Is the P&L model dead and buried? Not by a VERY long way

The rapid shift away from remunerating sales staff, partners, affiliates and introducers on net deposit a couple of years ago took effect in order that the retail FX industry could emulate the institutional sector and provide retail clients with an ethical trading system, whilst providing a more steady stream of income for the broker, and encouraging longer term relationships for all parties.

So much emphasis has been placed on this, that it has become widely understood across the entire industry that the ‘profit and loss’ model is a think of the past.

This is very much not the case at all, and in order to investigate, FinanceFeeds conducted extensive research in Shanghai, China, the center of attention for all industry participants worldwide.

Whilst most affiliates and introducers in the region are insistent on ensuring that their clients remain with them long term, and contrary to popular belief, are very cautious when entering into a deal with a broker to ensure that their clients will be catered for with their best interests in mind, this giant, fabulous and advanced financial powerhouse is home to some very large companies which operate their business purely on net client loss.

Whilst it most certainly could be argued that a profit and loss deal between broker and introducing agent is potentially against client interest, it is also most certainly worthy of consideration that it is not in the best interest of a broker from not only a risk management point of view but also a cash flow perspective.

If an introducing agent is remunerated on spread mark up, or commission as a revenue share, this ensures a steady income stream for the introducing agent, however, if remuneration is conducted on a profit and loss model, and there is a month in which many clients make a profit, then no commission would be due at all, and the introducing agent would be saddled with operating costs and staff salaries, but have no income.

Let’s put some figures on it. FinanceFeeds research has concluded that in Shanghai alone, there are approximately 10 introducers which would like to operate on a profit and loss model, however western brokerages which have a large share of the Chinese IB market do not operate with this method therefore they (and their customers) are targets for those which do.

Three companies in downtown Shanghai which prefer the profit and loss model have a net deposit amount of around $30 million per year, with clients purely trading using EAs.

IB commission is roughly $20 million per annum per firm, and there are approximately $100 million in assets under management within each company. The business model takes into consideration that clients will lose a combined total of approximately $70 million per year, hence the net deposit figure.

Remarkable indeed, and perhaps not as unsustainable as was once thought as word travels very quickly in China if things go awry for customers.