“Mind The Gap!” – The life and times of a man on the move Episode 14

Don’t let the big boys bully the FX industry, China is not a lost cause, a day in Cyprus on ESMA’s own goal, a big well done to Peter Hetherington and an AFX absurdity

In this weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment.

Monday: Tesla is FX on wheels

Elon Musk’s tussle this week with the Securities and Exchange Commission (SEC) is just as unusual as his own engineering ideology.

Motor manufacturers in their traditional environment of heavy engineering have spent the last 132 years defining and subsequently refining a vast and structured mass production business whose interaction with government authorities has been constantly restricted to environmental science bodies like the Environmental Protection Agency (EPA), trade unions such as the AWU in the United States and UNITE in England, and road and consumer safety institutes.

Effectively, Ralph Nader or Red Robbo are more synonymous with awkward necessity figures in the motoring hall of history, not the SEC.

However, Elon Musk is not a motor manufacturer, and Tesla is not a car company. Not in the traditional sense, anyway. Elon Musk is a highly intelligent, and extremely eccentric disruptor of every sector that he has been involved in, with masses of patents and engineering breakthroughs to his name in areas that nobody thought a breakthrough was needed.

It is absolutely fair to call the traditional internal combustion-powered automotive industry ‘the establishment’. It is one of the most prominent and rigidly structured industry sectors in post-industrial revolution existence and many employees of the large, dominant companies have spent their entire cradle-to-grave lifespan being raised by Ford, GM or Chrysler in the Great Lakes region and southern Canada, and British Leyland (until it ate itself), Jaguar, Peugeot, VW or Renault on the other side of the Atlantic.

Nothing was ever challenged. Governments invested in nationalization projects, social lives were formed around the factory social club, childhoods were spent in company-owned after school societies leading to “Dad worked for Ford, I grew up with Ford and now I work for Ford” inter-generational statements that are prominent across the United States and Europe. Very powerful unions and government lobbying groups ensured that the retirement of workers was absolutely guaranteed, there are even AWU villages in Michigan!

Even more critically, competition without massive purchasing power and global might is not only not welcome, but is unable to gain even a modicum of market share.

The automotive equivalent of retail FX?

Aston Martin, Bentley and Bristol may have illustrious heritage, but ultimately hand-assembling bespoke products at very high prices does not equate to refined machinery, reliability or an ability to remain modern. Only now is this possible as Aston Martin, Bentley and pretty much every other low-volume bespoke vehicle manufacturer that still exists belong to one of the large volume producers. Strip away the Park Ward Mulliner coachwork of a Rolls Royce and you’ll find very humdrum BMW components which are similar to those on a very cheap and basic hatchback.

The overall product, however, is better than it has ever been, more efficient, more powerful and more refined, and equally importantly, just as special to own, and that is what Rolls Royce sells – exclusivity. Without the backing of accountants, organized procurement, proper machinery and precise management that a large corporation can offer, it cannot succeed.

Tesla is none of these. It does not, nor does its founder, follow the traditional route of corporate structure. There are no workers social clubs serving subsidized IPA to keep the blue collar neatly pressed. There is no workers union or “we’ve always done it this way” mentality.

For this reason, Tesla is seen by the establishment as a thorn in its side, and a thorn that needs removing, and there is nothing more that a long established, strictly regulated and gray suit-wearing juggernaut hates than disruptors and innovators that throw away the piece of paper and start from somewhere completely else. This is when they turn to the SEC.

Sound familiar?

Elon Musk may well be in such deep water that he had to step down from his leadership position at Tesla, but he is effectively now in the same position as most senior executives of retail OTC FX brokerages.

Quite simply, the derivatives venues of London, Chicago, Singapore and Australia do not like us. They consider us to be Elon Musk, but an Elon Musk that has spent the last 30 years rapidly developing and refining a massively efficient and super-popular electronic financial services ecosystem that has afforded longstanding loyal clients very cheap and very effective access to live financial markets and giving them execution and trading facilities that would cost an absolute fortune on an exchange.

“Hello Mr Smith from Birmingham. How much do you earn? Oh, 25,000 GBP per year? OK, you can trade metals on our exchange, but first you need to pay $500,000 membership fee, and then clearing fees and be subject to exchange membership responsibilities that would require several hours per day. And by the way, there is no leverage and our execution is according to exchange system SLAs.”   Click…….. Hello!

“Hello Mr Smith from Birmingham. How much do you earn? Oh, 25,000 GBP per year? OK, you can trade anything you like on our proprietary platform, at any date or time you like, and it will cost you absolutely nothing and our execution is immediate and you can have leverage of 1:30 with no risk. We just charge a small commission per trade, which is stated on the terms. You can start now.”

Red Robbo (Derek Robinson) in action in the dark days of the mid 1970s at British Leyland

Hmm. I wonder why the exchanges are now doing what the major motor manufactures appear to have done to Elon Musk. ESMA, the CFTC/SEC and the FCA are all absolutely biased toward the establishment of hundreds of year old exchanges, and the exchanges want the retail business back. They have not been able to compete for 30 years, cannot modernize and cannot innovate the way that the major retail FX firms can. They cannot access global customer bases of willing clients.

Even in very traditional market where the population is analytical and calm, such as Britain, IG Group and Hargreaves Lansdown have absolutely conquered the domestic retail financial services market. Loyal customers that will never go elsewhere are fueling the business of two giants, and the London Stock Exchange cannot keep up.

I have before stated that the exchanges are buying up huge numbers of OTC FX businesses.

Elon Musk cannot fight the giants. His product is a beta test, really, but a very very good one at that. OTC FX is no longer in its infancy thus it is harder for the derivatives dinosaurs to ignore.

I have seen a few casualties of defeatism this week – Keep the chin up is my advice. We are leaders. All of us. From the sales desks to the platform developers. For encouragement, call a Hargreaves Lansdown customer and ask if they’d ever consider stopping using the Vantage platform in favor of an exchange, or a Saxo Bank customer if SaxoTraderGo is supplantable by LME’s open cry pit.

Once satisfied, let’s carry on and not let the bullies win.

Tuesday: APAC your bags and leave!

This week has been another example of a very short time frame in which dejection has set in. My thoughts about the SEC and Elon Musk on Monday rolled over onto Tuesday in which I spoke to several retail FX brokerages about the current perceived disdain for overseas business that centers around the Chinese authorities.

It is a perceived disdain, because like all aspects of government control in China, perception is all there is to go on because the government which is extremely sophisticated, organized and not only commercially savvy but able to outpace most global international companies when it comes to purchasing power and business strategy. Simply, the government does not talk. It is a huge economic superpower which carries out actions, not words.

I addressed 300 Chinese FX execs in Guangzhou. If you are in China, you are fine

Yes, the People’s Bank of China has been repeatedly publishing generic notices on its publicly viewable website to the effect that it intends to put an end to non-Chinese FX brokerages targeting Chinese retail FX clients, causing a conclusion among brokers that it is all over in terms of gaining IB business from China.

The People’s Bank of China is owned by the government, as are all entities that have centralized authority on any business sector, in line with China’s communist closed-market ethos.

My conversations with FX firms this Tuesday on the matter were a subject of dejection. Many executives believe that the end is nigh for any relationships with partners in China, however what has been overblown as a ‘crackdown’ is simply a reiteration of the existing view from China, in that China’s SAFE (FX regulator) has not approved any firm to act as an FX deposit business, and that it is illegal in China to conduct FX deposit trading without authorization.

Yes, that is true, and has always been, however the Chinese government’s very generic tone is also not new. Payment gateways are now becoming much harder to coax into life when it comes to transferring money to & from China. I speak from my own experience as Ive had to several times provide all kinds of documentation to banks in China to release funds even though I am not an FX broker and handle no client funds.

Still, however, this does not mean that there is an end to the business in China. The Chinese government’s surveillance system is so comprehensive that it knows what every person in every part of China is doing, right up to their latest purchase in a convenience store. The government knows all the transactions on all MetaTrader systems operated by vast IBs. The government knows who is transferring money – they own UnionPay!

The key here is the word “foreign”. Foreign means a firm with no infrastructure or base in China. China’s government is overtly concerned with what it terms as ‘social stability’ and therefore due to the communist method that only allows jurisdiction over national subjects, foreign companies cannot be regulated or brought to book if something goes wrong. Simply, China has no jurisdiction over any foreign person or entity, yet is concerned with social stability.

Social stability in this sense means that the government aims to ensure that no overseas entity comes into China and rocks the boat, leaving customers open to potential loss with no recourse. There are no lawyers or mediators in a communist nation. Just government officials. Thus, any large high profile losses orchestrated by an overseas entity would leave the government open to huge criticism because its propaganda tells the people that it is fully supportive, hence any dents in this image could expose the government to potential retribution from a very large, intelligent and empowered population.

A highly advanced business environment. Where next? Korea and Taiwan, among others

The only way to succeed, therefore, is to have offices and infrastructure in China. This way, your brokerage is seen as a Chinese company. I had this conversation with a few colleagues in the brokerage sector this Tuesday and whilst they were happy to hear that, would have to now consider following the likes of eToro, FXCM, Saxo Bank, CMC Markets, AxiTrader and many other large retail firms that actually have Chinese ownership and offices in the mainland with Chinese executive teams, which costs money.

There is a distinct pattern. The firms that have been chased out of China over recent years, followed by often rather amusing media campaigns that range from staged televized scuffles to the boarding up of booths at conferences, have all been firms taking money from Chinese customers with no offices in China. These are the firms that the government wants out.

If, however, you do not wish to spend the resources establishing in China, try Taiwan for retail FX, it is burgeoning, and South Korea for commercial FX as that is absolutely vast and very advanced indeed, and as far from being communist as Ronald Reagan.

As Confucius himself once said “If you expect great things of yourself and demand little of others, you’ll keep resentment far away.”

Wednesday: ESMA sends its clouds over a clear blue Cyprus sky

This is in no way intentional, but I cannot help but gain continued animosity for the European Securities and Markets Authority (ESMA) and its ill-judged attempt to over-regulate the retail FX market.

On Wednesday I took the 6.00am Aegean Airlines flight to Cyprus, to spend time with 6 long established FX brokerages with not only operations in Cyprus but also in London, mainland Europe, Hong Kong, Singapore and China. In short, large, well run, multi-jurisdictional brokerages and not the small white label efforts sporting a lead list and no infrastructure.

Among many points of great interest at this rapidly changing time for the retail sector, the subject of ESMA’s leverage and margin rules and its potentially adverse effect on clients, as well as inadvertently penalizing the good firms whilst allowing the smaller and less organized ones to circumvent the rules to the detriment of good quality brokers as well as retail clients.

Of course, I am sure that it is not ESMA’s intention to fan the flames of offshore business or to give the smaller and less stable or knowledgeable firms an advantage over the high quality established ones, but by speaking to FX industry executives who have spent 25 years in the business, the unanimous verdict from within is that ESMA is doing something unnecessary to a possibly departmental result.

Very interesting discussions on important subjects began just after a Cyprus sunrise

Leverage restrictions, whilst all well and good in principle (I also disapprove of massively leveraged margin FX) is superfluous and draconian for two reasons.

The first reason is that, as very well explained by a long standing Cyprus-based FX brokerage CEO on Wednesday, if a stop loss is guaranteed, and the brokerage is operating a b-book, which the vast majority of retail firms are, then where is the risk if a broker offers 1:50 or even 1:75 leverage? That level of leverage is not all that high, meaning that medium-sized deposits into retail trading accounts can still gain access to a market, especially if the market is made by the broker and proper price feeds are followed.

By operating a b-book but following the prices provided by aggregated liquidity connectivity to a prime of prime brokerage, a retail firm offers a smaller retail trader good and fast execution at roughly the right prices, with no risk. A b-book execution model with a guaranteed stop loss means that the worst that can happen is that a trading account goes to zero balance. Any leverage of less than 1:100 is reasonable in my opinion, as long as the execution model is on this basis.

Basically what is happening is that the rulings are making a normal, well regulated and properly risk managed trading account appear less attractive than a completely unregulated one by a rogue brokerage with a CySec license but no clients in Europe and no business going through the Cyprus entity.

This then highlights the second problem. Brokerages with pretty much no infrastructure and no intellectual property with a CySec license will simply onboard non-European clients to a sister firm in a Caribbean island and give them all kinds of bizarre trading terms, meanwhile using the CySec license and perceived ESMA/MiFID II compliance as a marketing tool, when in reality the trading entity will be offshore and no protection will be offered.

Thus, clients may flock to those firms. Where is the logic in this? Bureaucrats, and in particular Eurocrats are well known to be socialists who do not understand international business and are anti-entrepreneur and anti-capitalist however this really does not protect customers, nor does it protect brokers.

With opinions of esteemed executives in mind, I head back to Airstrip One.. er I mean Larnaca Airport

And yes, the hot air that states that ESMA will review leverage every three months is simply that. Hot air.

Let’s wait for ESMA to state that the good quality firms in Cyprus are non-compliant and the lead marketing offshore rascals are. That will demonstrate this dynamic well. One particular executive shook his head and looked at me with a sort of disbelieving smile and said “It is Orwellian in the extreme, but what can we do?”

Another executive, a former London based investment banker at Merrill Lynch, said “We need to become ambassadors for the retail business and instead of doing endless promotions, become voices in the TV news and reference points on business related media discussing developments and how this business works. That is how we will then be listened to by the authorities.”


With that in mind, I left at 10pm to drive back to Airstrip One…. er, I mean Larnaca Airport.

Thanks to all I met for a super and interesting day. See you all in Cyprus again soon.

Thursday: Peter Hetherington: Tenacity and dedication

It is never really much of a surprise when a leading CEO moves on, because in our business sector, entrepreneurial spirit and rapid development has shaped the retail FX sector throughout its 30 year lifespan.

Banks, institutional providers and technology giants may well have corporate CEOs, but the retail FX business often drafts in talent from other sectors, tempts new executives from rival firms, or gives birth to new CEOs due to their innovative startups that support and add massive value to the development of this sector.

Peter Hetherington. An evergreen leader

Thus, the whole environment is totally different to the institutional and technological divisions of the banking and corporate financial world. Except for in one very well known case.

Peter Hetherington spent 24 years at IG Group until this  Thursday, which marks a landmark date in the history of the leaders of the retail industry.

Joining IG Group as a graduate trainee in 1994, Mr Hetherington rose through the corporate ranks to the leadership of one of the world’s largest and well operated retail FX & CFD companies.

FinanceFeeds reported Mr Hetherington’s decision immediately, noting that during his time as CEO of the Group, he has played a vital role in leading IG through a period of significant regulatory uncertainty and further developing IG into a major company in online trading. Over his 3-year tenure as CEO, IG’s PBT and EPS are up by more than 65%.

He certainly has indeed. Mr Hetherington, whose accurate and focused demeanor has been an attribute that I have long admired, was instrumental in working closely with senior executives of British and European brokerages in putting a case to the regulatory authorities to work closely with the firms that have built this industry from the ground up in coming to a reasonable conclusion with regard to CFD and FX rulings.

It is very common practice for industry leaders to work closely with rule makers in any business environment, this way the sensible consult with the experienced, and a good quality sustainable outcome is achieved.

Applauding Mr Hetherington’s prowess as a CEO is certainly a very poignant thing that we can pretty much all do whilst looking back at his steering of the company as it goes from strength to strength. IG Group is a tour de force in Britain. It has 80% of its customers on the British Isles, has never been the subject of any complaints of any significance, generated a revenue of 517 million GBP in 2017, has always been very favorable towards shareholders and is up there with Hargreaves Lansdown as one of Britain’s largest household names in the modern retail financial sector.

Why would the regulators attempt to attack it when the same regulators allow villainous payday loan firms to flagrantly rip off unsuspecting and economically immobile people with vast advertising campaigns all over the internet and television? These vagabonds in suits belong in Dickensian East London, not in today’s civilized financial sector yet the regulators seek to clip the wings of the most polished firms in Britain.

There can only really be one explanation and that is lobbying from the exchanges. EUREX and LSE have massive power. I really hope that this was not a catalyst in Mr Hetherington’s decision, because we have just waved goodbye to one of the most astute executives in the entire business.

Peter, I wish you a great new chapter in your career and you can look back on your excellent achievement at IG with absolute pride.

Friday: CySec, are you serious? 

On Friday, CySec administered a 50,000 euro fine to AFX Group.

Whether to look at this with utter disbelief or to disregard it as an error of judgement is questionable.

CySec cited “possible law violations” as its reason for applying an administrative fine, but surely law violations are either handled by civil litigation or the law enforcement agencies, not via fines from regulators.

The absurdity here goes back over a year at which point I had collected substantial information that demonstrated AFX Group’s fundamental part in the demise of Gallant Capital Markets, signaling that profit sharing antics had been instrumental to AFX Group’s modus operandi.

Upon finding this out, I was bombarded by telephone calls attempting to prevent it from being released, however in April this year, it ended up in court.

This innocuous rental car is worth more than the fine administered to AFX by CySec. Says it all really

The demise of Galant Capital Markets opened up a massive question with regard to how retail brokerages should assess the execution model and liquidity relationships held by the prime of prime that serves them, with FinanceFeeds absolutely maintaining that retail FX firms should not work with a prime of prime unless they are certain that it is an actual prime of prime and operates according to correct liquidity management principles.

In May last year, when Gallant Capital Markets went belly up, FinanceFeeds became aware of an entry on the bankruptcy court filings in the name of AFX Group to the tune of $2.4 million, demonstrating that the firm had been lodging the capital deposited by its broker clients with Gallant Capital Markets on a profit sharing arrangement instead of holding it in a custodian account and transferring trades to live liquidity via bank relationships.

As a result of some detailed research in North America, FinanceFeeds can now conclude quite categorically that the trustee of the bankruptcy case surrounding Gallant Capital Markets has now instigated a lawsuit against AFX Capital Markets LTD., AFX Capital U.S. Corp. and STO SUPER TRADING ONLINE, in the form of an adversary proceeding which is being brought to recover sums due the debtors by defendants or to avoid and recover transfers made by Gallant to Defendants or funds improperly withheld by Defendants and which is due to Gallant.

Thus, it can be read that the litigator is insinuating that AFX Group’s debt had a material effect on the demise of Gallant Capital Markets.

Before analyzing the gravity and detail of this case, it is important that a few surrounding matters are explained.

In May last year, when FinanceFeeds began investigating this matter, we were inundated with a series of telephone calls from somewhat unrelated parties, urging us not to probe the matter, those being completely unrelated companies in Cyprus, including one marketing and events company and another being a binary options technology firm.

Why on earth would our investigation be of any significance to those outside the matter itself? On further investigation, it can be deduced that AFX Group has been spending a lot of money in Cyprus on frivolous activities set up by Cyprus-based events management firms, which is not a good look when you consider that this now turns out to be customers and brokers money.

Now, the trustee for Gallant Capital Markets’ bankruptcy is petitioning for the winding up of AFX Group, a subject that FinanceFeeds considers very important information considering that many brokers may well have been using AFX as a liquidity provider, hence we are reporting full detailed updates on this constantly.

At the same time as my initial investigation, a very stern and aggressive telephone call was received by FinanceFeeds from AFX Group, threatening to take action should we publish any adverse information about the company.

Maybe this is what they meant by monitoring the flow of liquidity – by looking out of the window

FinanceFeeds response was to ask to sign a non-disclosure document and visit the offices of AFX Group and look at the books, to be certain that the alleged withdrawal issues experienced by brokers and the alleged profit sharing and debt to Gallant were rumors and then publish accordingly, however upon arrival at AFX Group’s London offices, we were met by a heavily tattooed junior member of staff who told us verbally the company’s side of the story and did not show us any official documents to support their claims that the money was not outstanding and that there were no issues with brokers withdrawing.

If this is the sort of guff being fed to those investigating, who knows what customers (retail brokers) are on the receiving end of.

Now, at the beginning of this month, litigation has commenced against AFX Group in the United States Bankruptcy Court of the Eastern District of New York, led by Esther Duval, who is Chapter 11 Trustee of the estate of Gallant Capital Markets Ltd, determining that FinanceFeeds original research was indeed correct.

On or about November 13, 2014, Gallant and AFX Capital Markets entered into a client account agreement entitled “Terms and Conditions for Eligible Counterparties and Professional Clients”, clearly demonstrating a profit sharing arrangement rather than a method of transferring broker trades to market.

On March 20, 2015, AFX Capital Markets and Gallant amended the Client Agreement under the terms of the AFX capital risk share agreement (referred to by the court as the “Capital Risk Share Agreement”), in which the parties agreed to enter into a revenue sharing arrangement.

Under the Capital Risk Share Agreement, Capital Revenue is determined by analyzing the amount of realized profit/loss during each calendar month in Gallant trading account(s) owed to Gallant by AFX.

AFX Capital Markets and Gallant agreed that payment of AFX Revenue would be conducted on a monthly basis, with payment, if any, being made no later than 30 calendar days following the last day of the month.

FinanceFeeds detailed the full extent of the transactions that led to this can be viewed here.

50,000 fine for violating some non-descript laws?

When looking at the description of the laws, CySec states that a CIF ” must ensure, when relying on a third party for the performance of investment services or activities or operational functions which are critical for the provision of continuous and satisfactory service to clients and the performance of investment activities on a continuous and satisfactory basis, that it takes reasonable steps to avoid undue additional operational risk.”

It continues “Outsourcing of the above must not be undertaken in such a way as to materially impair the quality of its internal control and the ability of the Commission to monitor the CIF’s compliance with all its obligations, and arrange for records to be kept of all services provided and transactions undertaken by it, which shall be sufficient to enable the Commission to monitor compliance with the requirements under this Law, the directives issued pursuant to this Law and the Regulation (EC) No 1287/2006, and in particular to ascertain that the CIF has complied with all its obligations with respect to clients or potential clients.”

Come on, CySec. Here you have absolute clarity that profit sharing led to the demise of another firm, when all the while brokers thought they were getting genuine liquidity.

Wishing you all a super week ahead!




Read this next

Digital Assets

BlackRock digs further into crypto with metaverse ETF

BlackRock, the world’s largest asset manager with almost $10 trillion in AUM, is set to launch a new metaverse ETF to help investors securely monetize on the booming immersive version of the internet.

Digital Assets

Binance wins license in New Zealand as rival Huobi shutters derivatives

Binance, the world’s largest crypto exchange by traded volume, has obtained licenses to operate in New Zealand, even after rival Huobi shutdown derivatives trading last month due to concerns about regulations.

Retail FX

Hong Kong busts perpetrators of ‘ramp and dump’ scam

Hong Kong’s financial watchdog, the Securities and Futures Commission (SFC), has charged thirteen suspects of market manipulation in a joint operation with the local police.

Institutional FX

TradingView integrates market data from German Tradegate exchange

TradingView announced that it ‎has increased data coverage to allow its users to receive information from ‎and get free access to the intra-day and tick data from Tradegate Exchange.

Retail FX

Spotware Systems introduces Custom Push Notifications for cTrader mobile apps

Spotware Systems, a technology provider for the electronic trading industry, is introducing a new push notification feature to alert mobile users of price swings and market fluctuations through their cTrader app.

Market News

The Week Ahead: 30 September from David Madden, Market Analyst at Equiti Group

Sterling dominated the headlines last week, as there were concerns the UK government might struggle to service its debt.

Inside View

How does the quality of signal providers affect your business?

A must-have onboarding process for brokers with investment services like PAMM, MAM, or copy trading


DBS deploys Nasdaq Trade Surveillance

“The confidence that markets and our clients have in DBS as a safe and trusted banking group is anchored on our ability to detect and respond to anomalous activity, which in turn calls for a robust surveillance and prevention infrastructure.”

Industry News

SEC charges Justin Costello and David Ferraro for securities fraud and posing as billionaire veteran

The Securities and Exchange Commission charged Cannabis executive Justin Costello and David Ferraro, an associate of Costello’s, for promoting the stock of several microcap companies on social media without disclosing their own simultaneous stock sales as market prices rose.