Live from the Finance Magnates Virtual Summit: Now what??

Given the ever changing landscape, today’s panel of senior FX industry professionals demonstrate how to market make, how to distribute and acquire liquidity and what to look for to mitigate risk in a very different world to that which existed only a year ago.

“Now what?!” is an expression of haplessness and helplessness that many individuals and companies are likely to have exclaimed many times during the course of 2020.

Constant changes in the economy, business and social environment globally are abound and this is something that must be looked at closely by the FX industry.

Today, at the Finance Magnates Virtual Summit, senior executives Natallia Hunik, Chief Revenue Officer at Advanced Markets, David Belle, UK Growth Director at Trading View, Vinay Trivedi, Senior VP FX Strategic Initiatives at FlexTrade Systems, Drew Niv, Investor and Executive at Trader Tools, Evgeny Sorokin, SVP of Software Engineering at Devexperts and Nima Siar, Chief Executive Officer of FXPRIMUS assembled within a discussion panel to look at the way forward in electronic trading.

Drew Niv began the discussion by looking at how to provide liquidity in times at which disruptions occur. “The conundrum in emerging markets such as Turkish Lira, the people who have the most inventory are Turkish banks. It is something that whilst western banks have the technology, they don’t have the risk appetite for things like the Turkish Lira. You need more than five or six of the large G10 banks and you need a lot more diversity. There is nothing foolproof about Turkish Lira, but relying on the traditional liquidity providers is not the ideal situation. My experience where we connect to brokers or other institutional clients that want Turkish Lira, we connect them to their steady normal liqudiity providers byt also to local banks that have real involvement in that market and are not going from some hypothetical price.”

With regard to volumes on exotic currencies, Ms Hunik said “We have seen a lot of demand for carry trade for Turkish Lira, on ECNs and other venues. It is not a G7 currency so there is much less liquidity. However as a prime broker we do have access to a lot of liquidity providers, but there are many that have stopped trading the Turkish Lira for obvious reasons. The currency as we have seen over the last few months with this type of volatility, there needs to be protection in place to prevent negative repercussions affecting brokers and traders.”

Moving onto the crash in oil price, Ms Hunik said “I think the FX industry escaped any seriously negative impact from the oil price crash because of the way these deals are structured. We did see some derivatives firms in the US get hit because they were offering futures contracts, but the spot FX sector was not affected so much. In the FX market a lot of things stay under the rug because many firms aren’t publicly reporting, so I think the real effect of it is yet to be known.”

“The Q2 figures were about double what they were on Q1” said Mr Belle. “It has subsided slightly, however we are still seriously growing. It is funny and unfortunate at the same time. The more we lock down, the more we will see interest from people who may become interested in the markets as they see more volatility which at normal times we don’t ordinarily see. Interest is among the younger crowd at the moment, those who would use, for example, Robin Hood.”

Able to make custom platforms for brokers to rival the standard off the shelf products that are widely in use, Vinay said “Broker dealers that want to move beyond MT4 or MT5, and would like to do a lot more with the technology have come to us. The demand during these last few months has been different from each sector. The questions have been more around how good is execution and liquidity access when working from home? In this time more companies were doing RFQs than direct streaming of trades. We have seen a huge increase in equity trading, and firms realize how important it is to stay digital in this world, so the parameters are areas where differentiation should take place.”

Mr Sorokin said “In our US arm, volumes are definitely far from the heights of Q1 and Q2 but the markets are higher than before the first lockdown. Brokers definitely want to go multi-asset, offering many instruments on the same platform, others want to add quality analytics into the platform, and new ways to prompt others to trade. Many want to scale up and come to us with requests to upgrade their current OMS to accommodate greater volumes, so I don’t see any slowdowns.”

“How can lifetime value be increased?” asked Mr Siar.

“Allowing brokers to integrate into platforms is necessary. A lot of people tend to have their execution platform on one screen, and the charting on others so they are looking at their analytics already, but then only clicking on their MT4 platform. We should really push and ensure that regulated brokers are integrated onto the analytics platform. This way it is totally impartial, and the user gets the experience of being able to trade via our front end. Additionally we have alternative datasets and we can go pretty deep” said Mr Belle.

“Is everything pretty neutral?” asked Mr Siar.

“We do advertising on a native basis, it is built into the platform. Naturally if you are connected with a broker you won’t get adverts from another broker” said Mr Belle.

“What we provide to the clients includes post transaction analysis, exposure reports and expanding various tools from third party vendors. We are looking for tools internally to customize the offering depending on client profile. From a TCA perspective, we provide full analysis to clients” said Ms Hunik.

“We have a pretty extensive suite of analytics that clients can use, and can shape some of this to suit specific clients. From being in retail FX for 20 years I can tell you that there is an economy in retail that if you look at the behaviors that extend client life, they are unprofitable for most brokers. This is not just for people who are bucketing trades which is the majority, but P&L tends to be higher in currencies that are less volatile. Traders are attracted to volatility. Because of carry trades, people trade less. A lot of emerging market currencies, not a lot of retail users trade those however P&L tends to be higher for the end users so there are a lot of conflicts here. There are always ways to hedge risk, however you can monetize differently being your own market maker, and that is the software we are going to be selling” said Mr Niv.

Mr Niv continued “For things that have wider spreads it is a lot more juicy to be a market maker, however there is a thing here where brokers are going to have to get more creative and if you are looking at extending life, gold is a b book special! Silver is quite the opposite, it is a one way instrument, everyone hates to bucket it, and unfortunately there are a million examples like this. When I left FXCM and got into Trader Tools, I thought about what we could do to serve agency brokers as well as regional banks. Now, retail brokers can use this to monetize better. I think this is something very necessary today, as things are heading in that direction especially as leverage decreases in many regulatory jurisdictions, it drives them into that higher P&L. Currencies are more rangebound and commodities have calmed down.”

“It is tough to push clients that way. at FXCM we tried everything to push clients in that direction but in Asia, for example, only 3% of clients listen, 97% think they know better, so they aren’t going to change their behavior on a grand scale, but you can do things such as make the carry trade more attractive. I don’t think every broker could do it. Like Natallia said, it may be a case of raising margins” said Mr Niv.

“The margin issue has been a problem in the industry. It has been a risk for brokers for a long time” said Ms Hunik. “I don’t think many have thought about how to squeeze the margin out of the business. Many have been volatility farmers, therefore brokers looking for ways to diversify and make attempts to generate margin have become very commoditized. The default is MT5, b book operation. It is a tough business at this point due to massive saturation and low volatility” said Ms Hunik.

Mr Siar said “A lot of brokers coming in with MT5 and thinking they can take market share, it is unlikely. The volatility boom this year has provided some scope for differentiation. I know Vinay, one thing that your company does is offer broker neutral execution. How does that come into play?”

“What we have been doing in all asset classes starting in equities is to have an EMS system that allows access to as much liquidity as possible and everything is a one to one connection. Therefore recycling of liquidity and liquidity mirages can be handled. We can allow different streams from different counterparties so that brokers can find the best way of offsetting risk” said Vinay.

The importance of being able to change from A book to B book for clients that brokers consider not profitable was covered. “As a broker you need to be able to be given the right insights to be able to automate risk management” said Vinay.

“How you price the client and how best you should run the risk if you are managing the book should be in a controlled environment” said Vinay.

“We have a very flexible solution. We can integrate with absolutely anything, or you can buy a bundle of solutions and services from us” said Mr Sorokin. “Every project is a unique one, so I cannot define a specific trend. Every project has a specific reason – some want to launch with a short time to market but don’t want an off the shelf solution, therefore we can cook this cocktail for them.”

“What we did was, we took a HFT and put it inside a trading platform. What it will allow you to do is that, for example if you have two choices, being to B-book it or to A-book it but you are at the mercy of liquidity providers and giving up 90% of the deal. We allow you to add yourself as a market maker, and allow you to customize certain trades, certain clients and currencies according to your own assessment of what you want to do. Therefore if a trade goes from profitable to not profitable in 10 seconds you can get out of it. You then earn the spread on the client or the hedge instead of paying for nothing” said Mr Niv.

“There is a lot more flexibility than what would be offered by a market maker per se” said Mr Niv. “We give you this solution now. You’re not going to go out there and take market share from EBS and that type of venue, but it allows you to be a one way market maker and more intelligently hedge, and in currency pairs there is a massive difference in spread. If you look at behaviors where brokers offer people offer boring currencies like HKD, its always range trade, and if it is A booked it doesn’t even cover the cost of marketing. We offer brokers to go in the middle and make the spread. I would say customization should be done based on practical advice, the more you spread a certain business around the less loyal they will be to you when the time comes.

“Liquidity providers don’t care about you. Their self interest matters more and in things where the risk can be severe, such as oil, the best thing to do is to ensure that you have a better experience. It is partially as simple of that. We used to have a HFT client who used to spend every day looking at how much he could internalize, how much he could passively put to the live market. There are times when you can take control and increase revenue” said Mr Niv.

“Is this a time to buy new brokers?” asked Mr Siar.

Ms Hunik replied “I think post-SNB, a lot of businesses realized that relationship does matter and there has been a shift toward disclosed trading. This black swan event demonstrated that access to credit has been decreasing, and brokers have been removed from traditional sources of liquidity. There are a lot of market players disguising themselves as prime of prime or liquidity providers when they’re not.”

“The nature of the FX business is that the default is B book, but sometimes they come with a knee-jerk reaction asking if we can open an account in one day as they need to hedge oil. There are a lot of areas that institutional clients look into regarding execution and how you handle execution that retail brokers tend to ignore” said Ms Hunik.

Therefore, the combination of advancing technology and the need for brokers to concentrate on maintaining a detailed understanding of how to work with market makers, vendors and liquidity partners, along with greater accountability regarding order management appear to be the order of the day in this ever changing market.

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