Live from the Finance Magnates Virtual Summit: Key insights from the front line

The FX industry’s titans look at how the technology, liquidity, volatility and market entry points will change, covering all aspects from cloud computing, vendor services, US stocks and ETFs to how to structure your brokerage in these geopolitically unprecedented times.

How much does trade execution really cost

As an online, technologically driven global business which relies very much on the internet for its operations as well as interaction with customers, the FX industry has been ever more removed from the personal relationships with clients that had allowed it to flourish in recent years.

During the last few months, the entirety of the business has gone online including client interaction, and therefore insights from those in senior positions are more important than ever in terms of ascertaining the right direction for your company.

Today, at the Finance Magnates Virtual Summit, senior executives at the very coal face of the retail FX industry discussed important matters that are of great benefit to the wider electronic trading business, its vendors and suppliers.

The debate-style interaction included Brendan Callan, CEO of FXCM, Marc Burki, CEO of Swissquote, Andrew Ralich, Founder & CEO of oneZero, Matt Maloney, CEO of CFH Clearing and Harpal Sandhu, CEO of Integral Development Corporation.

Moderated by Ben Myers of Finance Magnates, the discussion began. Mr Myers enthused that this has been a record breaking year for trading, and has heralded a huge upsurge in volumes.

Mr Sandhu began by explaining “It has been an unusual year. In spite of all the problems associated with lockdowns, it has presented a tremendous opportunity for brokers. There has been a huge demand on their resources, technology and scalability. We have had customers with three to four hundred percent increases in volume, representing a huge increase in service capacity. Brokers don’t want their systems going down. We have seen here in the US some major venues experience outages. Brokers want stability, however they don’t want their costs to treble as well as their volumes due to need for extra service capacity.”

“Years of investment in people and technology has paid off. We saw a switch overnight to working from home, and this has given our employees a decade of experience in just six months. It has been a fantastic experience for traders and for employees” said Mr Maloney.

“Our revenues are up and capacity is up. Not everyone is as lucky as us, as we are in a transactional business” said Mr Callan. “Other industries, such as the travel sector, have been devastated which is terrible.”

Mr Sandhu said “We find that most of the younger employees don’t do much of their work from computers, they do it all from phones so when we transitioned to working from home, we had to order a series of new desktop/laptop computers.”

Mr Burki said “We are lucky that we are in a digital industry. Many of our peers in classic banking struggled. Sending people home to conduct their work remotely was a tremendous challenge for them. It may have been really good for us, but I am sure that some of our clients did find this year really difficult.”

“Everyone in the industry should be giving ourselves a collective round of applause, not just because of the high volumes. We held up really well, from brokerage to technology to liquidity. There have been unexpected challenges in the past where were would have spent an entire conference following these challenges walking through a graveyard of what could have happened. This time it has been totally different and the adaptation has been very impressive. I think in other industries we can look at them and say why didn’t we make restaurant software?” is Mr Ralich’s observation.

“There is a paradigm reshift occurring, and we need to look to find solutions to the tremendous pressure this has put on our business” said Mr Ralich.

“There will be some good news in the future which may drive volatility, for example the virus vaccine has driven some degree of stock volitility, and then there may be some disappointing news which can drive the markets in a different direction. We may see a big market rally when the whole COVID situation ends because people will likely rejoice and take to the markets” said Mr Burki.

“There was an interest rate differential between the countries when the central banks moved their interest rates to essentially zero. When this happens, you don’t really see much of a carry trade and there are narrow margins in FX. We are now seeing a shift. Governments used to see interest rates as a controlling factor for economies. This now isn’t the case, and governments may begin to use currencies instead, driving a potential future of volatility” said Mr Sandhu.

“Something we have observed over the last 9 months has been that we get some market volatility out of this, and we can see it is better than last year, however when we look at our client base, the volumes we are seeing from them are being affected by aspects other than just volatility. We saw an upturn in volatility in March, and of course volatility breeds volume, however if you look at some of the traditional ECN venues, their volumes are up from last year but in retail we see the initial stages of volatility coming out of the COVID situation, however our hypothesis at oneZero is that there are more people with the ability to work from home who are opening accounts and trading on a specualtive basis that fills the gap of time that was previously used for commuting. Therefore where is the account opening trend going and how can we sustain it, the working from home population that is now with us should be sustained after 2020” said Mr Ralich.

Mr Maloney concurred that we will likely see a continued trend as people affected by the COVID lockdowns begin to look toward other methods of seeking financial independence.

“The invention of the ETF a few years ago was a great phenomenon. It allowed customers to keep their assets with their provider but then to choose where to trade on various equities, indices and commodities which resulted in ETFs now being traded more than stocks in the US. Futuers on swaps, and complex products after Dodd-Frank became popular because clients could keep their capital with the same FCM but trade different markets. If listed derivatives exchanges futurized OTC products, and brought them onto exchanges, rolling spot versions could exist and bring these to the retail clients. We can then win the capital race as to which form of broker they can keep their capital with” said Mr Sandhu.

“The volatility index is up 50% over the past few weeks and we anticipate that being the case for the coming years. The markets will go crazy, and everyone is working from home so it amplifies it. We need to be able to pounce on where the volatility is when its there and be ready for the next spike when it happens” said Mr Callan.

“Having a product suite in place which is cross margined is the future” said Mr Maloney.

“More trading will go off exchange. The exchanges do not have better technology than we do. We don’t charge for data, you can get that for free. Our transactional efficiency is better than that of the exchanges” said Mr Callan.

“What does this product suite look like on a going forward basis? asked Mr Ralich. “It’s not just a spot version of a futures contract. We released a module into our product where brokers can custom develop and code in interest rate information and build their own CFD products. We also work with prime of primes and others in our ecosystem to work on the method of standardization. Is there value in looking for standardization in our industry as to how we build products and how we aggregate them?

“What have the Robin Hoods done to this industry?” asked Mr Myers.

“It’s not new to us” said Mr Callan. “Their entire business model is based on something that the FCA has deemed illegal as the conflicts of interest have been deemed insurmountable.”

“That’s probably why Robin Hood canceled its entry into the UK” said Mr Burki. “The pay for orderflow business is a tough business model in Europe, it doesn’t really work. We do have many discount brokers, but when you look at their performance you can see there has been a merger of two discount brokers in Germany but that didn’t make their business model any easier. Therefore this is a tough way to go into the equities market.”

“There is no such thing as a free lunch and clients know that. They know technology and operations have to be paid for. They are analytical and can work out where money is being made” said Mr Maloney.

“The number of firms that were involved in equities decreased and the commissions became higher. Robin Hood’s entry was just a matter of timing. They introduced a product that seemed like it was cheap, to an audience that were new. In many ways, the lightly regulated markets for FX worked out how to provide value services to clients way before the US did. FX innovated a lot faster. I would point out that Robin Hood takes no risk. For all the volume clients do, they are making a fixed fee. They have very little volatility in their dollar per million amount, and that is very attractive to the client base” said Mr Sandhu.

“Brokers who are intending to go public could look at this – Robin Hood are sending it off to market makers, this has a bearing” said Mr Sandhu.

“In Europe, the market is super-fragmented” said Mr Burki. “It is easy to get money out of order flow when everyone is trading the same securities but in Europe, everyone has their local heros and this causes it to be a lot less easy to navigate.”

“Regarding the election in the US, I think the Senate will likely stay Republican but the balance of power will likely not allow President-elect Biden to have a very leftish, liberal economic policy” said Mr Burki.

“I think there is a huge domestic agenda focused on COVID and trade wars, so therefore there is so much to be done that it is likely to be business as usual for a significant time in the US” said Mr Maloney.

“Gary Gensler, the previous Chairman of the CFTC is now heading up the treasury team in the US. He was a huge advocate for Dodd-Frank. They would have likely to have gone toward affecting the ability to roll FX, and if they appoint a Democrat, rule writing that comes out of the CFTC may well go down that route. If Elizabeth Warren has any say, it is possible that bank capital requirements may come into the fray” said Mr Sandhu.

“What is interesting about our political system is that we can have these regime changes. However I don’t think Biden will get the progressive cabinet that some are predicting. Some things can happen at State level rather than Federal level. Transaction tax for example, has been courted by New Jersey for some time, but other states haven’t. It certainly may mean that banks may look at Equinix NY4 which is the hosting venue this side of the Atlantic. They may look to London or the Far East and that would make a huge difference in how the market operates” said Mr Ralich.

“In New Jersey, if they implement a transaction tax, it would create a need to move hardware around and take a look at infrastructure changes to keep co-located” he said.

“What do we do with our license post-Brexit?” said Mr Sandhu. “I think we don’t know, and any entity looking to support brokers will have to have full capability in terms of matching, where their data is located, and how the bureaucracy will work. What could happen with Turkey’s new Finance Minister? The market could become a lot more flat footed.”

“There could be a no-deal Brexit, we won’t know till December 31, however we have the licenses in Europe, in Asia, and we can move customers around to meet their requirements and regulatory requirements. There is a lot more coalescence around the big players that have the scale and bandwidth to operate in various jurisdictions. The days of having one entity that can work globally from one place are probably gone” said Mr Maloney.

“I’m not sure if the industry has realized that there could be a last minute deal regarding Brexit, such as a passporting of services to and from Europe. it is very unlikely that firms cannot sell their product in continental Europe” said Mr Burki.

“This is a victory for cloud computing” said Mr Sandhu. “Firms can allocate their engines and matching to different regions.”

“The bigger companies have been organized and have licenses in various regions” said Mr Burki.

“Staying with regulation, there has been talk about an offshore exodus” said Mr Myers. “Where is this trend going?”

Mr Callan said “ASIC is the last of the major regulators to bring in the restrictions. I hope 2021 is a year without massive regulatory events for this industry. None of the marketing nonsense such as top up bonuses that create a lot of churn matters because most of those changes have been made. As far as Brexit goes, the only responsible thing to assume is that there may be a no-deal Brexit. I think the UK financial services entities have a high cost structure by way of the FCA being a good regulatory authority to be under. When that cost structure is only supported by UK resident revenue post-Brexit, it won’t work out for smaller firms. I think there will be consolidation and that is a good thing.”

“There will indeed be a wave of M&A activity post-Brexit, which is a good thing, we are all well capitalized large companies. We will in London always be the ecosystem that serves the world. There will always be a demand for the intellectual bandwidth and infrastructure” said Mr Burki.

“London has the most incredible talent base. If you want to recruit 100 professionals in a week, you can do it! Try doing that in Luxembourg” said Mr Burki.

“I predict that in the future it will be a continued ask for more and more data and as technology providers we need to be able to work on that” said Mr Ralich.

“The regulators are all merging in the same direction, and I don’t see regulations becoming tighter in the next few months, as we are all at the same level around the world now. I think this is good, as it keeps the dodgy players out and keeps the good quality firms in unison” said Mr Burki.

In terms of what to plan for next year, Mr Burki said “I think the world got a digital acceleration with COVID. We all turned digital. The panel we are doing online for example, it is all becoming so easy and is now standard. We are all used to working from home and I am sure this will change our industry. We have massive numbers of new clients, because they think that if they can do a Zoom call, they can manage their assets online simultaneously. What we have to be ready for is the threats on the infrastructure side. Many of us have experienced things like DDOS attacks, and these may well be a new type of issue, so we need to ensure we are safe from these type of events.”

Scalability, and ensuring that the business model remains as it has been so far – strong and reliable, with a focus toward accessibility, most of today’s panelists concurred that we are an industry well placed to ensure future-proofing.

“Bigger, better, faster” is Brendan Callan’s view, echoed by Mr Sandhu.

Concluding, Mr Sandhu said “It is an efficient place to keep capital and I think that will expand. Brokers are coming back to the US and those with a global footprint, serving their customers via the most efficient method possible, via cloud service, will likely do well.”

“New brokers coming in today are entering a highly developed market with globally accessible cloud service, and can operate with a well developed series of solutions that already exist and that they do not have to get involved in operating, allowing them to concentrate on their brokerage business.”

Mr Ralich’s last thought on a positive note was “I hope we will be able to meet face to face again in 2021.”

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