“We believe that we need to bring the data transparency into FX. In other asset classes this is normal, and there is real market depth, and a volume indicator displayed on the platform. Even in short term equities, nobody would trade without a volume indicator but in FX they do trade without it. HFT traders do have the means of looking at volume and market depth, but they pay a fortune to get it.” – Drew Niv, CEO FXCM
The end of 2016, a very interesting year which was filled with extremely poignant matters that FX industry executives had to navigate ranging from counterparty credit restrictions to regulatory matters to operational issues such as commercial bank accounts within which to lodge operating capital, is nigh.
In just over ten days time, 2016 will be history, leaving behind a twelve month period in which the entire FX industry explored how to provide direct market access to a retail and institutional audience, further increasingly difficult Tier 1 liquidity arrangements, and dealing with an environment in which caution and stringency have taken precedence, especially in the aftermath of January 2015’s action by the Swiss National Bank in which the 1.20 peg on the EURCHF pair was removed without warning, sending the markets into a period of extreme volatility that created exposure to massive risk for many FX firms, calling into question the entire execution model.
FinanceFeeds does not ordinarily go the extent of singling out particular leaders, our ethos being one of interactivity and close relationships with all of the senior executives who strive hard via experience and the wealth of knowledge they possess to drive this industry forward, however at the end of this year, we believe that a special mention should be given to Drew Niv, CEO of FXCM in New York.
Forex Capital Markets was founded in 1999 in New York, and was one of the early developers of online forex trading. In January 2003, FXCM entered into a partnership with Refco group, one of the largest US futures brokers at the time. Refco took a 35% stake in FXCM and licensed the FXCM software for use by its own clients. Following the collapse of Refco in October 2005, FXCM became entrenched in the Refco bankruptcy proceedings for a number of years.
In 2003, FXCM expanded overseas when it opened an office in London which became regulated by the UK Financial Services Authority (now the Financial Conduct Authority).
In 2008, the self-regulatory organization for the US futures industry, the National Futures Association (NFA), obtained permission from the Commodity Futures Trading Commission (CFTC) to increase the minimum capital requirements, in staged increments, to $20M for “Forex Dealer Members” including FXCM. The increase was in response to the failures of a few FX brokers, and it allowed FXCM to acquire new business from some of its smaller competitors who either ceased all operations or moved out of the US. The same year it continued its overseas expansion and opened offices in France and Australia.
The following year FXCM UK started offering a limited number of CFDs to its non-US based clients, in addition to its currency products. In May 2010, FXCM acquired the UK CFD and spread betting provider ODL.
Drew Niv co-founded FXCM and is today the company’s CEO, having steered the company through various acquisitions, and most notably the situation that ensued after the Swiss National Bank’s decision to remove the 1.20 peg.
Mr. Niv, in our opinion, is one of the industry’s most composed and astute leaders. He manages what is now one of North America’s only four remaining evergreen companies, those being GAIN Capital, OANDA Corporation, Interactive Brokers and FXCM.
All eyes were on FXCM following the Swiss National Bank’s sudden decision. The company was exposed without warning to a substantial amount of negative client balances.
Mr. Niv demonstrated his leadership abilities by remaining calm and dealing with it in a way that only a very experienced executive would.
In the aftermath of what has now become known as ‘Black Thursday’, industry executives, traders, news reporters from the mainstream press and those with an interest in electronically traded financial instruments followed FXCM’s fate closely.
The company was exposed to almost $300 million in negative client balances, and due to its standing as one of America’s giants, was immediately subject to a potential end of the road by shareholders, regulatory authorities and indeed is own financial position.
In the summer of this year at FXCM’s global headquarters in New York City, FinanceFeeds met with Mr. Niv, who spoke candidly about how he so effortlessly steered the company through this extreme event with such aplomb that the company remains as it was in terms of volumes, client base, staff and commercial strength.
What was it like on the actual day?
Mr. Niv explained that “As soon as it became apparent that these about 3,000 clients had suffered such significant loses, we notified our regulators and the regulatory authorities arrived at the office.”
“We have been doing this for 16 years now, so we have been through a lot of turmoil, and have a lot of crucial experience.”
“If you look at FXCM today, it is effectively the same company as prior to January 15 2015. Most of our customers stayed, almost all of the staff stayed. We did sell some non-core assets and for a few months we had some losses, however we kept the market share in tact. What many people don’t realize is that we effectively plugged the capital shortfall with Leucadia’s loan.”
In terms of actual impact on the business as a result of attrition, Mr. Niv explained “The customers that we lost were mainly some of the large customers. The total number of our clients that were actually affected by the market volatility that followed the SNB’s decision approximately 3,000 customers which comprised of around 200 here in the United States, and the rest were overseas.
This is a small amount, especially when bearing in mind that some were inactive customers. There were also some customers which stayed with FXCM but deposited less funds because, for example, they were happy to continue trading but would prefer to hold $50,000 in the company rather than $1 million.”
“If I looked at life as what I had on Friday and notice that I had less the following Monday, I would commit suicide every day. I have to look back at what I had 20 years ago which was absolutely nothing, and what I have today, which is still a lot. My kids still love me, and I have five of them. My wife didn’t leave! I personally lost approximately $200 million, however it is not healthy to show a lot of emotion, especially when you are in business.” – Drew Niv, CEO, FXCM
FXCM had 12 hours at first, not a weekend like other firms which have experienced something like this.
From his office which overlooks downtown Manhattan from the 50th floor, Mr. Niv calmly explained “We weren’t given a lot of time from the regulators. We had to act very quickly in the best interests of the customers, employees and shareholders. Although the outcome was actually very positive, had it not been, the absolute worst case is that we would have ceased. Other senior executives within the company explained to FinanceFeeds that Mr. Niv kept completely calm throughout the event.
“I said to myself, this loss I can personally take. In 5 years I will recover it and it will still be more than most people will have anyway. Philosophically I believed at the time that a person or any business that is in financial trouble will always make the wrong decisions as they will be driven by pressure and other factors, so therefore we always make sure that we are not in that position at any time and that we can make decisions that are sensible, regardless of the circumstances” – Drew Niv, CEO, FXCM
The composure with which this was handled is remarkable and in the opinion of FinanceFeeds, very unusual. It is well known that many executives would tend toward ‘meltdown’ in such a circumstance and either close down, or start holding emergency meetings and creating insecurity in the minds of staff by implementing emergency procedures. Mr. Niv did not go down that road at all. Despite the media speculation and rumors that the company had nervous employees and shareholders, the opposite is true, as is quite clearly depicted by the company’s situation today.
Shortly afterwards, it was apparent that FXCM had not been called up on its capitalization or order execution practices, and had indeed maintained an even keel, with the entire company remaining not only in tact but as one of the world’s most prestigious FX firms even to this day.
Having taken an emergency loan from Leucadia, with no time for management consultants and accountants to spend six months conducting due diligence, Mr. Niv has displayed his accumen in paying down the loan via the sale of non-core assets and the maintenance of his core business as a mainstay.
In early November this year, FXCM sold DailyFX, London’s most popular economic calendar to British spread betting firm IG Group.
FXCM had confirmed that the proceeds from the sale were used to repay debt owed to Leucadia. FXCM has made loan repayments of $154 million to Leucadia with $156 million outstanding. After the additional $4 million is received, FXCM will have repaid more than half the debt. That is a remarkable achievement indeed.
During the first week of November, FXCM generated its quarterly report, which provided a full commercial statement and detail on the pinnacle deal which saw one of London’s most popular economic calendars sold to a British firm, and North America’s stalwart electronic trading company make yet more progress in settling its debt to Leucadia.
FXCM’s statement on November 9 in its quarterly report on the matter details that on September 30, 2016, the company entered into an asset purchase agreement pursuant to which it agreed to sell the DailyFX business to IG Group for cash of $40.0 million, payable in two installments.
The DailyFX Transaction closed on October 28, 2016 and the first installment of $36.0 million was paid to the Company on the Closing Date and the proceeds were used to pay down the term loan. The second installment of $4.0 million will be paid to the Company on the completion of certain migration requirements, which is expected within 60 to 90 days after the Closing Date. The Company expects to recognize a gain of approximately $38.0 million during the fourth quarter of 2016 related to the DailyFX Transaction.
At-the-Market Common Stock Offering
On October 3, 2016, the Company entered into an Equity Distribution Agreement with Jefferies, LLC – itself an investment bank that merged with Leucadia in 2013 – as sales agent.
Under the terms of the Equity Distribution Agreement, the Company may, from time to time, issue and sell shares of its Class A common stock, par value $0.01 per share, having an aggregate offering price of up to $15.0 million , through the Sales Agent. The common stock will be sold pursuant to the Company’s shelf registration statement on Form S-3 which was declared effective by the Securities and Exchange Commission on August 2, 2016.
FinanceFeeds has every confidence that FXCM will emerge from the emergency loan that it took from Leucadia following the Swiss National Bank’s decision to remove the 1.20 peg on the EURCHF pair in January 2015 which exposed the firm to negative client balances, thus causing the firm to look for emergency financing, securing $300 million from Leucadia in a very short space of time.
Onwards and upwards: Execution is key!
Mr. Niv explained during a further meeting with FinanceFeeds in New York at the company’s headquarters that the firm has advanced the cause of execution to the point at which it can beat the Tier 1 banks.
Execution practice is a fundamental component within the electronic trading industry, and in order to investigate this further, FinanceFeeds engaged in a very interesting dialog with with Mr. Niv to take a close look at what is important with regard to execution across all sectors of the business, and how the interbank FX market can be usurped by leading-edge electronic trading companies.
FinanceFEeds considers that order execution is critical to the trading environment. We asked Mr. Niv if he think an arms race between exchange-traded FX providers such as the major venues of Chicago will begin to emerge?
“For the intended audience which is high frequency traders and banks the CME and other exchanges have a very good solution. This is not where they are lacking. It’s a regulatory and structure issue not a tech issue. The only way they can fix their issue with retail traders would be to not let HFTs be market takers at the exchange but that can’t happen as it goes against the basic fundamentals of an exchange as an all for all market place” explained Mr Niv.
We also asked how FXCM achievea effective execution in terms of order fill and time and avoids slippage when orders are going directly to a live market in which the bank is the market maker. “Given the amount of order flow we control we mandate very strict terms on what we will accept in terms of rejects etc. (as we highlight on question 10). All this is done to reduce actual execution cost minimizing slippage as much as possible” said Mr. Niv.
There has been a lot of speculation within the industry over the past year that retail FX in the US will make its way onto exchanges, with many executives conveying this to FinanceFeeds. We asked Mr Niv if the regulators will push for exchange-traded futures, or if data such as that which can be provided by FXCM can be influential in maintaining spot FX and off-exchange CFD contracts as best for customers. “This would require congress to pass a new law and that is something that there are no plans for at this time. FXCM showing that exchange clients are paying 3 to 5 times more on a typical trade on a spread comparison basis (not including commissions and fees) is definitely going to make any prospect of this even harder” said Mr. Niv.
Exchange fees are well known to be expensive, however if a dedicated FX exchange aimed at retail customers became established, this may reduce the cost of on-exchange execution. Something along lines of a virtual venue which is hosted and owned by a big exchange technology firm perhaps.
We discussed with Mr Niv how FXCM could compete with it on execution speed and pricing. “The exchanges aren’t really interested in investing heavily for retail clients. HFTs make up the bulk of revenues from trading, technology hosting, connectivity fees and market data fee revenues. Retail clients only make up a tiny piece of the action for the exchange. In my opinion the exchanges pretend they care about the retail clients for public policy speeches and for the regulators.
“I think actual dollars spent and a true study of all exchanges and how heavily dependent they are on their top 20 customers would show otherwise” explained Mr. Niv.
Market making has been a massive subject of interest for a long period of time, and became a focus again after the Swiss National Bank event.
FinanceFeeds spoke to Mr. Niv on this subject. ““Market Making is an often misapplied term” explained Mr. Niv.
“When people refer to market making in retail brokerages, what they refer to is relating to the broker’s time when he looks at a trade. He looks at it through the lifetime of a trade, which is from entry to exit of the trade. This should be a loss on balance.”
“Most dealers likely take into account that between 50% or 70% should be calculated as a loss. A lot of brokerages hedge because they have capital restrictions so they will hedge after half an hour” he said.
“In terms of execution, we all look closely at ensuring that we offer better margins and liquidity. At top of book you can put a better trade on. The problem is that you cannot win in the first ten minutes” said Mr. Niv.
“It’s ok if you put a trade on, and you say this guy puts a trade on, and then the brokerage does not want to take that particular trade. What we did was take the trader who makes money in four seconds as an example. You cannot do this unless you think like a HFT” he said.
“Usually, the broker wants the trade to go against the customer for just one second. Because the speed variation allows the super aggressive retail scalper that every one hates is never profitable in the first few milliseconds. We don’t hate these types of traders and with our new technology on enhanced CFD indices we encourage them to trade with FXCM””
“As an agency we have to be financially principled, because we have to finance the whole thing because HFTs cannot. This allows us to hedge in futures if we need to. It can also very easily place a trade, and before they even confirm it, we hedged it” said Mr. Niv.
Mr. Niv then explained the reason why this model is critical. “My belief is that when 10,000 people get access to this data, 99% of the data will be useless but there will be 300 more numbers which will move the market. How can a market maker cope? He can’t. He knows how to make markets based on familiar parameters such as national GDPs, and the US Non Farm Payroll, but if there are 300 unscheduled events, then it will become absolutely impossible. You’ll get run over for months until you figure out what it is that is running you over.”
“You have to have the entire brokerage system set up so that you can be an agent at any time, and you have to play the speed game.”
“We could not handle a HFT as a client, because he is faster than us or as fast as us but we can handle everyone else which is 99.99%. In CFDs that revolution is going to happen much faster than in FX because there will be a choice.”
Mr. Niv reiterated the need to keep pace with technological change “Fintech is now huge in all English speaking countries” he said.
“If i had taken it out on the workforce it would have finished the company” said Mr. Niv. “They would have started leaving, the news would have picked up on it, and the shareholders would have become nervous. This is absolutely not the right way to handle any situation if a company is to be preserved in good condition” he said.
What has been learned by the industry? The wrong lesson!
A question that is asked to many senior executives in the FX industry following the Swiss National Bank’s decision and the black swan event that it created remains centered around what has been learned and if the industry has learned a risk management lesson.
Mr. Niv considers the outcome to have been somewhat the wrong lesson. “The Swiss National Bank event has helped the industry take more risk management, which is a good thing” said Mr. Niv. “but instead, the wrong lesson was learned. Many unregulated B-book companies in obscure jurisdictions actually made a lot of money from this and that is the first problem. The second is that we were already facing a massive credit crunch, and banks are cutting off all access. The black swan event accelerated this and targeted the retail FX sector, and banks cut credit to a lot of people.
“There is a customer base of very large clients which are retail brokers because they have nowhere else to go. This did however open up the opportunity we recently took in offering a prime of prime solution for this crowd.”
We believe that we need to bring the data transparency into FX. In other asset classes this is normal, and there is real market depth, and a volume indicator displayed on the platform. Even in short term equities, nobody would trade without a volume indicator but in FX they do trade without it. HFT traders do have the means of looking at volume and market depth, but they pay a fortune to get it. – Drew Niv
“Many of our customers have NinjaTrader or EFutures, and then they buy the futures feeds for the platform. We want to bring a lot of data to the FX market for free because we feel there is a real need for it.”
Mr. Niv concurs that “So many retail clients are getting more sophisticated, and are selling data, and making their own algos, and companies there are going into fintech. Two years from now, the amount of tools in the hands of people will be completely insane!” exclaimed Mr. Niv.
For all of these reasons, including his unfaltering stability and calm composure, we herald Drew Niv as FX industry professional of the year.#drew niv, #FX Industry figure of year, #fxcm