The question is, why haven’t brokers in the FX and OTC derivatives sector got wise to this and joined in?

Recently, Tickmill onboarded CQG’s connectivity to exchanges which enables the firm to offer listed derivatives on MetaTrader 5, however via Markets Direct, it is entirely possible for any MetaTrader 5 broker to gain these instruments without making any changes to their solution.

In October this year, a fully accessible multi-asset solution for retail brokers which allow the trading of spot OTC derivatives on the same platform as multi-asset exchange listed futures and equities was launched.

This not only elevates the potential client base of brokerages, as it accesses the equities and futures traders on exchanges, many of whom reside in first tier regions such as the United States, Singapore, Hong Kong, Australia and Switzerland, but also generates a highly sustainable environment for brokers in which long-term traders with less leverage and larger capital margins operate, bringing them into the realms of the portfolio holders rather than CPA/lead conversion short term business.

Quite simply, it is high time that the entire FX brokerage and OTC retail electronic trading business went multi asset, and by that, we mean properly multi-asset, providing derivatives exchange connectivity and access to futures, equities and stocks on Chicago and New York exchanges, on the same platform as spot FX – namely MetaTrader 5.

If CME Group can prove that 500,000 e-mini contracts were traded on its venue since August 31, surely this means there is significant retail demand.

The solution, developed by Markets Direct, operates via a B2B integration to the CQG API to stream tradable FX, US equities and Futures prices via MT5, CQG and NetDania platforms.

“The integration of MetaTrader 5 with DriveWealth came to life at the best possible time, when the demand for access to US Cash Equities is truly high. This makes it possible for any broker, bank or hedge fund, through their MetaTrader 5 platform, to offer to their traders and investors the best of both worlds. That is, access to full or fractional shares, as well as futures and other exchange traded instruments, with the minimum complexity and with competitive conditions. Everything is accomplished by utilizing MetaTrader 5 Multi-Asset capabilities and the MetaTrader 5 Gateway to MetaTrader 5, for a Server to Server connection, both through DriveWealth as well as through its qualified intermediary, Markets Direct”- Christoforos Theodoulou, Head of Global Business and Sales, MetaQuotes

It is a 100% turnkey solution, including all of the technology, regulatory compliance, and banking solutions, and has the EU Level 3 license which offers the following unique opportunities to the small and medium broker. A multi-asset solution developed through a combination of unique participants.

For brokers, the most important feature is the Qualified Intermediary (QI) solution that Markets Direct established. Brokers can choose to work with Markets Direct for all asset classes or chooses an a la carte offering. Note, cross-margining across all three asset classes can only be achieved if a broker takes the complete solution from Markets Direct. For FX, brokers can continue to work with their existing LPs or access Markeds Direct’s extensive LP pool.

This is the very first true multi-asset platform with US listed equities and futures, which includes cross margining capability across all assets utilizing a single account (wallet), over 3300 listed equities and ETFs, and a choice of MetaTrader 5, Netdania and CQG platforms, and fractional share trading enabling.

Joe O’Mara, CEO of Markets Direct explained today to FinanceFeeds

“Multi-asset trading is the future for online FX brokerage firms. Companies are looking to be a more complete trading firm for their clients. Adding US listed equities and futures enables clients to build long term wealth with US stocks while empowering them to speculate and/or hedge their portfolios utilizing futures.

Markets Direct now offers a complete turnkey solution for brokers to be able to offer FX, US equities and futures from a single account utilizing a shared wallet. This enables clients to cross margin their holdings to trade across all asset classes giving traders the ability to capitalize on market opportunities across all asset classes!” – Joe O’Mara, CEO, Markets Direct

MetaQuotes is on board, supporting this huge step

For perhaps the first time since its inception, MetaQuotes, the developer of the MetaTrader platform which dominates the retail trading sector amon brokerages that have off the shelf platforms, is actually on board and working closely with Markets Direct and DriveWealth to deliver a full multi-asset solution.

DriveWealth, which is the equities broker that is integrated into the new Markets Direct solution, allows U.S. share trading is available directly in MetaTrader 5 via a sophisticated, server to server connection.

Speaking to FinanceFeeds in October, Bob Cortright, founder and CEO of DriveWealth, said

“Our goal at DriveWealth has always been to increase access to U.S. equities. We’re proud to partner with Markets Direct and MetaQuotes to bring our fractional equities offering directly to retail FX brokerages through MetaTrader 5”  -Bob Cortright, founder and CEO of DriveWealth

For connected brokers with a MetaTrader 5 server, direct integration to multiple brokerage APIs is no longer required. Instead, brokers can simply order the MetaTrader 5 Gateway for integration with dealers, such as DriveWealth, to perform trades on U.S. exchanges.

Server to server connection makes it possible to trade DriveWealth’s fractionalized U.S. equities. Now clients can place any order size, even for less than a full share. For example, it is possible to place an order for 1/2 share of AAPL or 1.2345 shares of AMZN.

For far too long, brokerages have been under served when it comes to opportunities to offer experienced traders with developed portfolios a genuine product range and trading environment that would attract such a client base toward MetaTrader brokerages.

This marriage of US Equities, futures and company stock via quality technology yet without the cost of exchange membership fees, clearing costs and high margin balances is most certainly the right way for the FX industry to go, as it preserves their familiar environment, yet opens them to a high quality, astute client base with a large number of assets under management.

In October this year, Thomas Elster, CEO of Netdania said of the launch of the solution:

“We are thrilled to be releasing this now. It’s been a long process, certainly not something you build overnight. We view this as a game changer for us and for the industry as a whole. This product has it all – true multi asset, ultra-low commissions, MT5 compatibility – even allows brokers to plug their own liquidity into the mix. All of this is packed into an affordable tech offering.

“We are also very pleased to see all parts of the system fully connected and running smooth. It creates a whole new range of options for online brokers to diversify their product range, attract an additional client base and increase user retention. Especially an ideal match for FX/CFD brokers, looking to expand into more assets, while ensuring a top user experience where everything is traded via a single account. Add to this out-of-the-box integration with outstanding front-ends from NetDania and CQG, as well as instant MT5 compatibility, and you have a really strong offering.”

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, and whilst regulators and large exchange firms have been attempting to ensure retail trading goes on exchange, resulting in various lobbying of regulatory authorities by exchange entities to penalize CFD and FX brokers, and in large mergers and acquisitions that have involved exchange companies buying lots of OTC FX entities in order to gain a piece of the retail pie, none of these have made it easy for MetaTrader brokers to keep their existing infrastructure yet compete with the listed derivatives sector and enjoy onboarding such clients.