A close look at how to avoid being blocked when connecting liquidity to Chinese firms, bearing in mind that external API business is illegal in China and results in the complete blocking of the company’s IP address and access.
Whilst leaders of the international FX industry convene today here in the veritable center for retail FX, Limassol, Cyprus, the inevitable focus on forging partnerships with all-important Chinese FX companies is very much a subject for discussion.
Here today at the iFX EXPO International 2017 hosted and produced by ConversionPros, the second day of the Cyprus fixture of the world’s most prominent FX industry conference, FinanceFeeds raised a point that should be considered by many FX liquidity providers and brokers providing institutional feeds to retail firms in China, which is a major focus for many companies currently.
That point centers on the infrastructural arrangement that follows the sealing of the critical deal with a Chinese firm, and very importantly, how to avoid being blocked by the Chinese government’s firewall.
One of the most critical facets in terms of sustainability and scalability is the means by which a company’s infrastructure is connected to that of the Chinese brokerage, especially in a world in which Chinese FX brokerages are burgeoning, introducing brokers in second tier development towns across China with $300 million in assets under management have begun conducting their own execution and becoming brokers in their own right – and all of them want Western liquidity from reputable prime of prime brokers.
Speaking to Chris Rowe Global Head of Sales and Marketing at Gold-i this morning, FinanceFeeds asked whether the illegality of using API connectivity to the ‘free market’ world by Chinese firms is something that impinges on the ability to sustain business with Chinese partners.
In short, if the connectivity and liquidity management is hosted externally, will it get blocked?
The answer is that there is a fair chance of that happening. Mr Rowe explained “The key is tailoring the technology to suit the local environment. Some firms want full control over everything, especially if their ethos is to focus on control and making money. Our view is client success, meaning that the more money the client makes the more we make.”
“We designed our solution to actually reside on the MetaTrader 4 server of the actual brokerage itself, so therefore our system would have the same IP address as the brokerage itself. We designed it that way to start with, however the upside of this when working in China is that, because it resides within the Chinese broker’s topography so it was designed that way to start with, there is no external hosting and connectivity so therefore there is no possibility to be blocked by the firewall” – Chris Rowe, Global Head of Sales & Marketing, Gold-i
“We always viewed it that the broker should be in control of their own technology. There is a lot of positives of doing that, not beholden to raising tickets to do simple changes. For example, if you want to reboot the system you can reboot easily, on a centralized system then it would have to be done by the provider” said Mr Rowe.
Connecting to external API sources is a factor to consider carefully when developing infrastructure to connect western institutional liquidity providers because the ramifications of doing so means being blocked from all business in China, having the entire company website blocked and any funds in a Chinese bank account seized by the government.
Speaking to Biyi Cheng, Head of Greater China at CMC Markets at the iFX EXPO Asia in Hong Kong in February this year, FinanceFeeds has become aware that this is a very important matter from both sides.
The Chinese firms are very willing to attempt new methods of market connectivity to deeper liquidity and varied asset classes which provide OTC and exchange traded products on one platform.
As far as staying on the right side of the long arms of the Chinese government’s reach in terms of what type of connectivity is permissible and what is not, China generally very much open to new business and if companies and their overseas providers operate according to the law framework of the government then that is fine and will create an industry standard in China.
Mr. Cheng considers that overseas partners such as CMC Markets and other well recognized institutional providers need maintain a cautious approach when beginning to work with local exchanges. The way they do business traditionally is not compatible with the western style of operating electronic financial markets, therefore the framework is very different to that provided under the remit of western regulation.
One of the reasons that local exchanges have been restricted to just one per region is that in many cases, the business model of smaller regional exchanges was at odds with that of established exchanges in that many were not really exchanges and instead were b booking order flow.
Mr. Cheng considers that in those cases, “their business model was wild compared to large listed products providers in heavily regulated parts of the world with large central exchanges, and as a result of the stigma that has arisen, most providers have wanted to separate the business they are doing in China from other regions, however nowadays there is a very structured means of accommodating Chinese institutional business and making it a core business activity, as both can both mutually benefit each other, despite the big challenge on both sides.”
“Many overseas suppliers want to improve their branding in China via connectivity to local exchanges, however the local exchanges could damage the reputation of an overseas reputable provider if they are what I previously described as ones with a ‘wild’ business model that have attracted the disdain of the Chinese government” said Mr. Cheng.
“Partnering with smaller exchanges that do not conduct their business properly could also lead to action from the Chinese government if the relationship cannot be maintained well and the business model is going to be not successful the government may intervene which would likely put a stop to the opportunities of connecting to such exchanges in future” – Biyi Cheng, Head of Greater China, CMC Markets
If API business is illegal in China, how can internet blocking be avoided and how can an API connection actually work at all?
With regard to connectivity, API business is illegal in China, but only within China’s borders and the all-seeing-eye of the notorious Chinese internet firewall.
Mr. Cheng explained that as a result of the restriction on API business only applying to the Chinese mainland, API servers based outside China and connectivity to Chinese exchanges by institutional liquidity providers works well without any restrictions. This way, the government has enough control as the partner is an established, fully Chinese owned exchange with government shareholding, and all can be monitored sufficiently.
“If an exchange is connected to its client base via MetaTrader 4 as a front end trading platform, then they must use a liquidity management system and liquidity bridge such as those provided by oneZero, PrimeXM or Gold-i, which are well positioned to provide an integrated liquidity connection between the supplier (CMC Markets) and the local exchange” said Mr Cheng.
“As you say, inside China, no venues or suppliers can connect via an API, but outside is fine, therefore nobody will put API server inside China, as all the core data would be on the government server and the government will then notify them this is illegal and block the entire company from cyberspace, including their website, payment channels, email server, trading platform and access to liquidity. Effectively the entire opertions would be switched off by the government” said Mr. Cheng.
In conclusion, Gold-i’s Mr Rowe concurred that with regard to connecting to liquidity providers “We aren’t the norm anymore. Liquidity providers will ask where is the server hosted. We don’t have a server hosted because we put the technology onto the customer’s MT4 to get low latency, and then the IP address by default is set at their location. Effectively we don’t need an IP address because its not hosted anywhere and even the aggregation tool is on a separate server which resides on the clients environment.”
Concluding, Mr Rowe agrees that the sustainable method is to empower the local client, which by default removes the risk of intervention by the government and preserves the scalability going forward