London’s high end prime of prime ecosystem expands further as CMC Markets PrimeFX plugs liquidity gap

Prime FX from CMC Markets has been designed to help fill the liquidity gap that has been left by many of the traditional prime brokers scaling back their dealings with smaller banks and brokers.

FX liquidity keeps changing

London is home to some of the most experienced and long-established non-bank institutional FX specialists, many of which have begun to expand their presence considerably over the past two years.

Today, a further development has come to fruition, in the launch of PrimeFX by British household name and electronic trading mainstay CMC Markets.

Careful consideration and planning has been a major priority for CMC Markets’ institutional service, in which the company has built on its proprietary system and in-house capabilities, led by Head of Institutional, Richard Elston.

In May last year, Mr Elston explained the structure of the firm’s institutional offering during a meeting with FinanceFeeds, stating that “Credit risk is apparent these days for so many companies, but if you go through the annuls of history, there were mainstay players such as CMC Markets, IG Group, Saxo Bank, FXCM and a handful more, but now there are brokers which have financial strength in their own geographies.”

“We have taken a very international approach, and should be very well positioned to be the number one provider of CFD liquidity” he said.

“An important point to consider is our standing as a company which has a combination of financial stability, good reputation, strong counterparty, with marked pedigree in this market place” said Mr. Elston.

“Secondly, we approach the concept of market data with tremendous transparency. Intelletcual property with respect from pricing is derived from an exchange source. When that demands that the venue or institution that we pass it to needs a royalty we are happy to do this and the market data agreemetns we have with brokerages focus on this clearly” said Mr. Elston.

“As a result of the amount of correctly delivered market data that we have, this means that CMC Markets can facilitate the broadest range of liquidity within the CFD space for API connectivity” Richard Elston, Head of Institutional, CMC Markets

Just one year later, the firm has completed the development of its institutional service with the addition of PrimeFX, has been designed to help fill the liquidity gap that has been left by many of the traditional prime brokers scaling back their dealings with smaller banks and brokers. Although there has been a proliferation of firms moving into the ‘prime of prime’ market, recent failings have highlighted the potential benefits of dealing with counterparties who are both appropriately regulated and are able to leverage their own strong balance sheets.

We have been actively providing our services to other institutional clients for over twenty years, during which time we have seen constant evolution in client demands. Our offering has changed to address this, but the recent scaling back of prime brokerage services by a number of major banks has created a huge market need. Our London Stock Exchange listing, international regulation and significant balance sheet means that CMC Markets is ideally placed to be a trusted counterparty when it comes to Prime FX” – Richard Elston, Head of Institutional, CMC Markets

The Prime FX offering from CMC Markets puts the dissemination of tier one liquidity first, ensuring access at scale on an ever-widening range of currency pairs and bullion types. This is another step in delivering a comprehensive and flexible venue to cater for all institutional client trading needs, supported by quick integration and a highly intuitive user interface.

Earlier this year, Mr Elston quite rightly explained to FinanceFeeds that retail CFD and FX trading may now be considered a mature market, but the infrastructure that enables the widest possible dissemination of these products continues to evolve – and it’s the quality of service to end-users and intermediaries that’s very much front of mind.

Richard Elston, Head of Institutional, CMC Markets

“Historically” he explained, “those institutional intermediaries wanting to deliver a third party service had one of two options. Either they looked for a white label provider that offered a complete ‘broker in a box’ solution, or they sought out an Application Programming Interface – API – that allowed a third party execution platform to be plugged into their existing technology.”

“To this end, CMC Markets has invested in excess of £100 million in its proprietary, Next Generation technology. Intermediaries can be assured that whether they are just looking for liquidity or an entire turnkey solution, they’re going to be drawing from exactly the same flow.In recent years, some of the biggest players in the sector have realized there’s a significant benefit to be had in pulling these two disparate systems together. The presence of scale is good as internalizing flows improves liquidity and keeps costs down, it’s the optimal solution for risk management and it ensures the fastest possible execution speeds” said Mr. Elston.

Which of the two solutions a client takes depends on a number of factors. There’s no doubting that a White Label is a far more complex proposition to execute, but it’s a valuable way of getting market exposure where intermediaries already have a strong brand and geographical presence. These clients have a very high expectation of what we will deliver both in terms of an intuitive interface for the end user, as well as seamless downstream technology.

We make no secret of the fact this is very much a two-way deal, and work closely with our White Label partners to ensure they make the most of the proposition. Similarly, there’s a weight of retail brokers out there, typically running MT4, who are always looking to serve up the best prices and execution options to their clients. In instances like this, the API is more appropriate, but regardless of the route taken, it’s all pointing back to a common core with exactly the same underlying prices and liquidity on offer – Richard Elston, Head of Institutional, CMC Markets

Mr Elston’s view is that it is of great consequence that CMC Markets delivers its institutional offering from all fourteen worldwide offices and has recently appointed Andrew Wood as Institutional Business Development Manager in Sydney to support clients right across the Asia Pacific region.

In that region, the institutional offering is burgeoning, with Biyi Cheng as Head of Greater China being a mainstay within the company.

In February, FinanceFeeds spoke at length to Mr Cheng with regard to expansion of the evergreen British company into China. “All of the fund management and stock broking companies are Chinese companies but they have traditionally only really been focused on the domestic market, but these days the senior management that operate these companies have the ability to undertand and operate in overseas markets” said Mr. Cheng.

“Chinese companies dominate outside China as well” he said.

“One of the reasons for this is that their customers want to trade asset classes based on overseas venues, largely down to uncertainty with regard to government policy and impending regulations, however they are willing to try to go to the overseas markets and do not have a risk averse approach when it comes to completely new business oportunities which gives CMC Markets institutional product good opportunity to connect with that type of traditional Chinese institution in order to bring our range of assets to a Chinese audience, via completely Chinese and long established domestic market venues” – Biyi Cheng, Head of Greater China, CMC Markets

CMC Markets widely recognized as an intriniscally British company with a large percentage of its retail audience being based in Britain, however the company’s institutional entry into China demonstrates the absolute necessity to adapt and develop specialist institutional solutions that will power the largest market in the world, on a completely business-to-business basis.

“Currently, there are many products traded on exchanges across China, most of which are owned by the government and in many cases, the smaller regional exchanges now face extinction because the Chinese government is passing a law that will allow only one exchange to be licensed in each region” said Mr. Cheng.

CMC Markets Head of Greater China Biyi Cheng discusses prime of prime liquidity distribution in China

“The available products are usually commodities, gold, and in some cases exchange-traded futures exchanges, but the number of products is very limited and the pricing is firmly restricted to the sealed (government restricted) market and not part of the the open market” said Mr Cheng.

“Now, the ability for external providers to get into the market has arisen, largely due to many Western companies having learned the structure of the Chinese business environment. Those who approach this correctly will be able to generate a mutual benefit by trading on the products offered by exchanges whilst at the same time ensuring that Chinese exchanges are able to offer products which are provided by CMC Markets” explained Mr Cheng.

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

Mr. Cheng agrees that via their existing IB collaboration with overseas providers they have gained a deep understanding of the risk management systems and how execution needs to take place, and can easily do it themselves.

The interesting matter here is that most Chinese IBs are responsible for over $300 million or more in assets under management, and nowadays they want to ensure that their customers are belonging to them rather than being sent to overseas firms directly.

“You are right” said Mr. Cheng. “It is very clear that the IBs are now becoming broker-dealers and taking liquidity directly from prime brokerages which could be large property magnates that have set up an institutional firm in China to redistribute liquidity on a business-to-business basis, and in cases like this, CMC Markets will provide liquidity on a prime of prime brokerage basis directly to those prime brokerages in China. Under this system they would then redistribute the liquidity and create a new ecosystem in the prime brokerage business within China rather than sending clients and their funds abroad for execution by retail broker desks abroad.”

“When establishing this type of business with new primes in China, the all important relationship based business model is essential. We would meet face to face and tailor the institutional product to suit them. Each institution in China has a unique requirement for service so we have to fit these requirements on a one by one basis. It is not standardized like in the West, in China it varies on a per institution basis” said Mr. Cheng.

The year ahead most certainly places the specialist non-bank stalwarts in a very strong position in the OTC derivatives sector indeed.

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