FinanceFeeds Podcast Ep.#12: IS Prime’s Raj Sitlani sees traders moving back to FX

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The FinanceFeeds Podcast series hosted by our Editor-in-Chief Nikolai Isayev has produced a new episode featuring Raj Sitlani, Managing Partner at IS Prime, part of ISAM Capital Markets which provides multi asset execution, tier 1 liquidity and risk consultancy services to institutional clients globally.

The Group has three regulated entities: IS Prime in the United Kingdom, IS Prime Hong Kong, and IS Risk in the United States, and has an impressive global client base of brokers, hedge funds, proprietary trading firms, and money managers.

A clear vision from the outset

Raj Sitlani is an industry veteran who founded IS Prime in 2014 together with Jonathan Brewer and systematic hedge fund manager, ISAM.  They had a clear vision to build a market leading Prime of Prime offering, leveraging state-of-the-art technology and quantitative research and trading. IS Prime’s focus was (and remains) to provide highly tailored liquidity, risk and margin solutions to an increasingly sophisticated set of clients.

With their technology driven approach, proactive client relationships and exceptionally strong relationships with Liquidity Providers, Raj and his management team hit on a winning formula from the outset, evidenced by the firm’s meteoric rise and very loyal client base. They rapidly gained market share and have continued to invest in their technology and their people in order to remain a preeminent firm in the industry.  More recently, they have successfully expanded beyond their traditional retail broker client base to also cater for non-broker clients looking for a high quality bespoke provider.

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In this podcast, we discuss Raj Sitlani’s significant experience prior to co-founding the firm, his journey into the world of FX, how IS Prime operates, his views on key trends and his opinion on the MetaQuotes iOS suspension.

We begin with a focus on his wealth of experience, which dates back to 1986 in a futures and options brokerage and includes over 20 years in electronic trading. He has held senior/leadership roles at ADM, Goldman Sachs and Sucden Financial, and has considerable expertise across a range of asset classes and products including commodities, fixed income, index and interest rate products and, of course, FX.

Raj Sitlani explains, “When I was at Sucden Financial, after the-financial market crisis when interest rates went into zero, being a futures guy was not a very exciting place to be. Having discovered the world of OTC foreign exchange, I saw an opportunity to play a role in transforming the industry by applying an exchange traded principle and methodology to an OTC FX market, aggregating liquidity and providing clients with best execution.”

Why FX? Raj Sitlani enumerated the many interesting facets to it, such as being highly liquid, deep, electronic, with many venues, and fragmented. “By virtue of being OTC, there’s healthy money to be made,” he continued, noting the FX OTC space was not a healthy environment at the time and needed to evolve.

The regulatory landscape has made it harder for new brokerages

And it certainly has evolved – and continues to do so, with changes to the regulatory landscape, in particular, shaping the industry more than ever before. We discussed Raj Sitlani’s views on some of the recent trends.

He noted that the recent rulings put forth by the European Securities and Markets Authority (ESMA) – namely in regards to leverage caps and more capital requirements – have made it harder for new brokerages.

“You can’t just open a brokerage with £3.50 in your wallet”, he said. “There needs to be substance, governance, control, regulation” he added as he pointed to a double-edged sword. “Regulators probably shot themselves in the foot by putting limits on leverage because it just forced brokers to set up offshore and offer the same product in a less regulated environment than they were.”

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Crypto, he believes, has now taken over as the new Wild West – it is similar to the early days in FX. In Raj Sitlani’s view, there will be a big clear out, with crypto coming out stronger, better, and less ‘spooky and scary’ for people who want to participate.  He notes that the cryptocurrency market in itself is “such a fragmented market…so nascent and very immature” that it takes a brave regulator to stick its neck out and say “this is how it is going to be.”

Macro trends have widened spreads

Another trend we discussed was the widening of spreads. We are now in highly volatile times with rising inflation and interest rates that haven’t been seen in a long time, with even the Bank of Japan intervening for the first time in decades.

This results in a defensive banking industry as they widen spreads. That will prevail for quite some time, he said, pointing to volatility, geopolitics, inflation, and interest rates as an unhealthy cocktail that will naturally push banks toward risk aversion.

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“Any geopolitical or macro theme is going to cause defensiveness among market makers because of the unknown,” said Raj Sitlani, with a reminder that the cycle repeats itself, and spreads will eventually come back in line when the macro view normalizes.

Raj Sitlani explained IS Prime’s approach regarding liquidity provision. The firm prioritises active dialogue with street side providers every single day. The goal is to first understand what clients are trading, how, and why, and then to translate and manage it in order to monetize and have a two-way relationship. “Transparency is very important. We feel we get a lot of that from LPs”. 

IS Prime Uncovered

Raj Sitlani further explained how the IS Prime business operates and the differences between the Group’s entities in the United States (which focuses on bridge technology and risk consultancy), Hong Kong (sales and coverage business), and the United Kingdom, with the latter being the headquarters that ensures physical connectivity and liquidity as well as the relationships with street-side liquidity providers.

IS Prime’s Hong Kong entity enables the firm to have a local presence in Asia and thus provide support in that time zone. It is open at a time of exploding demand for a more comprehensive product offering, whether stocks or crypto, going beyond classic FX, which is normally the core product of MT4 brokers.

This led us on to a discussion about the demand for multi-asset, particularly given that MT5 facilitates brokers’ adoption of more asset classes into their offering.

Multi-asset class mindset is reverting back to classic FX

Going multi-asset to address customer demand is a quite recent phenomenon that can be traced back to the COVID-19 pandemic.

“A lot of people got stuck sitting at home. They had time and money on their hands and they took to stock trading,” Raj Sitlani said, pointing to the highly speculative behaviour from retail traders that included the meme stock frenzy and crypto. “There is huge demand in the Asian market for high risk and highly speculative products.”

Raj Sitlani believes, however, that the multi-asset trend is not here to stay. “The bubble has slightly burst in a way. Interest in single name stock trading has diminished”, he noted, as the massive selloff in equities has helped dampen enthusiasm. “The multi-asset class mindset is reverting back to the original strategy of focusing on FX markets and indices,” he added.

Prime of Prime vs FX Prime Brokerage

The Co-Founder and Managing Partner of IS Prime spoke in-depth about the difference between Prime of Prime and Prime Brokerage at a time when some Tier 1 institutions exit the market and non-bank LPs increasingly become the go-to providers for brokers.

“If you’re an FX Prime Broker clearer, you’ll receive trades from across the globe 24/7 and it’s only really the following day that you know what you’ve inherited by way of risk. Whereas on the Prime of Prime side, we are pre-trade checking every single position that is put on board and when a client has no more money to use, they simply cannot put more positions on”, he told Nikolai, as he further explained the benefits of being a PoP.

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“That’s a luxurious place to be versus the big banks that have an FX Prime Brokerage: they don’t know what’s coming into their system. They just have a bunch of lines out to the entirety of the street and many players”, he continued, as he noted that, in terms of dollars per million basis versus the credit risk and the balance sheet utilization, it is simply not such an attractive business for the main street banks.

“They are far better off doing equity PB where they can lend out securities, equity financing. With the interest rate world coming back strongly and sharply, there are more opportunities for street-side providers to make more money within the classic PB construct. FX PB in isolation is still really not their area of expertise which explains why PoP still comes to the fore in the world of FX. PoP maintains an advantage in FX and more and more non-banks will join the party.”

MetaTrader’s iOS suspension: Too early for panic mode

The discussion also covered the suspension of MetaQuotes’ products from the Apple Store, with the IS Prime executive admitting that no one really knows what is behind the decision in detail, but the alleged Russian connection is an unlikely motive. Instead, other issues such as bugs and scams using MT4/MT5 are the likely cause.

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“So they’ve put things on hold. Not a very comforting situation given how many clients are dependent on the platforms, but equally I think it’s too early to tell whether there’s been a material impact,” he said, as he noted the MetaTrader suspension caused brokers to think about and revisit a backup platform, which is healthy as “there can’t be one single platform provider”.

Firms need to study alternatives in case the situation with MetaQuotes deteriorates further and they cannot service more white labels, but Raj Sitlani doesn’t believe we have hit panic mode yet. In addition, there is currently no match to the MetaQuotes ecosystem.

“There isn’t a broker out there that doesn’t deploy it. I don’t know of any platform specifically with the same sort of footprint within the ecosystem. All of the plugins around it can’t just be replaced overnight – they’re virtually embedded in the DNA of the whole product.”

Looking ahead: FX industry relocating to Dubai

In terms of future trends, Raj Sitlani took the opportunity during our discussion to raise awareness of the rise of Dubai as the new place to be within the FX industry. The iFX EXPO Dubai, which IS Prime will be attending,  will take place on 17 and 18 January at Dubai World Trade Centre and is expected to be the hottest event for industry executives as firms continue to secure licenses and relocate their offices and businesses. “One to keep our eyes on going forward”, he commented about Dubai.

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Having discussed the industry and IS Prime in some detail, we turned to focus on how else Raj Sitlani spends his time. He spoke about his charity work. For the last 13 years he has been involved with Jeevika Trust, a charity that focuses its work on rural poverty in India. He is now Chairman of the Board of Trustees.

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