As the lobbyists push OTC electronic trading toward exchanges, the MetaTrader platform is continuing to take on board listed derivatives multi-product liquidity connectivity. We take a look at how to future-proof a retail brokerage in these times at which there is little defense against the mighty powers that be
For anyone laboring under the clear misconception that the regulatory authorities in many regions with developed financial markets economies view the OTC derivatives industry via similar paramaters as those used to view the exchange listed derivatives sector, last week’s absolute decimation of one of the world’s largest and until now highly respected FX brokerages should serve a large dose of sobriety.
It has been on the minds of a large number of senior FX industry executives during the course of the past year that the long established regulatory authorities that preside over London, the largest financial center in the world with its Tier 1 banks providing eFX liquidity to every corner of the earth, just six institutions responsible for 49% of all global order flow, through to large non-bank institutional FX companies that dominate the Square Mile, right the way across to vast, publicly listed retail CFD companies with loyal, longstanding client bases and highly advanced proprietary platforms, all the way to New York’s multinational OTC businesses with client bases and branches in every continent, are looking to revamp the entire industry onto exchange.
Until last week, there would have been a very clear means of debunking such a theory, that being to point out that only offshore, unregulated OTC firms with a white label license and no live market feeds are catalysts for the regulatory bias toward the vast, highly capitalized exchanges that may well be lobbying the regulators to push for OTC retail electronic trading firms to endure a harsh environment in order to win back the business that was taken two decades ago by the cheaper, faster, more efficient and more attractive OTC market.
Now, however, any pro-exchange lobbyist can simply say “What about FXCM?” when looking to argue that it is not just the small white labels that are lacking in transparency. In short, FXCM’s several year period of trading against its customers via an external market maker in which it had an interest, and all the while employing a proprietary algorithm in order to take the other position of retail traders plays directly into the hands of the anti-OTC brigade, and with so much power to lobby regulators, they can easily pull the card that FXCM was a publicly listed, long established company, overseen by the NFA, with public reporting duties, in the most highly organized region in the world, and still it used a bent operating model toward its clients.
Of course, us OTC FX industry proponents know better. Every astute, highly experienced executive in this industry who has worked tirelessly to perfect their knowledge and innovate their business via correct models. Unlike FXCM’s founders, most come from positions within large bank and non-bank institutions, large global technology providers, after a private school education and a difficult and career-forming internship at Merrill Lynch or JPMorgan.
Quite clearly, a Head of FX within a North American, Australian or British institutional liquidity provider, top retail FX firm or prime brokerage whose background is peppered with senior executive positions at major interbank dealers and global venues is very unlikely to do anything other than uphold a very high standard, and that is exactly what concerns the exchanges so much.
Multi-million dollar retail FX, CFD and spread betting companies with public listing on stock exchanges in the world leading financial centers on both sides of the Atlantic are operated by the leaders of today’s financial services industry. Saxo Bank, CMC Markets, Swissquote and IG Group all enjoy shining reputations for high level in house technology that powers their trading environment and gives loyal customers access to millimetric execution precision and top level customer service.
In the United States, Interactive Brokers is a veritable giant, whilst GAIN Capital has retail clients all over the world and an ingenious institutional division, GAIN GTX, which hosts bank and non-bank liquidity providers.
The interest in the retail sector has been rising from within the listed derivatives giants recently, hence a correlation being drawn between them and the regulatory lobbying that appears to be taking place.
CME Group is looking at a project whereby they come up with a rolling spot contract which is a direct competitor to OTC derivatives firms.
Then there was the acquisition by Deutsche Boerse in July 2015 of FX trading platform 360T for $796 million.
Another example of this is Hotspot FX, one of the world’s most renowned OTC FX ECNs, which was bought by BATS Global Markets for $365 million in January 2015. It is also important to look at EUREX’s direction in which by September last year, the venue had extended its listed FX Futures and Options portfolio to include six new currency pairs while the overall minimum block trade sizes was reduced across all currency pairs to further improve hedging opportunities.
FinanceFeeds is also aware that this has been a focus for Deutsche Boerse for some time. Back in 2011, Deutsche Boerse took a minority stake in British FX technology solutions provider Digital Vega which was a technology vendor to buyside and sellside firms in the OTC derivatives sector.
At that time, the idea was to increase Deutsche Boerse’s positioning in the provision of pre-trade price transparency in the derivatives area for institutional investors and taking an initial footprint in the FX derivatives space. An investment agreement was during the later stages of 2016, whereby Deutsche Börse would pay a US dollar amount in the single digit million range.
EUREX bought the 360T treasury system , with the intention of moving the entire FX structure from an OTC bilateral system into an exchange clearing structure in my view.
Another example of equity exchanges moving into FX was NASDAQ which wanted to launch NASDAQ FX but were unable to do so as they failed to understand the nuances of liquidty provision in an OTC trading environment vs the exchange traded products dynamics. In any case there is a clear movement from exchanges into the OTC world, and perhaps somewhat ironically, ICE tried to buy FastMatch in July last year from its three shareholers, Credit Suisse, BNY Mellon and FXCM, for around $200 million to $250 million.
Now we are witnessing Leucadia’s interest in ousting FXCM from FastMatch shareholding, having disposed of Drew Niv and William Ahdout last week in favor of two Leucadia directors.
With this level of acquisition activity occurring, many OTC executives and traders have not been quite so worried as they would have been if generic, off-the-shelf platforms were offering exchange listed instruments to the same retail client bases as the OTC world, however now they are doing so.
Not only is Direct FX connecting to CME via MetaTrader and PFSOFT’s Multi-Connect ProTrader platforms, offering a combination of OTC and listed products to retail traders on one platform without the prohibitive membership and clearing fees normally associated with listed derivatives trading, but MetaQuotes itself is now becoming a major vehicle for this.
MetaTrader 5, which although is almost seven years old, has only recently gained any form of popularity among retail brokerages, largely following the addition of hedging in mid 2016, however the most interesting aspect of its rise in presence is that it has been connecting directly to derivatives exchanges.
Aside from the large number of brokers connected to emerging venue DGCX in Dubai via MetaTrader 5, the pools of liquidity now connecting to the platform are becoming increasingly venue-focused.
Today, Just2Trade released an integrated solution based on the MetaTrader 5, bringing within reach of retail customers some of the largest major exchanges.
In total, the company provides access to 9 000 financial instruments: 6 000+ stocks and ETFs on the US stock market, 700+ stocks of Russian companies, RTS, MICEX, stocks and currency futures, as well as direct access to GLOBEX, EUREX, SGX and other exchanges. Besides, stocks and futures contracts on all major European and Asian exchanges are available on request.
The multi-product direction is certainly a move toward empowering the exchanges in their quest for more retail business, and is likely to be a more globalized, less costly alternative to using Chicago-based retail listed derivatives platforms such as Trading Technologies or Tradeovate because the client basis of the retail brokerages that can now place traders on exchange are within the $3500 to $6600 deposit range (the average for OTC retail clients) rather than the $50,000 of exchange listed futures traders.
Even if there were some fees associated with exchange trading that are higher than those of OTC FX, MetaTrader 5’s single server requirement for a multi-site brokerage compared to MetaTrader 4’s requirement for a server farm in each branch of a broker will reduce support and infrastructure costs, thus any broker that goes down the multi product route via such retail platforms is future-proofing itself (pardon the pun!) and also is arming itself with a contingency plan should the less than favorable intentions of the regulators come to pass.
#Exchange Listed Derivatives, #exchange traded forex, #liquidity, #metaquotes, #MetaTrader