FX traders are self-directed and the social trading era is so yesterday – so why the noise about robo advisers?

“Robo” is the latest buzzword. The sensible will never embody it.

Self-empowerment. Enlightenment. Understanding.

Three tenets that describe today’s retail traders and the basis of the demands placed upon retail FX brokerages in the  major and well respected jurisdictions of North America, Britain, the Far East and Australia.

Retail FX trading is a rare beast in that it embodies not only fluid and instantaneous access to extremely liquid financial markets but it combines this with technological infrastructure which means that it is not just a financial service but a technological and mathematical science.

Today, it is a science which a large proportion of retail traders understand clearly, and, as has been noticed by FinanceFeeds for quite some time, this has led to the passing of the social trading era, which was once an engagement tool to bolster the confidence of novices.

OANDA Corporation’s failed attempt at taking its fxUnity product to a wide audience over four years ago is a case in point. The company is a technological tour de force, yet it brought ruinous R&D costs into the boardroom when it canned the fxUnity proprietary social trading platform a very short time after launch, before then becoming embroiled in the catastrophic purchase of the Currensee social trading network which was wound down and discontinued very soon after its acquisition.

Compare that to the self-directed traders that favor proprietary platforms and are experienced in navigating the markets electronically, and OANDA’s migration of 2,200 Tradestation users onto OANDA’s fxTrade platform last year when IBFX exited the US market demonstrates that the same company could not engage traders on social platforms, but was absolutely able to benefit from the onboarding of astute, self-empowered traders who favor a high quality brokerage environment and proprietary platform.

The social trading era has been consigned to the metal can of the ether and has become the hallmark of the early Millennial years in the same way that the Motorola cellphone and Filofax were consigned to the history books along with pinstripe suits during the analog financial market years of the 1980s.

There is a new buzzword that is being misused and misunderstood, however.

The word ‘robo advisor’ is the latest example of technobabble that should be entered onto Lake Superior University’s banned words list for overuse and misuse this year.

Recent research by FinanceFeeds not only deduces that social trading is about as fashionable as a caravan holiday in Skegness, but that most retail traders will not be interested in any form of automated solution outside professional services such as portfolio management.

The ‘social’ tag was applied to everything that was launched in the previous decade just as the ‘i’ prefix was in the decade before. This year, the word ‘robo’ is being prefixed to everything by those with little understanding of its real application.

The robo label is being applied to all sorts of software, ranging from simple lines of code and very basic MetaTrader 4 expert advisors that use Martingale, Right through to chat bots. These do not compare to IBM supercomputers but they profit from the label and from a deformed concept of Artificial Intelligence.

Marketing upstarts (pass me my earplugs please) will constantly over use the word ‘robo-advisor’ in their content marketing and parlance when addressing companies on what stance to take in order to differentiate their products.

New marketing-led firms including Capital U, Covestor, Wealth Front, Folio Investing, Betterment and Merrilledge have recently been establihed, with the emphasis being on the perceived robotic capability but with no track record and no long term high value client base.

Companies such as Hargreaves Lansdown, which is Britain’s largest financial services company and has its very own proprietary Vantage system that allows its retail customers – all of whom are in Britain – to manage their own portfolios from one platform including a range of CFD products under the IG Group white label HL Markets, intentionally eschewed going down the robo route.

Hargreaves Lansdown is astute and knows what its clients want.

One year ago, before the over-styled marketing ‘gurus’ began to froth more than their skinny lattes about the robo advisors that they do not properly understand, Hargreaves Lansdown decided to listen to its customers and not proceed with robo advice.

In October 2015, the company asked its clients whether they would be prepared to pay for a low cost online advice service. The answer was a resounding no.

Hargreaves Lansdown suggested at the time that such a service would cost between £100 and £400 and considered widening its existing non-advised portfolios into a wider advice proposition.

Ian Gorham, the firm’s CEO of the time, stated “People do not want to pay for advice.”

“There is no chance that robo is going to replace self-directed or advised” he said, concluding that robo advice will not replace execution only platforms.

Hargreaves Lansdown told FinanceFeeds today “We don’t have a so called robo advice proposition. We use technology to help people choose investments. This is a non-advised service.”

“The FCA’s Financial Advice Market Review is still ongoing and as part of this there could be some changes to the boundary between advice and non-advice. It follows once the Review is complete and the outcomes known firms will look to adapt accordingly.” – Danny Cox, Hargreaves Lansdown

In November last year, Tradency launched a robo-advisor service for CFDs, under the name of Smart Investor CFD. The SI CFD was intended to open a new market niche which can be used primarily as a retention tool and a vehicle to attract substantial assets under management and could be seamlessly integrated into the existing infrastructures in use by retail brokerages. Take up? A wave of tumultuous silence.

The SI CFD intended to provide a proposition of a long term, solid investment channel for customers who are on the verge of abandoning active trading, however the Mirror Trader social trading platform for which the company is famous is now passe and has resulted in waves of redundancies across the company as self-empowered traders want everything on one platform and do not favor copy trading anymore.

Research recently collated by FinanceFeeds that was conducted by A.T. Kearney, a global management consulting firm that focuses on strategic and operational CEO-agenda issues facing businesses, there will be approximately $2.2 trillion under management by robo advisors in 2020, equating to a staggering compound annual growth rate of 68%. That is still a very small amount globally however.

When looking at the assets under management of retail giants in Japan, which can really be narrowed down to just four companies – GMO Click, DMM Securities, MONEX Group and Invast, that pales into insignificance and almost every Japanese trader is conducting manual trading.

All of these companies regularly generate over $1 trillion in notional volume per month, and bearing in mind Japan’s leverage restrictions, that shows how many assets under management they have from astute, manual traders who will never entertain the thought of robo advice hence MetaTrader 4 being unpopular there as there has never been a need to standardize a platform to accommodate EAs.

The rest of the world outside Japan is in a similar situation. British CFD firms, with a 70% domestic market client base, offer proprietary platforms that are constantly being developed in order to continue to keep pace with the demands from traders that require specific functionality as they are generating their own trading activity.

social trading platforms in their own right were spinoffs from the affiliate marketing and gaming industry, which is, as FinanceFeeds continues to maintain, completely incompatible with the FX industry in any shape or form. Many of them took the gaming and affiliate model, mixed it with social media because that was the buzzword of the time, and proceeded on that basis.

Nowadays, traders want to see full charting facilities, be able to execute trades via algorithms just as proprietary traders in large firms in Chicago and New York would do. Traders are able to understand the methodology behind retail platforms, and in some cases are becoming equal.

An example of this is the current drive toward exchange traded multi-product systems for retail customers.

Speaking to Ryan Hansen, CEO of Tradovate in Chicago last year, FinanceFeeds learned that a the average deposit size in that sector from retail clients is $50,000 and that this is a burgeoning market for retail participants.

“Essentially, the platform itself is not being labeled as retail or professional, as we are not making that distinction and can provide it to all participants. We spent a lot of time building in key aspects of futures platforms, such as the depth of market (DOM) order ticket, so that traders can see the order book to place trades, in the form of a price ladder” said Mr. Hansen.

Mr. Hansen explained that Tradovate’s ethos is focused on an attempt to make things simple and easy to use. “This sounds remedial but in the futures space technological disruption among platform vendors and brokers is not the norm. This is usually very much a traditional Windows XP experience. We want to look at the design principles and make things easy to use for all users, whether they are new traders or professional traders.”

Brokers themselves have been passing on top level knowledge to their customers.

FinanceFeeds met recently in London with Saxo Bank senior executives Lucian Lauerman, Head of API Business, and Peter Plester, Head of FX Prime Brokerage.

Mr. Plester explained “We are focused on adding value for our clients; from helping them access liquidity, to optimising collateral to reducing risk.”

“This is a value added service” he said. Mr. Lauerman then explained it in detail.

“This is something that we implemented within our own market making business which was established in 1992” said Mr. Lauerman.

“We have designed a series of tools to optimize our flow to the market and we use that technology to benefit our clients. We are able to show them what their flow looks like and how the liquidity providers that they are accessing view their flow. We have regular conversations and understand what metrics the sources of liqudity use to evaluate flow and we have built similar reporting and analysis ourselves so we can show clients how their flow will be viewed and handled by liquidity providers” – Lucian Lauerman, Head of API Business, Saxo Bank

“We work closely with clients to make sure their liquidity access is sustainable. This is not alchemy, it is about creating an environment where clients have reliable and sustainable access to liquidity” he said.

Mr. Plester then explained “If a client was to develop those tools internally, there would be a lot of cost and resources and the client would spend a lot of time talking to several liquidity providers. By outsourcing that to us, we save them time and money.”

Extraneous gimmicks that are invented by trendy people for trendy people are not serious business tools.

Serious business people do not spend their day watching ‘top 10s’ on YouTube or recording every move they make in six minute videos, neither do they sport pointed beards and have a perpetual paper cup with an ice cafe in it in their right hand.

The coffee shop is not the trading floor. Berlin is not London. Melbourne is not Tokyo or Singapore.

In the summer of this year, FinanceFeeds explained in detail why angling services toward Millennials is expensive and fruitless, concluding that 26% of 18 to 30 year olds do not save or invest anything at all, with 62% admitting that they are clueless about financial matters, whereas the age range between 30 and 45 are investment savvy whilst being a lot less interested in gimmicky add-ons which cost a fortune to develop and do not ultimately regain the capital outlay in customer volume.

Whilst the gimmicks that cost a fortune, add no value and fail quickly are very much in the public eye, the opposite end of the scale – and the one that traders really value and concentrate on – is working round the clock to ensure a solid and reliable trading environment.

MetaQuotes and Spotware (the developer of the cTrader platform) are two major platform providers which supply off-the-shelf third party platforms, and in the case of Spotware, will actually design a bespoke one for you if you are a retail broker wanting to enhance your value proposition or attract a specific audience.

Both firms have some of the most astute developers in the business, and even the very young professionals at the firm fully understand the underpinnings of a retail trading environment and work tirelessly to provide the right products and support the entire ecosystem. This is a far more important facet than fly-by-night follies.

That leaves us with China. Land of the highly educated and all encompassing FX professional. Yes, Chinese portfolio managers use EAs, and yes, China is all about modernity and automation, but robo-advisers are unheard of there, because the programming is usually done in house by the IB or portfolio managers, and managed and supported by them as they calmly manage over $250 million in assets from small, neat offices in second tier development towns.

Chinese traders and Chinese IBs fully understand the entire structure of this industry, hence they will never go down the robo route, and instead will continue to develop their own trading systems.

Into room 101, please.



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