Live from iFX EXPO International 2017: Prime of Prime insight: Market maker or a marketer? That is the question

Sensible voices and experienced minds are the ones which will prevail in today’s increasingly competitive prime of prime brokerage sector.

The rapid expansion of prime of prime brokers in the non-bank sector has become a critical linchpin within the OTC derivatives business recently, and in some cases, has begun to straddle the previously large gap between retail and institutional firms.

Here at the iFX EXPO International 2017 in Limassol, Cyprus, hosted by ConversionPros, it is very clear that many retail FX firms have aspirations toward elevating their product range not just toward multi-asset trading facilities but also toward offering their own institutional service to other brokerages globally.

This afternoon, FinanceFeeds met with Ramy Soliman, who is an absolute expert in the institutional FX business, having spent five years at Citigroup within the interbank FX margin business in London, preceded by five years within IG Group’s institutional division.

A one year tenure at Integral Development Corporation ensued, before Mr Soliman, a qualified lawyer and highly urbane senior industry figure, established his own prime of prime brokerage, Stater Global Markets, in London.

“The rise of the non-bank prime of primes and the regulatory remit has created the current dynamic of market evolution” said Mr Soliman.

“There is a need for market liquidity and the balance sheet requirements by the bank have now dictated this even more, therefore the type of services that companies which fall into the same category as Stater Global Markets can offer are to provide liquidity that we can access from direct relationships, largely because establishing a prime brokerage relationship is not something that a firm coming to us can do. We can help them gain that access, and also to be able to redistribute” explained Mr Soliman.

“It is important to consider that a true prime of prime can match principal and not take risk” explained Mr Soliman. “Andrew, have you seen Noble Bank?” he asked. “This is a very good example of an interesting method by which new companies have tried to solve this problem.”

It is very interesting indeed, in fact. Just a few weeks ago, FinanceFeeds explained that Noble Banking International’s purpose is aimed firmly at the OTC derivatives and FX industry at institutional level.

The company earlier this month explained to FinanceFeeds that it considers several aspects of the current FX industry landscape to be addressed, those being a lengthy and often complicated process to establish credit relations, fragmented and restricted credit between participants, and very high costs associated with capital barriers for firms in the OTC sector.

Indeed, today, one of the most difficult commercial obstacles for prime of prime brokerages is the ability to obtain, and subsequently maintain counterparty credit agreements with eFX divisions of tier 1 banks.

FinanceFeeds clearly understands that it is possible to count the number of genuine prime of prime brokerages that exist globally on probably one hand.

Mr. Soliman agreed with our opinion that it is a myth that there are lots of prime of prime firms in existence, when actually there are hardly any.

“Yes, you are right, there are hardly any” said Mr Soliman. “The main message is to educate the client base as to what that constitutes and there has been a lot of abuse. Retail brokers in many regions have now expanded, and brokers want to attract a higher level of retail customer, so they put prime on the end of their existing name.”

“Most of those companies trade on MT4, very few are using an API connection to a top tier liquidity source, and most are offering the same service, so the question is, how can clients differentiate?”

The marketing factor – Prime = Quality by association

“If a brokerage says that it has prime of prime brokerage facilities and access to institutional liquidity, this is a clear marketing advantage, but whether they have the components to meet the criteria of direct relationships is never something that many can find out. If they don’t, then for me that is not a prime of prime” – Ramy Soliman, CEO, Stater Global Markets

“That does not mean that you can’t run a successful institutional brokerage on this basis, but without the direct relationships, it would not be a prime of prime” he said.

“For example, many firms in the institutional sector may say that they have a prime brokerage relationship with Saxo Bank or LMAX, for example, however those companies are prime of prime, therefore the company taking liquidity from them would not be considered a prime of prime, as that liquidity taker would not have direct access to liquidity providers, as it is all controlled by the prime of prime” said Mr Soliman.

“It is very important these days to be transparent with what you have and don’t have. There is nothing wrong with working to specialisms. From my point of view, i know the institutional world more than the retail sector, and understand that a retail firm is a completely different operation from an institutional provider, however it still remains that to do it properly you’d need millions” said Mr Soliman.

“Cyprus is a good example” he said. “There are some very well run companies with good service, good conversions, and effective marketing and they do good business. There are some drivers that we have seen over the last year, however, one of which is the increased scrutiny by the regulators in the UK and in mainland Europe from the European Securities and Markets Authority, which actually came out and said that Cyprus is one of the countries under its jurisdiction which is not compliant.”

To conduct whichever practices that have been commonplace in the past you need more capital and more resources to make sure everyone is compliant these days. There is nothing wrong with that, as many were taking too much risk, and some of the methods were not conducive to a good client outcome. I don’t interact directly with that aspect because that is really the remit of brokerages, but we need to do due diligence with customers and look at business models to understand how they operate and how to help” – Ramy Soliman, CEO, Stater Global Markets

Are you a market maker, or a marketer? This is where consolidation will lead

Mr Soliman said “Being at Citigroup, Alpari was a Citi PB, running on the face of it a robust business but underneath the surface there was evidence that this wasnt the case and some banks got caught.”

“We cannot be having a $5 million negative equity, therefore my intention is to be purposely conservative. I don’t mind having high entry points, as a prime of prime’s raison d’etre is to facilitate access to liquiduty, not to interact with the liquidity” he said.

“I have access to good liquidity, can aggregate it through the technology I have and can distribute it to customers. Different clients need different things and have different multiples, therefore can use the Smorgasbord of products because of access to good providers. They come to a prime of prime to get a high quality range of products, however a prime of prime cannot decide whether to A book or B book, or interfere with the way liquidity is distributed, otherwise it becomes a broker, or market maker” explained Mr Soliman.

“I think there will be consolidation and indeed that will likely be the case here in Cyprus. Asia is a growth area for us” explained Mr Soliman.

FinanceFeeds has conducted research that just one introducing broker which conducts no execution at all, and is unknown in the wider industry, keeps quiet and operates from a second tier town in China, does more business than all 154 brokerages in Cyprus in terms of volume.

Mentioning that to Mr Soliman, he said “It is inevitable that there will be consolidation in the retail sector. The 154 brokers in Cyprus that exist today certainly will be subject to that. With regard to looking abroad to other regions, we will have to see how regulation works in China. We want to make sure we are available in the right compliant way to service what people are looking for. Essentially we offer a product with meaningful value. Most of the retail brokerages cannot go to Goldman Sachs and get a prime brokerage agreement and ask for liquidity from certain sources.”

“Once that works, then those clients can distribute liquidity to 100 people that we don’t know about – its their job to do so. Decreasing leverage, and increasing scrutiny has been a major consideration” he said.

“A lot of them have to make a choice of being marketing agents, which they are good at, or risk managers, which some are good at and some have capital to do both, and some don’t, so many retail firms will have to make the decision of whether they should be a market maker or marketer, and many are likely to choose to take the marketing role” – Ramy Soliman, CEO, Stater Global Markets

“Ultimately people will have choices where possible, as we aren’t there to interact at that point, that is the job of regulation. We are there to ensure we service the institutional customers to best way possible.”

“Lastly, if brokerages decide to go abroad away from regulated areas and we begin to receive a spate of applications from brokers from St Vincent or Vanuatu, largely because they want to run high leverage firms and not adhere to MiFID rules or other stringent regulations in major jurisdictions, we would have to increase our due diligence to get a full set of answers. This is all part of the thinking ahead process that is needed in terms of looking to provide new products and asset classes, as those who stick to spot FX will be limiting their business opportunity unless they are looking to improve processes and be dynamic.”