“Mind The Gap!” – The life and times of a man on the move Episode 26
Plus500 demonstrates when to get in and out, Russia’s sudden purging of retail FX, everything appears to be intuitive and I embark on a TransferWise test
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: A flying start in London
Gatwick Airport may well have been anything but kinetic over the past week, but venture inside the M25 and away from the drones that have lingered over Gatwick airport, and things are a different story.
It may well have been the day before the vast majority of the world prepares for its most important and valued holiday period of the year, however Plus500’s stock market dominance, reported by stockbroker AJ Bell, was testimony to a continually buoyant London market whether you are a trader or actually buying stocks in FX firms.
The British retail trading sector is among the largest in the world, and consists of large, mostly publicly listed entities which have been established for the best part of three decades, and specialize in very domestic market-specific products including contracts for difference (CFDs) and spread betting which require dedicated proprietary platforms.
It is very hard to argue against the patently clear reality that evergreen British giants such as CMC Markets, IG Group, Hargeaves Lansdown are vast and highly well organized corporations that fully understand how to conduct business in Britain, their loyal domestic client base and abilities of their well-structured and highly experienced senior management being absolute testimony to this.
Two years ago, I looked at an opportunity that presented itself in London’s markets which represented a different view to that taken by many analytic British investors, which, around the time of the announcements by the FCA that the regulatory view favored leverage restrictions on CFD products, centered on buying stock in IG Group, Hargreaves Lansdown and at the time newly listed CMC Markets.
IG Group and CMC Markets are absolute household names in Britain, and whilst Hargreaves Lansdown is the largest financial services firm in the UK, its CFD platform HL Markets is a white label provided by IG Group.
just hours after the FCA’s announcement of its proposals in December 2016, IG Group, Britain’s second largest electronic trading and investments firm after Hargreaves Lansdown, which had a market capitalization of £2.25 billion, experienced a tremendous 21.9% drop in share prices which went down to 614p per share.
Also affected was Plus500, the evergreen example of efficiency with no sales staff, very light operating costs and a digital marketing solution that is the envy of the entire retail business. Plus500 took an astonishing 38% hit on its share prices on December 8, 2016 as a direct result of the FCA’s unpleasant and anti-business stance having been unveiled, taking its value down to £365 million. Just two years prior, this was a $1 billion company.
My assertion was that this presented a very good opportunity to buy into these companies, largely becaus electronic trading which is provided by what have now become very large companies with their own leading edge trading infrastructure and constant commercial innovation is the development ground for tomorrow’s financial infrastructure so we have arrived at an age where we don’t get to just trade via their platforms, but we get to actually invest in their companies, and I was right.
Monday’s preparations for the festive season for all except me and 13 million members of this tiny minority heralded AJ Bell’s report that Plus500 stock was the 2nd highest performing stock of the entire year 2018.
Out of the FTSE 350 stocks that AJ Bell calculated, Plus500 came in at number 2 for the entire year, falling behind only one company, that being multi-channel supermarket delivery firm Ocado which delivers food for British supermarkets to retail consumers on a nationwide basis.
Ocado aced the stock market this year, with a 96.2% capital return for investors, however Plus500 came in at number 2 with a 73.3% return for investors, beating every company on the entire FTSE 350 index in the entire country on that particular index apart from Ocado.
Smart investors got this right, and Monday’s revelation shows that if we are going to talk smart, we should look at the founders of Plus500. They got in at the right time, did it very cheaply and efficiently, kept their costs and headcount down whilst relying on a proprietary digital acquisition and marketing platform, listed their stock on London’s Alternative Investment Market, pumped the company up to its massive value in comparison to its tiny size and then mid-way through the year at which Plus500’s stock provided the 2nd highest return on the FTSE 350 index across all industry sectors in Britain, the world’s fifth large economy, they cashed out!
Thus I suppose it is fair to say that in terms of mentorship, It wouldn’t be a bad idea to follow what Plus500’s founders do. They appear to know exactly what they are doing.
Tuesday: Intuitive over and over again…..
A good friend of mine is busily engaged in developing new FX trading platform technology, and has been for some time. He and I share observational comedy quite often, as we both tend to lean toward the anorak-wearing, notepad-touting detail-orientated nit-picking that results in nerd-like laughter.
These things tend to range from inconsistencies in video editing, impedance of sound quality by combining non-high fidelity media to a high fidelity system, incorrect badging and deviation from manufacturer specifications by producers of advertisements when using products such as popular technology or cars.
On Tuesday, my kindred spirit’s discourse was created by an advertisement produced by a retail FX brokerage which had over-used the word ‘intuitive. Perhaps this particular company’s intuition had led its intuitive marketing department to attract the intuition of its intuitive future customers with regard to its intuitive new technology via intuitive methodology which can empower the aforementioned intuitive customers to be more intuitive when making intuitive decisions on market movements by using intuitive trading tools…. and so the nonsense could go on.
It does appear that this word is now the de-facto buzzword of the lower echelons of the marketing sector, perhaps on the grounds that it makes some sort of tenuous connection with the current trend for automating everything from home robots to autonomous cars, to Internet Of Things (IOT). By uttering the word ‘intuitive’ in a manner that could result in a Tourettes Syndrome diagnosis, the SEO packages on commercial website back ends such as Yoast, and website prioritizing technology such as Google crawlers would pick this up and lift it to a higher priority.
Do we really want to live in a world in which single words are repeated and retorted ad infinitum and often several times in one paragraph just so that visibility can be achieved?
If I cast my mind back to my childhood when all sales and marketing was analog and relied on a visit to the showroom, conversations were had in full, features and important aspects of a specific product were eloquently explained and very often a loyal customer experience was formed.
Imagine in 1979 if I had gone into the Jaguar showroom in Wavertree to look at the new Series 3 XJ6, and if I wasn’t sufficiently pre-versed in which specific model that was, and instead of a suited member of staff showing me the features and explaining them carefully, a soundbite repeated the same word over and over until the model concerned came to the front of the showroom.
Absurd? Yes of course, but that is the way this buzzword-repeating SEO style marketing is heading, even to the point of my pal who noticed it this week having gone to a furniture store last week and seeing a brochure for some porcelain plates. “A small bio of less than 50 words included the word intuitive 3 times. Its a damn plate!” he said. Quite right let’s avoid it.
Thursday. Russia slams the door on the establishment – Bye bye Alpari, Forex Club and Teletrade. Who’s next?
What a shocker. On Thursday, Russia decided to put an end to the operations of some of the longest standing retail FX companies in the entire existence of this industry, those being Alpari, TeleTrade and Forex Club, the latter of which is Russia’s most well known broker, with a massively high commercial profile, however the central bank stated in its complaint that all five brokers that it is targeting had only 2,000 clients in Russia. The rest of the clients were transferred abroad. That is, they worked as call centers for attracting clients to offshore brokers. Forex Club, Alpari Forex and TeleTrade were all just shells.
Just when we all think we have seen everything, another major milestone suddenly appears. Russia’s central bank making a sudden decision, reported on Thursday to simply revoke the licenses of pretty much its entire FX industry, all of which has been in establishment for almost 20 years, is as much of a massive game changer as the Swiss National Bank’s removal of the peg on the EURCHF pair in January 2015, and as much of a major regulatory event as the NFA’s actions against FXCM at the beginning of 2017 which stopped the company – at the time the United States’ most well known retail FX firm – from operating in its home market.
The magnitude of this may not be understated. Yes, Alpari and Forex Club are Russian companies, but they both had massive global presence with Alpari UK having been run by some of the world’s most well known retail FX business leaders such as Mushegh Tovmasyan and Daniel Skowronski. The company had operations in Japan and the United States, holding an NFA license until the mass exodus of firms who simply could not make the grade of the high-end material that the US market demands.
Forex Club also had a US arm, and respected names such as Alexey Pavlenko, Peter Tatarnikov and Pavel Khizhnyak, all of whom are permanent residents of the United States, had senior positions at Forex Club, and all three now have very senior recognition in the global FX industry. Forex Club also expanded to the Far East, its Shanghai-based mainland Chinese operations being very successful for the firm.
Russia’s explicit allegations regarding what these firms are supposed to have done to deserve a simultaneous clear-out have been published in absolute clarity and quite clearly there is no going back, hence it is fair to say that this is the end of the road for these companies, especially bearing in mind that they all have now reduced their customer databases and operational presence down from global coverage to domestic Russian market and the Commonwealth of Independent States.
No Russian license = no Russian customers. No Russian customers = no company.
Alpari, true to its stoic form, has now begun a fight against the Russian Central Bank in order to attempt to reverse the decision. Alpari’s efforts are to be commended for this approach, which reflects the company’s attempt to sue Tier 1 banks in London for their last-look execution procedures in the summer of 2017 which of course resulted in Alpari getting a bloody nose.
I personally agree with Alpari’s efforts to bring the Tier 1 banks to book for last-look execution practices, because whilst that is a very common practice among banks that is clearly written in Prime Brokerage Agreements with OTC counterparties, it is a one-way street because there is no way that a retail broker or a prime of prime would get away with picking and choosing which trades to reject. The reality of course, is that banks are the uppermost tier and the actual market maker which is at the highest end of the chain, hence they have to do last-look execution in order to make a stable market as otherwise it would be very difficult to manage order flow.
Of course, I personally don’t agree with it and never did. When I was deploying Cisco switches and CAT-5 connectivity architecture into banks in the mid 1990s for their trading desks, one of the important development specifications was that packets of data could be killed off if they are ‘blocking’ the transmission and receipt of information in the cables to and from routers and switches, the main reason being so that banks could get trade data to their servers as quickly as possible to see whether to accept or take a ‘last look’ at orders. I didn’t really agree with this practice then and I don’t now, even though I am fundamentally a technologist and not a trader, however until a new alternative comes up, this is the way to stabilize order flow from the top tier downwards so, hey-ho.
Inevitably, Alpari lost its fight against the banks but I applaud the David and Goliath battle it attempted.
I also believe that Alpari and anyone else who tries will lose against the Russian government. I am of course prepared to be proven wrong but let’s face the reality. Russia does not mess about and nor does it let its decisions on anything like this be reversed by those it acts against.
I also am sure that this is just the beginning. It seems that rather than apply any allegations of any misdeed to specific firms and allow them to either pay a fine or dispute it as in most regulatory and arbitration-based civil proceedings, the Russian authorities has decided to simply swoop in and get rid of major firms all in one go. The question is, which is next? It is likely that Russia is ridding itself of retail FX at a time when Moscow Exchange is growing its retail product range. Hmm, I sense a degree of deja vu. Exchanges with government connections and lots of lobbying power wanting retail customers without a meritocracy? Surely not?
Thus, we are now witnessing the end of the road for those firms, hence this is the end of an era in the retail FX sector as such long standing names vanish into the bleak depths of obscurity. In a year from now, I predict that attempting to find these firms online or anywhere in Moscow’s streets will be as easy as trying to see the bottom of a bowl of borscht.
Let’s see if any of these companies and their owners appear in Cyprus anytime soon and carry on as they have been. This is something the Cyprus authorities and ESMA should be looking out for instead of messing about with leverage restrictions for good quality companies.
Friday: Can I TransferWise?
I am not being paid to do this, nor do I have any commercial interest or bias, but I have for a few years now been a vocal proponent of borderless banking, and the empowerment of business and private customers via new channels that do not place them in the cold, corrupt hands of some of the world’s least respectable financial institutions.
I will be as of today conducting a one month test of TransferWise’s new debit card and ‘bank account’, and then comparing the cost of it and ease of operation to a standard Israeli and Cypriot bank. My initial belief is that the customer experience will be ten times higher, not that it is difficult to beat the appalling and corrupt Israeli and Cypriot banks who detest competition, threaten capital controls to anyone who dares to business abroad, and rip their customers off for outlandish fees whilst taking forever to carry out transactions, and when questioned spit fire and abuse instead of explaining their commercial terms correctly.
TransferWise is not a bank, and nor does it offer ‘bank accounts’ but you can load your debit card with money and quite honestly, in today’s electronic world, that is a sort of bank account in the absolute sense. Britain is leading the way with the establishment of non-bank alternatives to the high street for business and personal customers. I believe in it and understand that it will make a huge difference to firms which have to find client accounts and have been forced to open horrendously dangerous third tier bank accounts in places like Latvia, Georgia and parts of the CIS region, with no recourse over any fraud, lax security measures and subservience to corrupt governance.
Let’s see how it pans out. If it works, and saves for example $500 on $5000 worth of transactions, takes a second to process funds anywhere in the world and is free of any need to deal with banking call centers or obstacles placed intentionally in the way to cost time and money to customers, then it is worth it.
It’s time to put us in charge of the retail banks – after all, we are a global, technology focused financial services industry. Saxo Bank and Swissquote offer custodian services and investment banking, so does Hargreaves Lansdown – maybe everyone should and attach a debit card and personal account to it too. Banks in most countries are severely outmoded and disliked by long-suffering customers.
My aim is to try to prove a concept that having a commercial bank account in Britain with HSBC or Lloyds is ideal as these are among the best in the world for necessary, staple business transactions like invoicing customers and receiving funds, and to use a non-bank entity such as TransferWise or Revolut for everyday transactions globally.
My findings will appear here in a month’s time!
Meanwhile, I wish you all a happy new year and a prosperous 2019, and of course a well deserved day off on January 1.