Heated debate on technology’s relationship with prime brokerage, and what is important in execution – Live from Cyprus

Today, live from the iFXEXPO International 2016 hosted by Conversion Pros here in Limassol, Cyprus, discussions have begun on some of the most important matters that face all sectors of the FX industry this year. This morning, five technology company senior executives, all indsutry leaders, assembled to discuss what needs to develop in terms of […]

Technology's relationship with prime brokerage

Today, live from the iFXEXPO International 2016 hosted by Conversion Pros here in Limassol, Cyprus, discussions have begun on some of the most important matters that face all sectors of the FX industry this year.

This morning, five technology company senior executives, all indsutry leaders, assembled to discuss what needs to develop in terms of technology in order to allow brokerages not only to address current matters, but to ensure longevity of their businesses.

Moderated by Avi Mizrahi, Managing Editor at Finance Magnates, the conversation, which proceeded to become a full debate as opinions polarized, began with Harpal Sandhu, CEO of Integral Development Corporation.

Andrew Ralich, CEO of oneZero posed the instrumental question at iFXEXPO to FinanceFeeds CEO Andrew Saks-McLeod “Will the legacy aggregators such as FlexTrade, Currenex and Integral Development Corporation be able to engineer their services to cater all the way downstream to the retail broker, or will the providers such as oneZero, PrimeXM and Gold-i which have grown up in the retail space, be able to adapt to this specific institutional functionality to be able to move upstream for their clients?

Mr. Sandhu said “There needs to be concentration on the number of micro partners that offer global solutions in the FX space.”

“Depending on where they are in terms of their own maturity as brokerages, firms which use such services need to be aware of their ability to understand things like regulatory evolution and, for example, changes in major factors such as leverage” said Mr. Sandhu.

“Brokers also have to navigate the credit contraction post-Swiss National Bank removal of the 1.20 peg on the EURCHF pair. As a result of so many factors that now exist, alternative sources of liquidity are needed” said Mr. Sandhu, concurring with many executives which spoke to FinanceFeeds yesterday during the opening party at iFXEXPO.

“There has been a lot of work that has been concentrated on helping firms acquire credit” = Harpal Sandhu, CEO, Integral Development Corporation

Mr. Sandhu continued “Additionally, technology must manage hedging more effectively. Regulators are asking institutions to hedge more of their positions according to the capital they have, therefore they need much more sophisticated microstructures to help them communicate.”

At that point, Fred Scala, VP of Sales at Forexware in New York interjected, agreeing with Mr. Sandhu’s observations. “We are looking at similar issues” said Mr. Scala.

“We just built out a new order routing system so clients an access liquidity providers. Some firms are explaining to brokers that they are giving prime of prime services, and saying they can give a liquidity bridge but really they are just offering margin FX” – Fred Scala, VP Sales, Forexware

Mr. Scala continued to explain that in his experience, brokers are now saying that they want certain options for specific currency pairs, and also that brokers are looking at different solutions other than MetaTrader 4, something that has certainly been emphasized by development of platforms such as cTrader with its algo capabilities, and also Gold-i’s recent launch of its Matrix 2.0 product which will see MetaTrader 5 gain global popularity within 2 years.

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Stanislav Efremov, ‎Chief Operations Officer at ICM Capital then explained “Competition is very tough for FX firms. Spreads are so low now, whereas back 5 years ago, spreads provided a huge advantage for brokers. From the point of view of a brokerage today, how to structure the operational aspect becomes ever more complicated.”

“Brokers must invest in their own technology and also brokers need to find their own risk management solutions. The world has become more and more integrated, clients want to have access to FX, as well as CFDs, stocks and equities” said Mr. Efremov.

Kobi Gur, CEO of Leverate stated “Technology providers need to find the troubling conditions that brokers have and enable them to overcome them.

As I see it we have two major issues that brokers face. Regulation is one which I see as an opportunity, however the second issue is that the competition is fierce which leads to lower margins nd as a technology provider the way to solve it is to help customers to optimize” – Kobi Gur, CEO, Leverate.

“Brokers spend a lot of money driving traffic and trying to convert. The stronger the competition the more important this is. If we do optimization of sales funnels and use big data to personalize the approach on a per lead basis, then much better solutions can be brought” explained Mr. Gur.

Opinions polarized on execution model

Maor Lahav, co-founder and COO of PandaTS said

“Kobi is right. If we are looking at trading platforms, the end user doesn’t care about what happens behind the scenes in terms of execution and how it is connected to the market. Of course they want the system to perform but they dont care about speed of execution, hedging capabilities and other such technicalities, and if I needed to bet on it, I would say the trend is going more toward marketing and sales” Maor Lahav, COO, PandaTS

“For last 10 years we developed CRM that is specific to the market, the traders can be retargeted by brokers an issue a relevant campaign. Brokers need to improve marketing capabilities and effectiveness of call centers” said Mr. Lahav.

This sparked quite a discussion!

Andrew Ralich, CEO of oneZero said “Avi, when you introduced the panel, you said technology is driving the industry, whereas I have seen something very much the opposite.”

“We are adapting to a market that is out of our control with aspects like difficulties obtaining credit, volatility caused by events such as that created by the SNB, and access to liquidity” continued Mr. Ralich.

“I think many companies are doing whatever they can to address some of the matters but an overall trend that I see is that retail brokers are now needing to act more like institutional brokers, as well as develop technology to access credit and address the margins that they are making on their business” – Andrew Ralich, CEO, oneZero.

“Being creative about what platforms are being offered is a necessity so we are seeing a lot of demand from our clients to integrate a more institutionally designed system. The facility for brokers to extend liquidity provision to other brokers, and credit to each other is now important. There used to be more chance to do that when Tier 1 banks would extend credit but now it has to be done via an ecosystem model” said Mr. Ralich.

Mr. Mizrahi then asked the delegates if they expect more inter-broker cooperation to overcome the credit and risk matters.

Mr. Ralich said “Yes, certainly. A term we are starting to use a lot is ecosystem. There used to be enough margin to pay a provider, a prime brokerage and have multiple liquidity options but nowadays the way we are seeing things is that it is best to take one system by cooperating. This is very important because the squeezing of margins does not stop at the broker, it applies to us as well. By using technologies that can cooperate between institutional and retail spaces is very important.”

Mr. Mizrahi then asked whether liquidity providers, prime brokerages and technology companies can produce specialist solutions which could help these kinds of tight margins be overcome and ensure tighter liquidity?

Mr. Sandhu then explained “The vacuum that was created when the prime brokerages exited the market was actually greater than the effect created by institutional brokers coming in and filling the gap. To access liquidity from technology service providers in an aggregation network that wasn’t previously available.”

“For many years we used to give clients access to point to point liquidity which was state of the art in 2008 but things have moved on. Andrew (Ralich), I am glad you have come over to the completely integrated stack because the debate back then was can you be the reference point and its alot of work but when you work with a tech provider that will never be your competitor that can give a fully integrated stack and allows brokers to operate under their own name gives alot of power. It now has to be a full service brokerage offering including credit, liquidity, hosting and lastly something people wouldn’t get wworking with our offering is now the marketing facilities that we now provide” – Harpal Sandhu, CEO, Integral Development Corporation

Mr. Scala said “What we have seen since the SNB event is the major providers like Citigroup and Deutsche Bank have retracted their prime offering and put the costs up due to credit risk. When they were offering liquidity at $2 dollars per million it was manageable but now they have gone to anything between $5 and $8 per million for prime services. The credit component has become so expensive that we are going full circle, and are going back to point to point LP relationships that are managed through a true hub so you can have multiple PB relationships not going through PoP but actually acting through a hub.”

Many brokers don’t care about any of this. They are risk takers, they want to B book trades, they want concentrate on sales. For example, smaller binary options brands are not interested in what happens behind the scenes. I think that the vendors will eventually take this on behalf of the brokers. They will do risk management and the whole service will become something offered integrally. I do not see smaller brokers doing aggregation, because today you have LPs with good enough for small brokers” Maor Lahav, COO, PandaTS

Mr. Ralich then said “I disagree. Speed of execution is a massive differentiator for retail brokers now” to which Mr. Lahav replied “But everyone is trading over the web these days so the small difference in milliseconds in execution is not really a concern.”

Mr. Ralich replied “Not necessarily, because those well established brokers with with good execution make up the best customers with the highest volume. For the institutional customers we are working with refined quality of execution and risk management which are very important tools. Internalization is an important answer to a credit crunch but B book went away in a cloud of smoke because of SNB

Mr. Gur then said “Across our client base of 150 customers, because of margins getting tighter, we need to be aware that in the retail space it is a case of taking more risk.”

Mr. Ralich then asked “Are these brokers capitalized to take the risk?”

Mr. Gur concluded by saying it is part of the way they do business, many are regulated and adhere to the stipulations of the regulation. I think the regulators do not operate in the space of liquidity, instead they look at KYC, and protection of funds.

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