Exclusive: FX pioneer Drew Niv sees FX entering golden age while Crypto at risk

Rick Steves

In an exclusive video interview with FinanceFeeds, FX industry pioneer and thought leader Drew Niv pointed to 2022 as the turnaround year that stopped the 10-year drought in retail FX.

Exclusive Interview: Drew Niv

Other key themes for the year include the iOS issue with MetaQuotes and the rise of prop trading, but the new momentum in FX is certainly, where the focus will be.

After the golden age in FX of 2007-12, the industry experienced progressively lower volatility that would not come back as interest rates went to zero. That environment made it much more difficult for industry players, but things seem to be changing. The cause is more than just geopolitical, he said, pointing to a shift in the financial structure because of interest rates, which may lead to a 3-4 year bull market cycle for FX.

Those who survived this long by optimizing their businesses in inhospitable waters will be able to reap the benefits in a big way, he added. “People should be looking forward to that.”

FX and Crypto, the red-headed-step-child

Moving to Crypto, Drew Niv told FinanceFeeds Editor-in-Chief Nikolai Isayev that FX and Crypto share the red-headed-step-child syndrome “as the established financial players want them dead”. He gave an example:

Up until the Dodd-Frank Act, FXCM – the FX brokerage and white label technology provider founded by Drew Niv in 1999 – catered to large financial institutions. Refco, one of the biggest futures houses in the world, was one of them. Then, authorities’ uncovered fraud going on at Refco in October of 2005, much like FTX, which led to Refco’s bankruptcy.

Refco’s operation was mostly in futures and, within months, the business was sold to MF Global. FX and OTC customers and their $200 million worth of funds, however, found themselves in bankruptcy limbo. “They got 11cents on the dollar because of bankruptcy court. Lawyers charged like $4 million in 3 or 4 years. A huge catastrophe”, he said, adding that the same discrimination repeated itself throughout the years. “Whenever a bankruptcy in FX, customers was got completely screwed.”

“Unlike broker-dealers in the US, there is no legal mechanism that prioritizes these customers. There is no place in the world that they are general creditors. I think we’re going to see that in crypto”, he continued, as he predicts that four to five years from now, customers of bankrupted crypto businesses will get cents on the dollar at best.

Crypto lending, basically a fraud

Crypto lending, on the other hand, “was basically a fraud”, he put it bluntly, pointing to offerings of +10% yields that were only possible through Ponzi schemes like LUNA. “All these lenders were involved in this stuff. Everyone that is big in the lending business is basically all done”, he stated, adding that there was not enough need from hedge funds to go through that route. Most customers of crypto lenders were not even trying to gamble.

In regard to the aftermath of recent bankruptcies in crypto, the risk of contagion and further downward prices in digital assets, Drew Niv stated that buying a crypto broker is essentially buying a falling knife.

“What happens if Bitcoin falls to $3,000? I do not think many people will survive that level. If all books were kosher and regulated…which is not the case at all…” he said, pointing to lack of transparency, and the probable zombie state of many crypto businesses out there. “We don’t know if they’re really alive. Are they really solvent? We’re not sure.”

The infamous ‘crypto winter’ has reduced the price of crypto assets, as well as dollars per trade in commission and overall volumes. In addition, the likelihood of raising new money coming outside of the ecosystem is near zero. “Very few people will want to catch the falling life.”

Binance should focus on survival, not rescuing others

The advice: “If you’re in that business now, instead of spending money rescuing somebody else, make sure you stay alive”.

Drew Niv mentioned Binance, which is drawing a lot of attention since the collapse of FTX and the unexpected break with auditing partner Mazars. The largest crypto exchange has just acquired Voyager’s asset for $1 billion, but Drew Niv would advise otherwise.

“There’s no way they’re not sitting on massive balance sheet losses for the lending also. If they go out of business, the industry is… how do you come back from that trust? Millions and millions of customers gone. First, you have to worry about yourself”, he said, adding that more people are likely to pull money from crypto exchanges.

Crypto is replacing black market dollars

Still, there is hope for Crypto as an asset and that can be observed in the price action. “If there’s a run on the bank and everybody’s selling, why isn’t the price closer to zero? Prices should be cratering harder than they are now. They’re not because of third world payment demand”, he explained, noting that crypto is replacing black market dollars in countries such as Russia, China, Argentina, and Venezuela. “Crypto is very relevant for these countries. It is the best gateway to US dollars there is.”

“Thank God we didn’t regulate crypto”

As the crypto dominoes fall, the role of regulators in the United States come into question. Have they failed consumers? On the other hand, would it be worse if they did regulate digital assets? Yes, it would, according to Drew Niv, who believes regulators dodged a bullet there. Firstly, because all these disasters are not on them. Secondly, because it was not regulated, most large financial institutions never touched crypto. “Essentially nothing happens to any of the big banks or big brokers. They do not have any exposure. They don’t care”.

Drew Niv believes that, unless forced by legislation, US regulators will not take the initiative of providing regulatory clarity in the space. In addition, they do not need regulatory jurisdiction to have enforcement jurisdiction. Both SEC and CFTC can claim fraud – a broad thing that can even include inaccurate advertising – and go after people anywhere. The same goes for “unregistered securities”: “they can go after anybody they want”.

The harsh reality is that nobody wants to be in a fight with a regulator, which does not even need evidence to file a complaint. “They don’t have the burden of proof to worry about. There is no judges. No legal protection for the firms. Theoretically, you could appeal to a federal judge but that is after you are found guilty and everybody already cut you off. You cannot fight the regulator. If they want you out, you’re out.”

Regulators in the US will choke the life of Crypto on purpose just like in FX

Drew Niv reminded that, when at FXCM, he spoke with regulators about putting FX customers in the same footing as futures customers in case of bankruptcy. “They didn’t want to give legitimacy to FX. They’d rather let customers burn than giving legitimacy.”

If regulation does come to the United States, it won’t be like in Europe”, he stated. “In the US, it will choke the life of the majority of players and it will be on purpose just like in FX”.

The same happened in derivatives, where Dodd-Frank booted most foreign banks’ derivatives operations, which led to a sharp drop in competitors and the widening of spreads. The big players, first lobbied against Dodd Frank, but they turned out to be biggest beneficiaries because they were the only survivors. Now, they lobby to maintain the status quo, he said, adding that the same will happen in Crypto. Only a few players will be allowed and nobody else will qualify.

Regulation needed because of incentive to steal

Still, regulation in crypto is a necessity because the risk of businesses turning into fraud is too high if there is no oversight.

“When customer money is at stake, you just need it. There’s too much incentive to steal it”, Drew Niv said, adding that most people who end up stealing it, didn’t started like that nor they did it on purpose. They just made a few accounting and spending errors, then borrowed temporarily, then doubled down the losses, and next minute the money is gone. That has always been the case throughout Drew Niv’s career, he said.

This means that regulation has to be very strict, but at the same time, Drew Niv believes that most of the players in the industry currently do not have the balance sheet, discipline, and the systems to survive if such a regime came.

TraderTools brings FX market making capabilities to regional banks and retail brokers

NIkolai Isayev changed the subject to TraderTools, an advanced FX trading platform for liquidity access and distribution catering to regional banks and retail brokers so they can be market makers in their own right.

The market making technology allows small regional banks with a minimum of $0.5 billion of daily volume to truly make markets for clients, give those better prices, and make more money on the trades. Until TraderTools, market making was possible for firms processing over $50 billion.

Drew Niv started as an investor of TraderTools and later became an executive as well in order to help tackle the heavy concentration in FX that took place over the last 20 years, which saw regional banks becoming price consumers only to resell big bank prices with a markup.

TraderTools combines stability of A-Book and earnings of B-Book

In addition to Regional Banks, TraderTools is aiming at Retail Brokers to offer a true hybrid market making: a much-needed middle between A-Book (where they agency everything) and B-Book (where they bucket everything).

Drew Niv explained that, most trades that are currently a-booked could be processed through the TraderTools market making technology without taking much risk and benefiting from the spread, and not only a markup. Doing so would help brokers monetize a-books 5-6 times what they are doing today without taking b-book type of risks, he argued.

It all depends on the currency pair, he explained, pointing to opportunity in wider spread currencies (CAD, NZD, etc). Capturing the spread combines the stability/predictability of the a-book model with the type of earnings of the b-book model…on a portion of their book. On Emerging Markets FX, the TraderTools platform would help brokers outperform the b-book by two or three times, he claimed.

FX entering new Golden Age

The timing is particularly favorable for TraderTools as we get into next year and carry trading become the norm in the FX industry and brokers will need to adapt to the circumstances. Rollover rates will come back into fashion as traders go old school.

“Being old is an advantage”, Drew Niv admitted. He was there since the start of electronic FX trading, pre-financial crisis. Back then, the majority of FX traders traded FX for interest rate purposes, not for alpha purposes, he said. “To do that, you can’t b-book the trades.”

The fall of interest rates changed much of the FX landscape and many new brokers were able to respond to what clients needed as they increasingly seeked alpha. That is about to reverse on itself, he continued, predicting that users will want the roll back again.

“It will be a meaningful trade. Less trades. More winners. More large moves in the market. A golden age for brokers”, Drew Niv clarified. “Our solution from TraderTools will be ideal for brokers to do this well.”

Even small brokers can put an end to A-book and B-book

Drew Niv added that TraderTools is a cheap solution that even the small brokers can afford and put an end to both a-book and b-book, which “are not optimal strategies at all”.

“We spent the last 25 years really shrinking every year the number of true market makers. Concentration is very unhealthy”, he said, adding that TraderTools brings the force into balance, allowing the FX world to become more stable as brokers and regional banks turn into true FX market makers, lower their risk profile, spread, and get better execution.

If regulators do come into Crypto, brokers will have to pay attention to best execution and standards as the remaining crypto traders will be execution-cost sensitive.

TraderTools helps brokers manage risk during slow moving recession

As to the financial landscape of today – experiencing the aftermath of 12 years without interest rates, leading to high risk investments such as crypto and a burning hot real estate market – Drew Niv sees the rising interest rates forcing air to flow out of a lot of bubbles.

This is likely to be a slow moving recession, he said, reminding that the 2008 crisis really started in 2006. “It doesn’t happen overnight”. When the world is burning is when FX does best and it should not be any different today unless one is exposed to the wrong side of a trade.

“TradeTools will help people manage things more cleverly. Life is about to change in many ways […] I agree risk is going to be a big thing. No one knows. Even in 2008 no one thought it would come out that way.”

Brokers may regret Single Share CFDs in the future

One last pointer for brokers: during the 2008 financial crisis, a lot of single share CFD businesses were destroyed because so many stocks went belly up, he said.

Brokers across the globe have been adding single share CFD offerings to address growing demand from traders who are looking to gain exposure to such instruments with leverage. Such products have become a significantly important part of many brokers’ business, with a considerable share of trading volumes alongside other asset classes.

The way interest rates are rising, however, and the world seems to be preparing for a hungover after 12 years of cheap money, CFD brokers should take heed of Drew Niv’s words as he ended the video interview with FinanceFeeds’ Nikolai Isayev. “Single share CFDs are booming now, but brokers may regret in the future.”

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