How FX brokers create value when scaling their business – Executives share their view

As brokers aim for a larger slice of the market pie at a time during which the OTC FX/CFD market has been fiercely competitive combined with a drop-off of customers, strategically cutting costs without compromising on service quality is paramount. 

From optimizing technology infrastructure and outsourcing non-core activities to streamlining regulatory compliance and risk management, there are several tweaks FX brokers can make to cut costs when scaling, including moving to software licensing fees rather than volume fees when it comes to trading technology. 

Efficiency is about strategic decisions

Scaling embodies the capacity to handle an uptick in trading volumes, client demands, and market complexities without compromising on service quality or operational efficiency. As brokers scale, they tap into larger market segments, diversify their offerings, and enhance their market reputation. This not only propels revenue growth but also fortifies their market positioning against competitors and market volatilities.

On the flip side, scaling elevates operational costs — a reality that can swiftly morph into a financial quagmire if not astutely managed. The costs of technology infrastructure, regulatory compliance, personnel, and market engagement activities burgeon with scaling. These escalating costs, if left unchecked, can erode profitability, derail growth initiatives, and in extreme scenarios, threaten the broker’s financial sustainability.

This is where the essence of cost management while scaling comes into sharp focus. Cost management is not about penny-pinching but making informed, strategic decisions to optimize resource allocation, enhance operational efficiency, and ensure financial sustainability amidst growth. It’s about striking a judicious balance between investing in growth-enabling resources and curtailing unnecessary expenditures.

A roadmap to better scale a brokerage business

• Optimizing Technology Infrastructure:

Technology is the linchpin of modern trading operations. Harnessing the power of cloud computing not only slashes costs associated with physical infrastructure but also provides a scalable environment to handle burgeoning trading volumes. 

Meanwhile, automated trading systems minimize manual oversight, thus reducing operational costs and human errors. Efficiency and speed are the byproducts, crucial for handling a higher volume of trades as brokers scale.

• Outsourcing Non-Core Activities:

Diverting resources to core trading activities while outsourcing back-office functions and customer support can be a game-changer. This strategy trims operational costs and ensures proficient handling of non-core tasks by specialized service providers.

On this matter, FinanceFeeds spoke to Roman Nalivayko, CEO of multi-asset trading platform software provider TraderEvolution Global, who explained “Deploying a full back office suite which has been designed to allow full access to multiple global markets via any futures dealer, prime broker, executing venue or liquidity provider for any asset class, in order that brokerages can diversify and target a higher quality client base which would trade other asset classes is a point of interest to discuss these days. Accessing such markets via a licensable software suite represents a cost effective alternative to in-house development with the comparable flexibility but at fraction cost and faster time to market.

“Brokerages which are able to offer a genuine multi-asset environment allows them to target a wider audience. It also gives vital opportunities to cross-sell across different asset classes without the barrier caused by having separate systems for OTC instruments, listed products and futures” said Mr Nalivayko.

• Efficient Risk Management:

Real-time monitoring tools and regular audits are the sentinels in risk management, helping brokers nip potential costly mistakes in the bud and ensuring compliance with regulatory standards.

Real-time monitoring tools and regular audits are the sentinels in risk management, helping brokers nip potential costly mistakes in the bud and ensuring compliance with regulatory standards.

“As brokers B-book more and more business, effective risk management is not a ‘nice to have’, but an essential tool to protect profits and drastically reduce potential losses”, said Tom Higgins, Founder and CEO of Gold-i. 

“There are really 2 parts to risk management. The first is risk monitoring, so you know WHAT the risks are. The second is risk mitigation, so you can STOP the risks that you have found causing financial loss. Traders are now very sophisticated and have access to EAs, algos and AI systems that are smart. Gold-i developed Visual Edge to address the complex task of identifying the risks continuously, in real-time, and MatrixNET to mitigate that risk by using advanced B-book and A-book management.

“Regulated brokers need to operate within the risk mandates approved by their Board and within the regulatory regime they operate under. Advanced risk management systems will help brokers keep within these mandates and within the rules that the regulator requires they operate in. It is not unusual for us to hear a broker say they have lost all their money due to huge B-book losses, but this is completely manageable with the right tools, and is not a valid excuse anymore! Risk Management tools need not be expensive and can save you seriously large amounts of pain, as well as maximizing your profit.”

• Streamlining Regulatory Compliance:

Leveraging Regulatory Technology (RegTech) can be a masterstroke, automating compliance tasks, reducing errors, and saving invaluable time. Staying ahead of the curve with regulatory changes also staves off costly non-compliance issues.

“The worst mistake we see in the industry is when a growing brokerage is spending a large amount of time fixing errors they made in the past, instead of adequately accommodating the new growth.  This often turns into a vicious circle because by focusing precious resources on remediation they end up making additional mistakes in BAU (Business As Usual), which in turn need to be fixed in the future”, said Quinn Perrot, co-CEO at TRAction. 

“Trade Reporting and having to backload fixes for historical errors is a classic example of this phenomenon. The lesson here is if you don’t have 100% confidence in your capability and resources, Trade Reporting is best outsourced to firms that are dedicated to this important area of compliance and have experience assisting multiple firms.“

• Investing in Training and Development:

A well-oiled machine is the sum of its parts. Investing in continuous learning and cross-training employees ensures better performance, higher productivity, and ultimately, cost savings.

• Negotiating Better Terms with Liquidity Providers:

Brokering better terms with liquidity providers, such as volume-based discounts, can lead to lower transaction costs. Utilizing multi-bank platforms provides the leeway to compare prices and choose the most cost-effective option.

• Tapping into Market Research and Customer Feedback:

Identifying new revenue streams and acting upon customer feedback can improve service offerings and reduce costs associated with acquiring new clients.

• Working with vendors which help you evolve and future-proof your brokerage

An important area to consider is possible limitations caused by a brokerage needing to offer new services, greater access to different liquidity and a wider range of asset classes, but their service provider may not be able to support such requirements.

Being able to adapt and be agile, without the disruption of having to restructure the entire trading environment which could be disruptive to existing customers or responding to new trends and demands for new asset classes from clients by having to have several individual platforms which is expensive and difficult to manage, and inhibits homogeny and cross-selling opportunities is vital.

From a brokerage perspective, Natalia Zakharova, Head of Business Development and Operations at FXOpen, commented: “We license different software from MetaQuotes to TradingView, we also work closely with liquidity providers and offer an advanced TickTrader platform, developed by Soft-FX. Something that we value is long term relationships with both clients and vendors, therefore we are focused on ensuring our loyal clients have a range of different options when it comes to capitalizing their trading strategies and accounts. The same goes with our vendor relationships. I think it is worth considering that different types of clients may have different objectives and therefore for some types of trading activity, it’s better for us to have volume based relationships, and for other types it’s better to have a fixed price deal. 

“Retail trading nowadays is very diverse , so I think brokers should have diverse options available to accommodate all types of trading, as well as to ensure they are running their business as efficiently as possible with good scaling possibilities.”

Summary

Scaling is a growth imperative for FX brokers in a competitive and globalized market landscape. Simultaneously, astute cost management is the financial compass that guides brokers through the scaling journey, ensuring that growth is achieved sustainably and profitably. 

The interplay between scaling and cost management is not a choice but a necessity for brokers aiming for long-term success in the tumultuous waters of the FX market.