FinanceFeeds detailed review of 2017 - April to June. Spotting slippage, American resurgence, prime brokerage expansion, broker accountability and MiFID II - FinanceFeeds

FinanceFeeds detailed review of 2017 – April to June. Spotting slippage, American resurgence, prime brokerage expansion, broker accountability and MiFID II

Andrew Saks

As 2017 draws to a close, we look at the important details that shaped the industry this year, continuing with April to June as the first part in a four part series this week. FinanceFeeds remains committed to detailed reporting from within the industry’s major centers and continuing to work closely with the most important companies that shape the entire future of this business internationally.

2017 has been another very eventful year, however there have been some distinct differences between the past twelve months and the developments that have formed the commercial landscape for the majority of this decade.

In particular, the entire spectrum of the FX industry does not resemble its structure at the end of the last decade, when MetaTrader 4 was in its relative infancy and a plethora of small brokerages made their way onto the retail market, as nowadays, a combination of consumer wisdom, regulatory understanding in some of the more important regions, and a need to elevate the standard of smaller brokerages with third party solutions away from the ‘second tier’ status that they have held until now in the shadow of the large, publicly listed companies in the world’s most technologically advanced major financial centers.

FinanceFeeds has committed vast resources to reporting and conducting research from within the companies that lead this industry worldwide, a matter which we consider as vital as working with our esteemed and high level partners whose expertise and engagement assist us in providing the absolute detail on every aspect of developments in this business globally.

In this four-part series this week, FinanceFeeds takes a detailed look back at the events of the year that have been influential and changed the direction of our industry, in chronological order:

April 2017

As a result of substantial research from within the electronic trading industry in both New York, the home of OTC FX, and Chicago, the global center for exchange-listed multi-asset derivatives exchanges, FinanceFeeds began to advocate the return of top quality companies to the United States.

With just two retail FX brokerages in the United States, and a high quality domestic client base with very little option outside the futures sector, now is the time to establish. Is it worth the $25 million start up cost, and if so, would you establish in the Land of the Free?

FinanceFeeds concurs that this year’s absence of competition, combined with North America’s discerning customer base which is used to high quality electronic investment platforms that are long established and in many cases publicly listed, is a very good opportunity for firms with the right credentials to enter.

Doing business in the electronic investment sector in the United States requires diligence and professionalism, as well as the ability to display a balance sheet that not only provides confidence to analytical and conservative investors that often have portfolios in several places, but also satisfies the requirements of the federal authorities, which are known to be the most comprehensive and diligent in the world.

Whilst those who champion the cause of firms with no chance of complying with the expectations of American customers and no chance of maintaining compliance looked away from the most lucrative opportunity ever presented, FinanceFeeds championed the cause of the high quality companies that could easily do well in a nation where expectations are high, client lifetime value is more than double that of every other market worldwide and the level of investment acumen is the highest in the world.

In April this year, we looked at how American customers take a long term view, with an average deposit amount of $6000, as opposed to $3800 in the rest of the world, are loyal to companies that they trust, analytical and often have diversified portfolios, yet only have two retail FX firms to choose from.

We took a look at how $25 million start up capital could go a long way to mastering one of the most sophisticated electronic financial markets regions in the world.

Here is our debate on the subject:

Our advocacy was well directed, as Britain’s most highly regarded electronic trading company, IG Group, is heading back to the United States, a development reported by FinanceFeeds exclusively this month, hence reinforcing our viewpoint.

This is an excellent addition to the United States’ electronic trading sector indeed.

And on the other end of the scale, we looked at the lower end of the retail market, and how by April this year, 80% of clients of small, MT4 based brokerages, do not understand the execution method being used.

Some of the silent anomalies in today’s retail FX trading environment center around execution practices and the extremely difficult variable to monitor from the outside, that being slippage.

In some regions of the world which are populous with electronic trading companies, especially North America where the vast majority of trades are made on the interbank market or via vast wealth management desks by professional traders and all trade data must be uploaded on a daily basis to the National Futures Association (NFA)’s trade reporting system, slippage and unacceptable latency in closing trades are very much under the microscope and there have been publicly reported cases of fiscal penalties by the authorities.

For example, back in February 2014, FXCM settled with the FCA in Britain to the tune of $16.9 million following a review of trades that took place between August 2013 and January 2014, of 43,128,901 Forex and metal executions, FXCM was found to have provided clients price improvement on 15% of orders, totaling $15.5 million.

What about retail brokerages in regions where no reviews on pricing take place?

Last year, FinanceFeeds ran an automated web crawler which provided accurate results as to how many active brokerages there are that use MetaTrader 4.

The result was that as of March 20, 2016, there were 1231 active retail FX brokerages using MetaTrader 4, many of which are white label customers of MetaQuotes, having paid $5000 for a white label platform license, and then either take their price feed from another retail broker’s dealing desk, or in some cases, have no price feed at all and internalize every order.

Out of these, around 150 are based in Cyprus, and have CySec licensing, which includes adherence to the MiFID directive on market infrastructure and are subject to rulings set out by the European Securities and Markets Authority (ESMA). In Britain and the United States, MetaTrader 4 is uncommon, with proprietary platforms being far more the norm, hence it is fair to say that the vast majority of the 1231 brokers and brands are in, Asia, Cyprus and the Middle East, or are registered in offshore jurisdictions with lax regulation and little client recourse.

Surely market infrastructure relates by definition to the structure which provides access to financial markets to retail customers, right the way through from their front end trading platform, to the means by which it is connected to a liquidity and price feed, how the prices from Tier 1 banks are aggregated, to the quality and accuracy of execution via brokerage servers and, if applicable, dealing rooms that should be following their live price feeds.

This, unfortunately, rarely comes up in any discussion and is not included in any remit anywhere outside three regions, those being Britain, the United States and Australia.

Everywhere else in the world, slippage and execution method is an anomaly.

FinanceFeeds can deduce that approximately 80% of retail traders globally have absolutely no understanding of how slow execution and slippage is applied to their accounts, and are unable therefore to contest it or prove it, or even more effectively, to measure it against what would have occurred to a specific trade should it have been executed in accordance with correct practice.

Perhaps even more alarming is that many introducing brokers (IBs) also do not know how to monitor this, as many are focused on sales and marketing, rather than developing systems that can test the prices that are being quoted and validity of orders being filled by their broker.

The only region in the world in which this is tested by IBs is China, where the IBs are huge companies which employ a full array of staff ranging from back office to customer service through to portfolio management and algo development, as they have the resources to develop systems that test the operational conduct of the firm that they are referring clients to, often by developing automated software that picks up anomalies in trade history.

CySec, a unique regulatory authority in that it presides almost solely over retail FX brands and brokerages, does not monitor execution practice or slippage. This is clear within many examples, the first being that FxPro, one of Cyprus’ largest brokerages, releases its own slippage and execution data, however the data is produced by the brokerage itself, and is not subject to audit by professionals who take samples of the company’s trade history and examine it on an impartial basis, therefore, rather like volume reports of retail brokers, it can be considered to be PR rather than fact.

Indeed since FxPro began issuing reports of its slippage statistics in 2015, no impartial regulatory auditor has been to the company’s offices to check if this is valid or not.

That in itself is simply lack of transparency, however there is a more problematic situation in that FinanceFeeds has examined the execution statistics of several Cyprus brokerages, and many have clearly applied slippage and requotes to accounts in the hope that their IBs or direct retail clients will not notice.

Here is an example:

Courtesy of Jon Grah, Awareness Forex

How to avoid being served poor execution

Whether an IB, a small brokerage looking to take a solution or liquidity feed from a larger company, or a direct retail customer, this stealthy practice is something that can be avoided to a large extent by delving into the commercial structure of the companies that can provide an appropriate service.

In March this year, the FCA in Britain stated “If we find that firms are still not fulfilling their best execution obligations, we will consider appropriate action, including more detailed investigations into specific firms, individuals or practices.”

The FCA’s damning verdict on execution was unveiled late last year, the regulator believing that 82 per cent of spread-betting clients lose money, and is looking to include the mandatory disclosure of profit-loss ratios on client accounts to better illustrate the risks and historical performance of product being traded. This is because it is very difficult to price and clear CFDs which are an off exchange futures product.

This may be reassuring, however it is the quality of the companies that operate in Britain that speaks volumes. CMC Markets, for example, invested $100 million in developing its new Next Generation proprietary trading platform, and has its entire trading topography hosted and operated in house.

The company also provides an institutional service to other brokerages, which should be something to look for when choosing a brokerage whether on a B2C basis or B2B basis.

Swissquote, IG Bank, Dukascopy and Saxo Bank are all registered with Swiss banking licenses, hence their execution is their responsibility, and slippage and misquoting is frowned upon heavily by FINMA, the Swiss banking regulatory authority, which in turn requires any firm registered as a Swiss Bank to have its own completely ringfenced proprietary systems from server downwards, hence every aspect is free from interference by an outsourced market maker, and is completely auditable by the Swiss authorities.

When striking up a new IB relationship, it is worth checking whether the company in question has a prime of prime division. Invast Global, ADS Securities, Saxo Bank, and CMC Markets all provide prime of prime liquidity to institutions, hence they have direct relationships with eFX divisions of Tier 1 banks, meaning they are able to execute at the correct market prices with no delay (even if the trade is internalized).

Back in December last year, FinanceFeeds met with Lucian Lauerman, head of API business at Saxo Bank at the company’s offices in Canary Wharf, London.

At that time, Mr. Lauerman explained “If you lodge $5 million in total, use 5 prime of primes, put $1 million at each prime and then are long at number 1, and then short at number 2, then long at number 3, you will lose out on netting benefit re your use of collateral, and have a complex issue to manage re ensuring you minimize your funding costs.”

In terms of explaining how Saxo Bank conducts its bank relationships, Mr. Lauerman explained “Because of our balance sheet and our status as a regulated bank, we have stable, decades long relationships with the largest liquidity providers in the market, and are able to effectively evaluate the new entrants to the market. This is a major differentiator.”

This is a very important consideration when looking from a retail perspective, the question being, how well does a retail broker understand this type of liquidity arrangement further up its commercial structure?

Hosting FinanceFeeds at a private meeting in Hong Kong in February alongside global wealth managers and hedge fund operators, Adam Reynolds, CEO for Asia Pacific at Saxo bank explained “Customers want algorithmic capabilities and charts that interact with platforms, and to be able to clearly see what their holdings are. A true multi-asset strategy is a must these days, and from the point of view of a client, they’re looking at asset allocation” said Mr. Reynolds.

“Even with retail trading in today’s environment, the idea of having one platform for FX, another for shares, and another for exchange-traded futures is not a great user experience. That is the challenge that a lot of institutions have today. The history of banking has always kept a silo mentality, therefore today’s requirements are a new challenge for long established institutions” observed Mr. Reynolds.

“I spent 12 years at Merrill Lynch, during which time the bank spent an inordinate amount of money developing its own single dealer platform, which probably to this day many people have never heard of because it is not as good as Velocity, Autobahn or BARX, even though it cost a fortune. It was only designed for ISDA (International Swaps and Derivatives Association) and and CSA (Credit Support Annex) and due to this type of dynamic existing, trying to adapt that type of system alone to end users has been difficult for banks to do” – Adam Reynolds, CEO for Asia Pacific, Saxo Bank

Other vital criteria to check is how the firm approaches the market, and if it uses one of the main three liquidity integration firms to connect itself to aggregated bank liquidity provided by its prime of prime brokerage, these firms being oneZero, PrimeXM and Gold-i.

If a brokerage cannot give this type of comprehensive answer to how it interacts with the live interbank market and how its price feeds are structured, even if you are an average retail client with an average deposit balance of $3800 (the average deposit in retail FX across the world with the exception of the US), this is how to check whether it is structured properly, or whether a fly-by-night white label MT4 firm – large or otherwise – is tweaking your orders.

For an IB, who is in charge of customer accounts, this is perhaps even more of a consideration.

Mind how you go…..

May 2017

As winter gave way to spring, FinanceFeeds began once again reporting from major retail FX centers, including the second tier development towns in mainland China, largely those populated with very highly developed introducing broker (IB) networks that work closely with the Chinese offices of Western multi-asset electronic trading companies.

Many FX dealers dream of finding just one IB which manages client funds with such vigor that 40,000 lots per month are traded.

However, in the second tier Chinese development town of Zhengzhou, a city of 10 million people in the Henan province, approximately 5 large introducing brokers are referring business to large FX brokerages overseas.

The level of business being conducted there is somewhat different.

Zhengzhou is a one and a half hour flight from Shanghai, and is a burgeoning financial center, as well as being the provincial capital. Its location is indeed prime for IBs wishing to tap into the young ‘new money’ in the province, of which there is a tremendous amount, however western brokers wishing to approach these established IBs in this region should bear in mind a few caveats.

Meeting with several very young CEOs of introducing brokerages which provide direct retail business to large FX industry mainstays including Saxo Bank, GAIN Capital, GKFX, and rather perhaps surprisingly to those outside China, FXDD, have their own dealing platforms for retail customers in addition, FinanceFeeds has noted that once a deal is cemented and the infrastructure is in place and has been proven to be accepted as reliable by the IB in terms of being able to process client payments to send funds directly to the broker (ie getting the money out of China directly to a brokerage’s client funds account), a very strong income stream per IB is a prime factor.

For many of the young Chinese CEOs, $300 million in assets under management is not uncommon.

Many end users do not know or have any regard as to which brokerage is actually providing the FX dealing service, which execution model is being used, or where the payment gateway is sending their funds, as they are totally reliant on the IB for all customer facing and trading matters.

For this reason, China’s enormous and largely misunderstood FX industry is highly developed in the Tier 2 towns across the provinces, and FinanceFeeds has committed substantial resources toward investigating its modus operandi on a cellular scale over the past few years, spending significant time within the offices of large FX brokerages, portfolio managers, technology providers and introducers of large scale business across the entire country.

On May 10, in the advent of what was then the imminent launch of a Chinese version of FinanceFeeds, hosted from within China and fully compatible with the networks used on WeChat and Baidu by Chinese institutional and retail firms, FinanceFeeds once again reported live from Guangzhou, during a two day conference attended by over 300 senior FX industry executives from across China.

Guangzhou, which is just a 45 minute train journey from Shenzhen – yes, 200km in 45 minutes is possible on China’s CRH high speed trains – and is one of two major Tier 2 towns in the southern Guangdong province, the other being Shenzhen itself.

Both Shenzhen and Guangzhou are FX industry mainstays, demonstrating that firms should widen their focus away from Shanghai and investigate the lucrative business in the provinces, which, due to the large population of young and wealthy traders whose property empires reaching into the tens of millions generate a rental revenue per month which is then traded on FX by large scale IBs and portfolio managers to create greater return as property is considered a long term investment, and Chinese business methodology is to use the rental income from long term investments to gain via short term investments whilst not touching their capital base.

Taking place on May 12 and 13 in the banqueting at the Sofitel Guangzhou Sunrich Hotel, the two day event focused on China’s vast B2B FX industry.

Attended by Chinese firms as well as the Chinese divisions of Western companies, there were discussions during the course of both days, and keynote speeches included looking at the effectiveness of automated FX trading via mirror platforms (almost ALL trading in China is automated or via MAM accounts), further debates on the Chinese FX industry’s development model and what has been achieved thus far, and how to hedge against any consequences of RMB depreciation.

Interestingly, there is a growing number of English-speaking salaried staff working for British and Cypriot retail FX companies in Shenzhen. They are paid between 9,000 to 10,000 RMB (approximately $1,418 to $1,576) per month as a base salary, and then earn a lot-based commission of between 50 cents and 75 cents per lot depending on the company, which equates to $5 to $7.50 per million on a lot size of $100,000.

It is also not uncommon for an IB to be trading around 100,000 lots per month.

Today’s Chinese retail FX trader is astute, often extremely well-heeled, and in many cases, especially in second tier development towns such as Shenzhen and Guangzhou, has multi-million dollar commercial real estate ventures and vast derivatives portfolios being funded by the monthly profit from lease agreements on vast illiquid assets such as mutli-storey apartment towers or shopping and leisure complexes.

As all FX business is conducted on a B2B basis in China, due largely to the reliance on IBs rather than brokerages taking direct clients, this will be a valuable two days of industry discussion and gathering of vital information from within one of the world’s most important centers for retail FX.

China may well indeed be a land of opportunity, however its internet is domestic, its payment solutions systems and banking infrastructure is domestic, and the entire environment in which the country which powers the entire world’s industrial, commercial, intellectual and financial world is impenetrable to the outside world, and vice versa.

This has made China, in the eyes of western brokerages, relatively akin to an oasis in a huge desert which, after massive effort has been made without resources to approach it, turns out to be a mirage.

As a result, many brokerages which have managed to forge some relationship with Chinese IBs or via media campaigns that have been small enough to not be of consequence to the all-seeing eye that is the Chinese firewall, have rested on their laurels and let this continue.

Until now…

At the end of last year, SAFE, the Chinese FX industry regulator, which is owned by the People’s Bank of China, which in turn is owned by the Chinese government, made new rulings that any customer wishing to transfer money abroad to a non-Chinese individual or business, will have to declare what the funds are for, and if they are for derivatives or securities trading, they will not be transferred, as this is one of the categories that the Chinese government has banned for transferring funds abroad.

Thus, for small brokerages with no presence in China, that is the end of their ability to operate omnibus accounts with all-important IBs, and it is also the end of the ROI (return on investment) for any media having been purchased on Chinese sites by such firms, as they will be unable to attract an audience that can transfer their funds into a trading account overseas.

FinanceFeeds CEO Andrew Saks-McLeod took the conversation in this direction when presenting to 250 senior Chinese FX industry executives in Shanghai in January, stating “For brokerages, technology providers and integration firms that make up the entire infrastructural architecture of the retail trading environment, only those with actual presence in mainland China, with physical offices, hosting, and a Chinese website based in China which is connected to Chinese payment facilities and has partial Chinese ownership or a joint venture agreement in place will be able to conduct their business with Chinese retail customers and IBs in future.”

“We are speaking about the new ways that media in China will have to be used in order to attract and maintain a sustainable client base as well as organically grow any business, and from my research, the only method now is to concentrate on media campaigns that are based in China, originate from Chinese entities – meaning Chinese hosted and partially owned subsidiaries of Western brokerages or technology firms, and not to make any media campaigns that focus on China, from outside China” – Andrew Saks-McLeod, CEO, FinanceFeeds

This has given rise to the necessity for yet more face-to-face interaction, which is vital in order to secure that all important B2B deal in China.

Just slightly further east, things were somewhat different.

Japan, home to the world’s largest retail FX sector, all of which comprises domestic firms working with domestic customers and accounts for 40% of global retail FX activity, is completely different to China in its modus operandi.

Four large firms continue to dominate, those being DMM Securities, GMO Click, and Invast and MONEX Group.

It is not uncommon for a single company in Japan to experience over a trillion dollars in monthly volume, however despite their high level of trading activity and their conservative, analytical client bases that trade manually with domestic firms only, one aspect of risk is apparent.

Unfortunately, it is virtual currency.

Contrary to Japan’s risk averse business structure, Bitcoin and other crypto currencies have been of great interest.

In May this year, FinanceFeeds reported that GMO-Z.com had taken a bold step in launching its own coin, however this was not without considerable hurdles.

The company has announced a change in the schedule of the service rollout, and is delaying the launch by a week, that is, instead of May 24, 2017, the full-scale services were scheduled to be provided from May 31, 2017. GMO apologized to those affected by the delay.

The company explained that the postponement of the launch reflects the recent increase in volumes of bitcoin transactions, which requires the adjustment of the system and additional checks for its security and stability.

GMO – Z.com Coin started accepting applications for trading accounts on May 9, 2017. The growing interest in bitcoin and the new Japanese regulations for the virtual currencies (including favourable tax treatment) were among the factors justifying the business rationale for the launch of the service.

GMO – Z.com Coin Co., Ltd. was established in October 2016 in order to be GMO Internet’s virtual currency exchange and trading business. In November 2016, GMO commenced carrying out tests for virtual currency trading services and since then the company has been setting the stage for full-scale operations.

This is not the first time that GMO enters into the virtual currencies segment. For example, in February 2016, GMO Internet sealed a business partnership with Tech Bureau to develop back-end engine for games based on Tech Bureau’s private blockchain technology.

By the end of November 2016, Tokyo Stock Exchange, Inc. (TSE) announced that TSE, Osaka Exchange, Inc. (OSE) and Japan Securities Clearing Corporation (JSCC) were setting up a consortium of Japanese financial institutions to keep conducting proof of concept (PoC) testing and explore the possibility of applying blockchain or distributed ledger technology (DLT) to capital market infrastructure both from technical and operational perspectives.

JPX established an internal research group in 2015 to explore the applicability of DLT to capital market infrastructure. The research showed that DLT has the potential to transform the capital market structure.

Back in London, home to the world’s largest and most advanced electronic trading companies as well as their respective prime of prime brokerages and the Tier 1 banks that deliver the liquidity to the entire global market, FinanceFeeds spent the entire summer in its own heartlands, among the industry’s giants.

London is home to some of the most experienced and long-established non-bank institutional FX specialists, many of which have begun to expand their presence considerably over the past two years.

In the middle of May, a further development came to fruition, in the launch of PrimeFX by British household name and electronic trading mainstay CMC Markets.

Careful consideration and planning has been a major priority for CMC Markets’ institutional service, in which the company has built on its proprietary system and in-house capabilities, led by Head of Institutional, Richard Elston.

In May 2016, Mr Elston explained the structure of the firm’s institutional offering during a meeting with FinanceFeeds, stating that “Credit risk is apparent these days for so many companies, but if you go through the annuls of history, there were mainstay players such as CMC Markets, IG Group, Saxo Bank, FXCM and a handful more, but now there are brokers which have financial strength in their own geographies.”

“We have taken a very international approach, and should be very well positioned to be the number one provider of CFD liquidity” he said.

“An important point to consider is our standing as a company which has a combination of financial stability, good reputation, strong counterparty, with marked pedigree in this market place” said Mr. Elston.

“Secondly, we approach the concept of market data with tremendous transparency. Intelletcual property with respect from pricing is derived from an exchange source. When that demands that the venue or institution that we pass it to needs a royalty we are happy to do this and the market data agreemetns we have with brokerages focus on this clearly” said Mr. Elston.

“As a result of the amount of correctly delivered market data that we have, this means that CMC Markets can facilitate the broadest range of liquidity within the CFD space for API connectivity” Richard Elston, Head of Institutional, CMC Markets

Just one year later, the firm had completed the development of its institutional service with the addition of PrimeFX, which was designed to help fill the liquidity gap that has been left by many of the traditional prime brokers scaling back their dealings with smaller banks and brokers. Although there has been a proliferation of firms moving into the ‘prime of prime’ market, recent failings have highlighted the potential benefits of dealing with counterparties who are both appropriately regulated and are able to leverage their own strong balance sheets.

We have been actively providing our services to other institutional clients for over twenty years, during which time we have seen constant evolution in client demands. Our offering has changed to address this, but the recent scaling back of prime brokerage services by a number of major banks has created a huge market need. Our London Stock Exchange listing, international regulation and significant balance sheet means that CMC Markets is ideally placed to be a trusted counterparty when it comes to Prime FX” – Richard Elston, Head of Institutional, CMC Markets

The Prime FX offering from CMC Markets puts the dissemination of tier one liquidity first, ensuring access at scale on an ever-widening range of currency pairs and bullion types. This is another step in delivering a comprehensive and flexible venue to cater for all institutional client trading needs, supported by quick integration and a highly intuitive user interface.

At the beginning of 2016, Mr Elston quite rightly explained to FinanceFeeds that retail CFD and FX trading may now be considered a mature market, but the infrastructure that enables the widest possible dissemination of these products continues to evolve – and it’s the quality of service to end-users and intermediaries that’s very much front of mind.

Richard Elston, Head of Institutional, CMC Markets

“Historically” he explained, “those institutional intermediaries wanting to deliver a third party service had one of two options. Either they looked for a white label provider that offered a complete ‘broker in a box’ solution, or they sought out an Application Programming Interface – API – that allowed a third party execution platform to be plugged into their existing technology.”

“To this end, CMC Markets has invested in excess of £100 million in its proprietary, Next Generation technology. Intermediaries can be assured that whether they are just looking for liquidity or an entire turnkey solution, they’re going to be drawing from exactly the same flow.In recent years, some of the biggest players in the sector have realized there’s a significant benefit to be had in pulling these two disparate systems together. The presence of scale is good as internalizing flows improves liquidity and keeps costs down, it’s the optimal solution for risk management and it ensures the fastest possible execution speeds” said Mr. Elston.

Which of the two solutions a client takes depends on a number of factors. There’s no doubting that a White Label is a far more complex proposition to execute, but it’s a valuable way of getting market exposure where intermediaries already have a strong brand and geographical presence. These clients have a very high expectation of what we will deliver both in terms of an intuitive interface for the end user, as well as seamless downstream technology.

We make no secret of the fact this is very much a two-way deal, and work closely with our White Label partners to ensure they make the most of the proposition. Similarly, there’s a weight of retail brokers out there, typically running MT4, who are always looking to serve up the best prices and execution options to their clients. In instances like this, the API is more appropriate, but regardless of the route taken, it’s all pointing back to a common core with exactly the same underlying prices and liquidity on offer – Richard Elston, Head of Institutional, CMC Markets

Mr Elston’s view is that it is of great consequence that CMC Markets delivers its institutional offering from all fourteen worldwide offices and has recently appointed Andrew Wood as Institutional Business Development Manager in Sydney to support clients right across the Asia Pacific region.

In that region, the institutional offering is burgeoning, with Biyi Cheng as Head of Greater China being a mainstay within the company.

In February, FinanceFeeds spoke at length to Mr Cheng with regard to expansion of the evergreen British company into China. “All of the fund management and stock broking companies are Chinese companies but they have traditionally only really been focused on the domestic market, but these days the senior management that operate these companies have the ability to undertand and operate in overseas markets” said Mr. Cheng.

“Chinese companies dominate outside China as well” he said.

“One of the reasons for this is that their customers want to trade asset classes based on overseas venues, largely down to uncertainty with regard to government policy and impending regulations, however they are willing to try to go to the overseas markets and do not have a risk averse approach when it comes to completely new business oportunities which gives CMC Markets institutional product good opportunity to connect with that type of traditional Chinese institution in order to bring our range of assets to a Chinese audience, via completely Chinese and long established domestic market venues” – Biyi Cheng, Head of Greater China, CMC Markets

CMC Markets is widely recognized as an intrinsically British company with a large percentage of its retail audience being based in Britain, however the company’s institutional entry into China demonstrates the absolute necessity to adapt and develop specialist institutional solutions that will power the largest market in the world, on a completely business-to-business basis.

“Currently, there are many products traded on exchanges across China, most of which are owned by the government and in many cases, the smaller regional exchanges now face extinction because the Chinese government is passing a law that will allow only one exchange to be licensed in each region” said Mr. Cheng.

June 2017

London remained very much the forefront of development throughout the early part of the summer this year, and FinanceFeeds London-based reporting was accompanied by the hosting of several key industry figures for the beginning of several symposiums which relate to how the forthcoming MiFID II regulatory directive from the European Securities and Markets Authority (ESMA) will affect British firms.

FinanceFeeds took an active part in this, organizing the first of many MiFID symposiums which hosted senior executives and compliance officials from FX brokerages globally.

Held at EIGHT MOORGATE private members club in Central London, FinanceFeeds, along with TRAction FinTech, hosted a breakfast symposium, beginning at 8.30am until 10.30am, which presented the absolute intricacies of compliance with MiFID II, what will need to be done, and how to most effectively achieve it.

In attendance were a series of very senior FX and multi-asset electronic trading executives and leaders from across the entire spectrum of the business, from the interbank sector, through to the institutional technology division as well as retail FX brokerage and their respective service providers.

Organized by FinanceFeeds and hosted in conjunction with Australian OTC trade repository reporting service provider TRAction FinTech, the symposium sought to address a matter that is not often clarified and yet is extremely important in the advent of the impending MiFID II regulatory infrastructure directive which is schedule to be invoked across the European Union in January 2017, that being how every company in the entire business will prepare its technological infrastructure and what the guidelines are in order that they do not fall foul of the increasingly technology-led regulatory authorities.

In Europe, preparation for MiFID II is a major milestone that all FX brokerages, executing venues and electronic trading firms will have to pass, requiring substantial preparation and keeping abreast with technological change.

Introduced by FinanceFeeds CEO Andrew Saks-McLeod, Quinn Perrott, a highly experienced senior FX industry executive and director and co-founder of TRAction FinTech commenced with the first subject to be covered by the symposium, that being

to analyze the current situation that the OTC derivatives sector is experiencing, and the size of the industry which at $639 trillion per year in notional volume, overshadows absolutely every other form of electronic trading, and has become the bete noire of the regulators.

Mr. Perrott began by setting the scene for an in-depth dialog, within which the attendees participated actively, looking at arbitrage opportunities among regulators, multi-licensing strategies which use top tier and bottom tier countries in a group, and product intervention risks, BREXIT implications in an enviroment in which regulation will continue to advance as deregulation is very unlikely – Even Donald Trump has been met with a metaphorical brick wall in that respect!

Going into great detail, James Cole, Trade Reporting Officer at TRAction FinTech elaborated for over an hour with regard to how the regulatory environment has become so infused with technological stipulations as far as brokerage infrastructure is concerned.

Mr Cole pointed out that the comprehension of regulations is subject to a vast differential, that being the gulf between the assets, income and human resources of regulatory authorities globally, compared with that of the institutions which absolutely dwarf those which oversee their activities.

Mr Cole provided a very comprehensive insight on how trade reporting solutions must be in place in preparation for MiFID II, one of the factors covered in great detail being the need for the use of a Legal Entity Identifier (LEI).

From 3 January 2018 firms subject to MiFID II transaction reporting obligations will not be able to execute a trade on behalf of a client who is eligible for a Legal Entity Identifier (LEI) and does not have one.

An LEI is a unique identifier for persons that are legal entities or structures including companies, charities and trusts. The obligation for legal entities or structures to obtain an LEI was endorsed by the G20 countries.

An LEI is a code unique to that legal entity or structure. When an LEI code is allocated to companies subject to MiFID II, the code is included in a global data system. This enables every legal entity or structure that is a party to a relevant financial transaction to be identified in any jurisdiction.

Mr Cole explained that there are currently 520,000 LEIs on issue, and that this number is expected to increase by at least 50% post January 2018.

Mr Cole also explored why brokers have to report to MiFID & MiFIR, and what the difference is between trade reporting and transaction reporting. Interestingly, there will be no grace period following the introduction of MiFID II, meaning that the onus is on companies that report to European authorities will have to have understood and provided for the entire range of stipulations, thus avoiding ‘back loading’, which is a practice in which the regulators would reserve the authority to insist on a brokerage having to go through its entire trading history and report it to trade repositories.

Concluding, Sophie Gerber, Director and Co-founder of TRAction FinTech explained the current methodologies that must be adopted and in very charismatic fashion concluded the event, which heralded the first in a series, the next being in Sydney, Australia in November this year, focusing on Australian regulatory infrastructure and trade reporting.

The organization of this symposium plus its impact on the attendees sparked a series of followups, largely by specialist regulatory technology firms that provide full consultancy services with regard to ensuring that the infrastructure of electronic brokerages is compliant.

Not only was regulatory change and infrastructural transparency on the agenda in June this year, but the ability for retail traders to actually hold their brokers to task on pricing and execution came to fruition.

Many companies claim to be disruptive, but only a handful really achieve true disruption for an industry. FinanceFeeds spoke in June to the founders of a new company that, although still in its infancy, could have the potential to change retail Forex forever.

When one decides to buy the latest gadget, most of us browse the Internet to get an idea of price. For example, one retailer may be more expensive but offer free shipping, another may be cheaper but the item needs to be picked up in-store, yet a third retailer may be the cheapest with free shipping.

This type of price comparison keeps retailers honest, competitive and allows the consumer the ability to make his own decision on based on factors that are important to him.

Online shopping has in of itself become the “regulator” for retail shoppers. We don’t see government bodies regulating the price we pay for a new gadget, therefore to be competitive, retailers keep themselves in check, otherwise they would go out of business because online shopping has created complete transparency for the consumer.

MIFID II is undoubtedly front-of-mind for all industry professionals, but retail traders seem to be completely oblivious to how these new regulations affect them.

This new regulatory framework will have far reaching consequences for how brokers execute and settle their trades, but will the trader really benefit? The average man on the street really only wants to be assured of one thing – that he/she isn’t getting ripped off by his broker.

In June this year, VerifyMyTrade came to fruition. It’s a website with one simple idea in mind: allow a trader to see if they paid a reasonable price for their transaction. The service consolidates published retail price data from a few dozen retail Forex brokers, creating some basic statistics describing what a fair price would have been for every second of the day.

Of course VerifyMyTrade doesn’t allow traders to “shop around” before making a transaction, but the fact that traders can look up their historical trades would provide the consumer with one of three things – confidence that their broker isn’t ripping them off, definitive proof that they need to change their broker, or, enough information to know they are paying a premium. Whatever information a trader learns from the service, it’s a step forward in empowering traders and allowing them to hold their broker accountable for their actions.

Despite their knowledge of different brokers’ pricing, we respect the way the developers are declining requests to recommend a broker based purely on pricing.

In a way, this position is an acknowledgment that pricing is not the only factor in the selection of a broker – tools, education, platform, customer service, jurisdiction; these are all factors that traders should take into account in their selection process.

Although the website’s current offering is aimed at traders, it was explained to FinanceFeeds that that development of an API is in progress. This API would allow regulators and money mangers to check the fairness of pricing. I am of the opinion that brokers themselves should subscribe to the service as a tool that gives their customers peace of mind that they are open and honest, as well as allow them to handle price queries in a quick and timely manner.

Most certainly a substantial number of further developments and changes to all aspects of the industry have made themselves apparent since June, even though that was only six months ago.

In the next part, we examine the summer months of 2017, and how the developments during that time, shaped the industry, detailed by FinanceFeeds on-the-ground presences in literally every important FX industry center of the world from Britain to Australia and back.

Featured image: Andrew Saks-McLeod at Invast Global in Sydney, Australia, April 2017

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