2018 will be excellent for the established and high quality companies. A year of growth and for their prestige and ability to shine. Conversely, it will be a year which will show the low end exactly where to go, and will expose the danger of follies such as ICOs, and various crypto-bandwagonism which is not part of this industry. We examine each sector of the business, and what to look out for in 2018. A great year lies ahead!
The FX industry is one of the most rapidly changing business sectors in the world, and 2017 has been one of those periods which will stand out in the minds of the majority of FX industry executives as a year which has required extreme levels of concentration and commitment, quick responses to industry-changing circumstances.
The past twelve months have been quite different to any annual period that preceded, largely because until recently, there have been two camps in terms of the progress made by retail FX brokerages, that by the established firms with public listings in top quality financial centers and their continual refinement of proprietary systems that continue to serve loyal domestic-market customers, and that by the plethora of MetaTrader 4-based brokerages with third party solutions.
For brokers in the second category, that being the smaller, retail market MetaTrader 4 (and now 5) brokerages with no prime of prime liquidity relationship, there will be a considerable change of operational structure within the next year.
In order to look closely at this, and the circumstances that will likely amount to a requirement for absolute change of direction among smaller retail FX brokerages, examining their origin is critical.
Between the beginning of this decade and the end of this year, an easy route to provide retail trading environment in what have appeared to be bona fide regulatory environments for very small, undercapitalized companies with no concept of, or ability to provide, proper market execution to their customers has created a realization among many retail traders, let alone experienced industry professionals that this is neither sustainable, nor did it come from the same origin as those at the top level of the corporate structure within the retail sector in proper regions of good standing.
It is FinanceFeeds steadfast notion that the FX industry’s retail sector should not be about cheap licensing in improper jurisdictions and low entry points for small sales-led white labels. It should be about sustainable and well organized business practice and economies of scale that represent proper infrastructure and long termism.
This is where the dichotomy between the sustainable representatives of good quality for the year ahead will substantially differentiate themselves from those which did not invest resources in building a good quality commercial environment.
The number of smaller companies generating overtly marketing-led claims of listing on premium stock exchanges has dwindled to absolutely zero, largely because enough time has passed between the blustery PR propaganda issued by those wishing to create a large scale level of media attention, whilst attract cash-ready second rate investors and the resultant non-listings that this is no longer a plausible means of pulling the IPO-infused wool over the eyes of investors and prospective customers.
Meanwhile, publicly listed mainstays in the retail sector, those being IG Group, CMC Markets, GAIN Capital, and Interactive Brokers (still a retail broker despite their larger minimum deposits and focus on Eligible Contract Participant (ECP) business) have not only retained their evergreen and high quality business model regardless of changes that have affected smaller firms, but have built and are continuing to build on important components to lead them forward.
CMC Markets has been expanding its institutional service, led by Richard Elston, and has, alongside the development and release of its $100 million Next Generation proprietary trading platform and proprietary hosting and infrastructure, been expanding its physical presence in China, with the opening of a new office in Shanghai, fully operated and facilitated from within mainland China.
Recently, the Chinese government provided FinanceFeeds with an official document listing 40 well known brokerages as entities with whom the Chinese government has great concern, and has instructed the Bank of China to cut off their payment channels.
These are all companies with substantial business in China, most of which are operating without having operations there and are simply ‘churning’ IBs and customers, a short term approach to which the Chinese government is now wise and will no longer tolerate. Attempts to stem them by cutting off their non-Chinese websites, and restricting their sales operations across China have preceded what will now be a much more ultimate solution to stopping them.
CMC Markets is not on that list, and that is likely to be because of the company’s correct approach of establishing itself as a genuine and licensed Chinese company with full access to all servers and internet presence, as well as physical operations by the government, as well as having Chinese officials as senior executives.
The short term ‘grab it now’ approach by small firms which do not hail from proper regions is coming to an end, which is a good thing as it paves the way for sustainability for those doing it correctly in China, as per CMC Markets, and Saxo Bank which sold 30% of its commercial stock to a Chinese conglomerate (Geely Automotive) and has approached and built its infrastructure there correctly.
Thus, we can look forward to a year ahead of doing business in the most important region for retail FX in the world, without the waters being muddied by those who do not mean well and without worrying about their actions causing a full scale government block on everyone.
On this basis, the only way ahead, especially when considering the imminent implementation of the MiFID II infrastructure directive, is to be part of a company that is well established, run by genuine financial and technology industry senior professionals who have gained their experience in proper institutions rather than those on the back streets of the gaming business who have learned how to recycle gaming leads and sell them binary options or B-book FX on a white label MT4 platform.
It should not be about paying a second rate law firm a fixed fee to get a bank account in Georgia and a tiny office in Cyprus and a website that onboard clients via an offshore entity.
These are people who are nothing to do with the financial services business and have their roots in gaming, lead buying (stealing!) and adult entertainment and are largely Israeli or Russian entities with a client list that most British or American firms would – in their own words and quite rightly so- not want any association with whatsoever. It will also no longer be tolerated by ESMA, whose scope is far larger than keeping some small firms in business for their own interests rather than that of customers.
FinanceFeeds has already taken note of some Cyprus and Israel based marketing agencies which used to hawk very implausible leads and sell them to binary options firms, now selling ‘crypto leads’. Most of the people behind these agencies have worked at binary options brokers and have actually taken the lead lists with them, and then combined them.
The implementation of MiFID II in January will see a lot of these smaller firms off, or at least make them head to offshore jurisdictions and the rest will fold and do something else, especially bearing in mind that most of the retail clients of these firms are not based in Europe, but are in Indonesia, Vietnam, Thailand and other regions which are not covered by large financial markets participants or strong regulators.
Comparing this to the UK, which has a very well organized financial markets economy and whose retail FX firms can claim legitimately that 50% of their clients are on domestic territory, the difference is clear.
Cyprus is becoming a funds and family office area but there are at least 80 small brokers that will either metamorphacize (showing their lack of commitment to proper infrastructure) or will move on completely. Binary options crooks have adopted the buzzword ‘crypto’ for everything and all of this is worthless, and not helped by an inept regulatory environment and slack business acumen across the small firms in the region that have been allowed to misuse the European regulatory banner and then onboard clients via the Marshall Islands and St Vincent or the Seychelles.
Among that sector, the only companies that have a good future are larger and established firms like FXPro, and easyMarkets as they know their market and are well organized and large in scale. It is a different market to the British and American firms though, but still a very sustainable one, and soon they will have much less ‘baggage’ around them so will be able to work steadily without affectation by small chancers being established by even less than reputable lawyers and consultancies.
Cryptobabble – where to draw the line
The morphing of some of these entities as the end of the road draws nigh for the binary options and lower end retail FX business draws near into ICO or cryptocurrency entities, and their influence over the media is also a case in point.
In 2018, the flurry of criminals that are now attempting to appear as Venture Capital moguls by touting implausible ICO schemes will have their day.
Once a few million has been stolen, and it has become clear that ICO – literally an offering of nothing, for the funding of nothing, in a currency that does not exist – is futile and a means of former binary options brands and market makers stealing their money having got away with their binary options related crimes as a result of paying the Israeli government off, and showing themselves to be part of this industry (which they are NOT) by attempting to have their updates posted on FX industry websites, they will disappear without recourse.
The cryptobabble that is currently abound is very temporary, and will lead to its perpetrators running away with a fortune. Whilst in some respects it is good that they are no longer passing themselves off as purveyors of an electronic trading product as they were with binary options, because that did substantial damage to a retail market via regulatory bans on every firm’s marketing effort, hence ICO fraudsters will not be associated with any FX or electronic trading entity, it still represents a misuse of marketing and sponsorship budget when they are lumped together with genuine fintech and FX industry entities.
On this note, any notion of blockchain development and all of the equally marketing-led startups touting it as a means of raising the automation abilities of the electronic trading industry can be dismissed. Banks and management consultancies are not investing millions into ‘blockchain’ development for the purposes of using an item that cannot be separated from Bitcoin – the very anarchistic and dangerous medium that they are not aligned with – so that they can automate and generate distributed ledger technology.
They are investing in developing non-Bitcoin related distributed ledger technology of their own. Once this happens, blockchain will be rendered another obsolete buzzword and all those who invested in specific Bitcoin-related blockchain R&D projects will have lost their money. Simply put, distributed ledger technology represents the future of banking procedure, but blockchain will not be part of it. Banks will separate it from Bitcoin.
This month, FinanceFeeds met several CEOs of British and American companies in the retail and prime of prime sector, all of whom agree that ICO is an insidious stain and should not be associated with the FX industry at all. It is our understanding that this short lived opportunity to create fraudulent venture capital raises for non-existent and banal projects will fizzle out and unfortunately leave a lot of losses behind.
Thus, FinanceFeeds stands vehemently behind a viewpoint expressed this year that ICO is nothing more than a folly, and a potentially expensive and damaging folly at that.
As far as digital currency itself is concerned, it is, and should be regarded as a commodity, and therefore the trading of it as an instrument on genuine venues such as CME Group which may introduce a futures contract on Bitcoin this coming year (but also may not!), and doing so via genuine technology providers and market access integrators is the only future it has as part of this business.
Indeed there are some new names that are purporting to provide Bitcoin liquidity however from a third party software perspective, only oneZero, Fortex, Gold-i or PrimeXM are companies that should be consulted about any type of integration of liquidity to trading platform.
The only entities to pay any attention to in this respect therefore are exchanges, large, listed companies issuing virtual currency as a tradeable asset, and the integrators and technology vendors that provide market access for it to be traded as a commodity.
Everything else – ICOs, crypto ventures and former marketing people touting ‘the next big thing, get rich now’ are to be avoided at all costs, and will have had a close encounter of the 22nd kind within just a few months from now.
In short: Unlike the consolidation of retail companies that has been anticipated in the past, there will be the removal of the lower end firms that do not carry any credibility, as they will go off to non-entity regions and into other marketing-related activities. Conversely, there will not be a merging of the large, bona-fide companies as these are flourishing in their own right.
A very good example of this is IG Group’s application to become an FDM (Forex Dealer Member) and RFED (Retail Forex Dealer) with full NFA membership, as the company heads back to its Chicago heartlands to re-enter the American market.
FinanceFeeds was absolutely right in prediction that this is an ideal time to re-enter America for the top level retail companies as it is an excellent market, has top quality organization and regulatory structure, and no competition. Companies in America, rather like in Britain, cannot survive without quality and expertise, hence IG Group is making a very good step by leading the good firms back to a very high quality market.
Prime Brokerage: Just a handful of genuine firms, however those are the darling of the banks and should be the ones to do business with
Looking back at the last two years, FinanceFeeds has been engaged in many a debate with senior executives in the prime brokerage and exchange sectors, and as a result of these discussions can deduce that the prime brokerage sector has changes in store.
This year, the perspective within the boardrooms of London, Sydney, New York and Chicago would, understandably, doubt that prime brokerages would establish relationships with exchanges or whether the authorities would make them process all orders through an exchange, largely due to the vast membership and clearing fees that big technology providers and venues such as CME, ICE, NASDAQ OMX or LME would impose, because their businesses are geared toward catering for the order flow of large institutions rather than retail brokerages.
Our view is that there will be a gradual move toward exchanges, but it will not be a case of paying vast fees to Chicago’s vast exchanges and then hoping that retail firms can factor this in (which they would never be able to). Having discussed this matter with European regulatory officials engaged in implementing MiFID II, it is clear that asset classes that have a read across to the same asset that is listed on a major exchange in Europe, will be eventually placed on exchange only, as the European Securities and Markets Authority (ESMA) wants to move as much away from OTC execution as possible during the coming years.
This will lead to OTC firms intentionally focusing on products that do not have an exchange listed counterpart – thus Bitcoin and some most Spot FX pairs will remain traded on an OTC basis, but multi-asset firms wishing to diversify to other classes will likely offer a hybrid platform which combines OTC spot FX with exchange traded derivatives on the same platform.
The liquidity provision area is very sustainable and will continue to be, largely because there are really only a handful of genuine prime of prime brokerages in existence, those being ISPrime, Sucden Financial, CMC Markets, CFH Group, Advanced Markets, Invast, Swissquote Stater Global Markets, and that is about it.
This year, there is unlikely to be any new entrants into that area, even though a conversation between FinanceFeeds and RBS Prime Brokerage division at the RBS head office in Bishopsgate, London, recently denoted that the banks are now looking to re-establish business with the OTC derivatives sector by extending counterparty credit.
Whilst it was very encouraging to hear such enthusiasm to provide OTC derivatives liquidity once again as the banks cannot afford to ignore such a large and liquid market as the retail FX business, the extension of credit is subject to massive due diligence procedure, hence any notion of simply going to a Tier 1 bank and getting a Tier 1 relationship to offer DMA liquidity to brokers will not happen without a six month audit, and a balance sheet of over $100 million plus a vast escrow account, and scrutiny of what risks are being taken.
Thus, our advice to retail brokers is to welcome the banks’ view on needing to extend counterparty credit to OTC prime of prime brokerages, but to stick to the existing names listed here for the foreseeable future, as it is unlikely that any new genuine prime of primes will come to the market this year, even if they are using the word ‘prime’ as this is often a marketing gimmick.
This documentary by FinanceFeeds shows where this division is heading, in great detail.
FinanceFeeds prides itself in working closely with the high quality establishment that continues to move the electronic trading business forward. We invest a lot of resources in reporting and researching from within the major industry centers, and in particular from the boardrooms of the major companies in the industry. This is the only way to provide a good quality reference point for those of our partners and colleagues, and we consider this a vital service to you all.
Thus, 2018 will be a year of stability and growth for the large, public firms. The dwindling of the lower end of the market will be good as it will create a disassociation which will allow growth for the good, and anonymity for the lower quality entities who will reduce in numbers as they seek other schemes.
2018 will also be a year of loyalty to existing prime of prime brokerages. MiFID II examines ‘best execution’ practices and ensures that the relationships between broker and liquidity provider are transparent and not based on commission-free incentivization via implausible execution at liquidity provider side, hence genuine prime of primes will be able to expand their client list and continue their position as mainstays of the market, and this sector will remain firmly planted in Britain and Australia.
No more IPOs will take place, the high end are already listed, and the smaller firms will not go down that route.
This can be put down to 2 things – The zero value proposition fraternity that exists in a low quality environment where everything is the the same as peers because no real effort was put into establishing and progressing a genuine company, and also because of the glitzy marketing-led campaigns that chop and change, along with the trade shows that have now allowed a presence, will go by the wayside. Even at the Shanghai Money Fair this year, which is notoriously retail, many institutional providers and technology vendors attended in order to bring on board IBs that now wish to become brokers and do it the right way.
2018 therefore is likely to represent a return to the focus on high quality, and for customers and the industry to continue to view those who have always upheld the high standard as the firms of the future. Companies that do not chop and change their tack all the time. Companies that do not jump on the latest craze and exhibit it in a banal fashion. Companies that have always represented the leadership in this sector from top down.
Hence, 2018 will be a year of progress rather than bandwagonism, a direction that we welcome.
FinanceFeeds wishes all of our colleagues a very well deserved winter vacation, and vows to support, research and report in great detail in the coming year, for the greater good of those we value tremendously who drive this business forward and do so with aplomb in the right and proper way.
Happy holidays to you all !
Featured image: James Alexander, CCO, Invast Global, discusses the year ahead with Andrew Saks-McLeod in Sydney, Australia