“Mind The Gap!” – The life and times of a man on the move Episode 34

Who will B MI friend? Not Lufthansa. Buying a broker in Australia in the new direction for FX, my 26,700 mile 10 day insight into our quality future, and FinanceFeeds’ sixth Sydney Cup

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: What’s worse? Bankruptcy or Lufthansa?

After several decades of extensive airline usage to the point at which it has become my main form of transport, I have finally experienced the very worst service, resulting in a clear opinion as to which airline genuinely deserves the metaphorical wooden spoon.

My past experience with Germany’s flag carrier Lufthansa has been forgettable, aside from the somewhat brusque nature of the staff on board, however as with all industry sectors, in times of irregularity, the opportunity presents itself for companies to absolutely shine, or to show their full hand.

On Monday, having returned by road and ferry to England from Holland, I began to check in for my flight to Australia to host the sixth FinanceFeeds Sydney Cup event in conjunction with CME Group and Cappitech.

A sight never to be seen again

So accustomed have we all become to using online resources and electronic boarding passes for air travel, that it has instilled a somewhat zombie-like dependence and automation of action to the point of routinely launching the airline landing page exactly 24 hours before departure, expecting the identical experience every time, regardless of airline.

This time, however, the message was somewhat different. As I logged into BMI’s landing page to check in for the Bristol to Frankfurt leg of the journey, a polite and lengthy message, stating that Francis Graham Newton, Antony David Nygate and James Bernard Stephen partners of BDO LLP were appointed Joint Administrators of the Company on 18 February 2019, and that Joint Administrators are agents of the Company and act without personal liability.

On some quick research, this message had been set in force just a couple of hours before I was due to check in, leaving me very little time to search for an alternative. Switching on the news, BMI’s demise was absolutely front page stuff, and for the first time ever, I had begun to experience the logistical wranglings that result from such a corporate misfortune.

Indeed, it is fair to concur that airlines, especially those which operate short routes and have limited airport coverage, are not profitable entities, and although the absurd official line was to blame Brexit, rather than lack of corporate coverage, the curtain fell on BMI. By contrast, easyJet is also a short haul airline between Europe and the UK and is immensely profitable and is one of the best airlines in the world in my opinion.

Initially, I was not unduly concerned, as this was just one part of a three-part journey to Sydney, the remainder being handled by QANTAS and Lufthansa, with Lufthansa as the overall service agent, so I contacted Lufthansa for rearrangement of the first leg, which went very smoothly, and I was given a boarding pass for a journey from Birmingham to Frankfurt, where I would then resume the remainder of the journey as normal, so I concluded, and carried on as normal.

After a few hours, an email with no subject arrived, asking me to contact Lufthansa, whose rather ominously named customer ‘service’ division explained that the flight for which I had a boarding pass was full, hence they were not going to honor it, despite my confirmation in writing. Several bucks were passed, and several shoulders shrugged, until I gave up and resorted to a bit of legal coercion by which time a new flight was provided from London Heathrow to Sydney on British Airways’ direct BA15 flight, arriving a day later than expected.

This resulted in an extra journey to Heathrow, rescheduling of important meetings – I would like to thank the executives concerned for their incredible professional standards and understanding, and rearranging at short notice to meet a very tired and less than well dressed me during what ended up being a 24 hour day-trip to Australia! You once again demonstrated the high standards of Australian business conduct, and I greatly appreciate it.

Arriving in Sydney on the morning of Thursday February 21, the day of our Sydney Cup FX industry networking event, afforded me a single day in Sydney, and what a super day it was. Great to see you all, and a privilege to represent the industry in Australia.

Lufthansa, take your wooden spoon……

Tuesday: Want to buy a broker? Now’s the time!

Two days before the British Airways 777’s tires hit the tarmac down under and I could unleash myself from 30 hours of travel via the superbly efficient Sydney Airport Link train which conveys me into the business district of Sydney within 15 minutes, I was ready to listen to the important opinions of FX industry executives in what has become the region everyone is looking at.

As it turned out, the same subject was approached by Ron Finberg of Cappitech during his keynote speech at the FinanceFeeds Sydney Cup event two days later, hence this matter is clearly a consideration on the minds of many, that being how to approach the Australian market as a new entity.

As I arrived at Heathrow, I began to engage with Australia’s executives to gain further perspective on what exactly is on the agenda for many firms, and it appears that how to approach the market is a major one, largely due to the reluctance of ASIC to give licenses to margin FX brokerages. Yes, they’ve started to issue them again after a long hiatus, but a Sydney-based FX brokerage CEO told me “It can be done, but it takes over 18 months to receive approval.”

Where have we all seen this before?

Another message from a longstanding industry associate of mine stated “I see an AFSL for sale every 2-3 weeks with full client base here in the Antipodes”, this being part and parcel of Mr Finberg’s keynote a couple of days later when he looked into the details of whether it is best to establish a new brokerage or buy an existing one for the Australian market.

“If you look at the draft industry code for OTC derivatives, one of the key metrics for the continued earnings of brokerages is the ability to offer 500:1 leverage” he said.

This indeed explains the massive leap forward in revenues that FX brokerages in Australia have experienced, as the region has a unique blend of extremely high quality FX brokerages, astute leadership, integrity, massive leverage and a large client base in Asia that respects Australian brokerages.

“The industry code stipulates various changes which mirror that of ESMA in Europe, including proposed leverage restrictions, and the worst of all, negative balance protection which basically encourages internal market making!” he said.

“The code also says that traders should spend 12 months as a retail trader, after which time they can be classified as experienced. I think Buckley’s chance (Australian slang for something that has no chance at all – Ed) as ASIC are really fired up and are looking at the ESMA rules closely” he said.

“ASIC has increased to fees FX margin brokers pay here by almost 100% from early costings, they have gone after MDA AFSL with aggression, financial planners are being banned left, right and center and the regulator will prosecute first, ask questions later, effectively making their target zero FX margin brokers” he said.

This viewpoint could have some merit, as ASIC, rather like the NFA in North America, does actually have law enforcement powers and has wound up several brokerages in the past. It also reinforces the need to look at the possibility of acquiring an existing ASIC licensed brokerage rather than establish a new one, and perhaps very importantly, look at going multi-asset by connecting your retail platform to derivatives and equities venues as well as spot FX.

For example, my conversation this week with Alex Douglas of MONEX Securities highlighted this, as I conveyed my opinion to Mr Douglas that MONEX’s adherence to the equities market has future-proofed it not only in Australia which has a vast and highly advanced equities and securities trading community, but also in the APAC region as mainland China’s client base is equities oriented and the government is perfectly happy to see Chinese traders operating via international exchanges as the government can monitor activity, whereas they cannot with OTC FX brokerages hence the recent purge in China of many FX brokers, and the welcome participation of listed derivatives and securities firms, to which Mr Douglas saw my point.

In the know: Australia’s leaders are well aware of what needs to be done moving forward

Effectively, to please regulators and to expand to a higher quality of client base across the region, multi-asset connectivity would be a good move.

“The second riddle” continued my Antipodean pal, “is more around how the FX margin broker runs their business.”

“Why would you hedge a retail client that was going to lose money [A Book ] and how would you even know this risk profile? Most risk management tools seems to still focus on hedging to dampen earnings volatility, so you still hedge clients going to lose money. You know that 95% of stocks listed in the US exchanges since 1925 and in some cases even earlier do not make a return greater than the 30 day cash rate” he said. “I’d say it can be a similar set of statistics or distribution for retail traders, such that 5% of traders make 100% earnings so why are risk management systems in broker exposures so limited?”

“I’d say that systems such as VaR are used by many but I consider most of these to be at best a pseudo science quantitative program, but still better than anything else” he said.

“I often wonder what a broker’s most profitable retail trader looks like, and often think that the clue is not in the earnings metrics. Apparently very few brokerage executives ask that question and fewer know the answer hence why the cost of acquisition is so high and SEO search consultants have a good lifestyle selling spades to miners!” he continued.

“I’d say that, rather like television advertisements – or the shotgun approach – spray enough spiel around and you will catch something. To me it seems most most brokerages using MT4 still live have no real clue of the actual intelligence needed to run their business, and technology is catching up, but the old thinking still prevails which is lazy thinking which perhaps explains why Plus500 came from nowhere and became bigger than Ben Hur and is still hard to replicate” he said.

Wednesday: Are we there yet?

Most of Wednesday was spent in a semi-upright position in British Airways economy class, with a very small stop in Singapore for refueling – and by refueling I mean the aircraft and myself, who had 45 minutes to escape the confines of my seat and find some good food. I have never used British Airways before, and whilst the flight experience was average (below QANTAS, Virgin, Cathay Pacific but above EL AL, IBERIA, Alitalia) the food, if it can be called food at all, is anathema.

It most certainly is.

Thankfully Singapore airport offered salvation from British Airways’ 1950s food rationing with boiled cabbage, but there is little else to report because that particular 45 minutes represented my only step onto terra firma for the entire day, all night and part of Thursday morning, hence not much to report. The odd cloud, perhaps, but not much else.

Australia – a lovely place, and a joy to work in, but far!

Thursday: Great to see you all at the Sydney Cup!

It is always a great pleasure to host the FinanceFeeds Sydney Cup in Australia, because it genuinely is a region of enthusiasm and quality. Many interesting conversations were held and important matters discussed by leaders of some of the most well respected companies globally.

It is important to maintain the ability to network in such a high level environment and this format will continue, especially as Australia’s retail environment continues to emulate the professional trading scene with new technology from CME Group’s repository offering retail brokerages access to a method of post-trade administration that replicates that of the institutional world, and various new multi-asset solutions from large, well known platform developers and derivatives firms concentrating on Australia – a subject about which I will go into in detail this week on FinanceFeeds, including the thoughts and perspectives from those leading the development of such initiatives.

It is interesting in terms of development, and therefore I applaud the commitment in Australia, and of course enjoyed hosting you all in Sydney this Thursday.

Friday: 26,700 miles in 10 days.

Friday afternoon meant a trip to Kingsford Smith airport in Sydney to retrace my semi-global steps back to the Northern Hemisphere. Before boarding the excellent QANTAS QF1 flight to Singapore which is almost half way home, I could reflect on the last ten days, which has involved several journeys around the UK by road, a trip to Holland by boat with my car, and a completely improvised flight to Australia.

What can be gleaned? The FX industry is going places. I mean really going places – proper places like Holland, England, Sweden and Australia.

Who said the West is not the focus. It certainly is, and from a global perspective too. I see this as a revolutionary resurgence toward established markets with fantastic infrastructure, great banking and commercial environments, highly educated and stable talent bases and international reputations for high quality and transparency.

Isn’t this just what we need?

Wishing you all a great week ahead. Meanwhile, I’ll try to keep my feet on the ground for more than a day…. Until next time!

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