“Mind The Gap!” – The life and times of a man on the move Episode 56
The regtechs of London are disrupting and attracting firms like Revolut and have FX in their sights, a debate about trade execution and Peer to Peer trading systems, and I move permanently to London
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: How do you execute? Is Peer to Peer the savior?
Segregating and considering defined methods of trade execution was for many years the preserve of the institutional and professional trading world, however we have all spent the past decade considering different types of market infrastructure and order management, beginning almost a decade ago when the Dodd-Frank Act was sworn in by President Barack Obama.
Yes indeed, the mention of the Dodd-Frank Act and Barack Obama may well be legacy prose in today’s rapidly evolving commercial world, however since the US authorities’ absolute and all encompassing reform of the method by which all retail OTC derivatives trades are sold, executed, reported and cleared, everyone else followed suit.
Only a few large retail brokers remained in the US market following the Dodd-Frank Act’s implementation and the ensuing ruling by the CFTC that all margin brokers serving retail clients need to maintain a capital adequacy of $20 million, however Cyprus, under its European MiFID II directive, has remained an aircraft carrier for licensed offices of small but internationally owned retail brokers.
Thus, whilst the US went one way – either stay and do it right or leave – the European Commission’s very similar infrastructural overhaul created a long term stand off between brokers and rules that still exists today.
This Monday whilst in London, rather appropriately at the Royal Exchange Buildings, I had a conversation with an algorithmic software engineer who builds systems for professional trading firms, who looked at the future of trade execution in three categories.
1) Experienced traders or algorithmic automated traders.
ECN brokers are still generally BBook – but they need a very sophisticated risk management program in assertaining the A Book hedge on what is HFT trading to intraday trading [say over hours not seconds]
His opinion on this type of client is that brokers will need to be au fait with how to hedge the winning trades. This is where products like Tapaas exist, that being risk management profiling that determines the success of a trade within 20 seconds to hedge or not to hedge, and the profit for the broker will be made by turnover with commission.
2) Institutions which are active trading houses.
“These should be A Booked all the way” he said. “Broker revenues should be based on turnover with commission but not operating in the same sector as experienced intraday traders.
3) Then the hybrid OTC exchange model.
This would be a retail sector trading method which could well be based on some type of distributed ledger technology for transparency and operational cost reduction, on the blockchain and P2P trading featuring a multi-asset solution with all instruments.
“The exchanges make no bones about the main objective being cutting operational costs” said my colleague, and that is an important factor for retail trading firms these days. “So does P2P trading offer something new, like STP but one can trade within one’s wallet which means no money is held with the broker, yet you get all the bells and whistles?
Yes, I think there is merit in that.
Tuesday: Regtech and Revolut
This Tuesday, I had the privilege of meeting some of the senior management team at ClauseMatch, a Canary Wharf-based company which was founded by Evgeny Likhoded a senior Morgan Stanley executive whose 10 year tenure at the bank involved gotiation of master trading and margining agreements for financial products and physical commodities including ISDA, EFET Gas and Electricity, GTMA, IETA, SCoTA, CPMA, CSA and all associated annexes.
Mr Likhoded founded ClauseMatch in 2012 as a Next Generation enterprise document authoring, management and workflow platform, however its remit has expanded tremendously since then so I went to the firm’s offices at the ubiquitous One Canada Square tower in the middle of Canary Wharf to see how it differs from the FX industry specific regulatory technologists.
Interestingly, ClauseMatch has gone for the disruptors, and has actually managed to onboard some of them as clients, one of which is Revolut.
Revolut is currently working in multiple jurisdictions with different rules applied to financial services companies. And across these jurisdictions it faces different financial regulations creating challenges for a company taking compliance with extreme rigor. The company’s CEO and Founder said back in January this year that one of the main reasons the company was able to scale so fast is due to its serious approach to compliance.
ClauseMatch went into the agreement with Revolut in January, the idea being that Revolut would streamline its management of internal policies and regulatory compliance.
On Tuesday, ClauseMatch’s executive team explained the artificial intelligence and machine learning aspect of the business, which pretty much automates compliance procedure and reduces staff cost, and also reduces the chances of human error, describing the solution as “Compliance collaboration software.”
I pointed out that in London these days, self-employed contractors who work within non-bank institutions (such as large FX firms and trading houses) are being paid day rates of over £1200 because it is almost impossible to find senior level professionals with regulatory understanding/legal background as well as technological competency because compliance these days is just as much of a software business as trade execution.
“While many traditional banks are still largely addressing compliance in a manual way, employing thousands of people, FinTechs are making their way forward, quickly adopting new technologies to automate risk and compliance because they have nimble operations and no legacy. Revolut is an excellent example of such a company” said Mr Likhoded.
The firm considers itself well poised to work with FX and CFD firms as the reporting requirements evolve, and has been implementing new machine learning algorithms to automate certain aspects of the compliance procedures of modern fintech firms, which, let’s face it, are all over London now. “Revolut is already one of the main players in the financial services industry, and we are eager to help them with their global growth with state-of-the-art compliance tools” said Mr Likhoded.
This conversation and visit to the offices of ClauseMatch highlighted once again that brokerages in the retail electronic trading sector are well equipped to forge ahead and disrupt the trading sector with new app-based tech and rival firms like Vibe, and to challenge the banks like Revolut.
I will never understand why MT4-based FX brokers relying on South East Asian IB networks yet have revenues of over $500 million per month (!!!!) would continue down that road when there are sufficient funds to invest in being a challenger, owning their own IP, and offering a full product range rather than being an also-ran on a third party system with no ownership of clients, no product differentiation and no scalability.
Instead brokers such as that are doing the opposite, for example canceling their Australian ASIC licenses and going to the Seychelles.
Wednesday, Thursday, Friday and beyond – London Calling!
It had to happen sooner or later and now it has. I have made an international move and spent the end of last week forging ahead with my permanent move to London.
Yes indeed, FinanceFeeds has been a British company ever since its inception, however I personally did not reside in the UK.
London is the world’s capital, and many years ago I did live there for a period of just over 12 years, and consider it, its culture, its people and its commercial environment to have given me a comprehensive experience in all aspects of life and business that I could never repay to it.
The Queen’s capital may well be the center of our industry, however it is the center for most business worldwide, leading the world with calmness, sophistication and aplomb.
For the initial period, Canary Wharf will be my home, the familiar sight of the Cabot Square towers visible from the window, a reminder of the transformation which I saw for myself in the late 1980s and early 1990s as the London Borough of Tower Hamlets went from being the UK’s poorest and most deprived borough to the small island in the River Thames that powers the entire world’s economy and handles 65% of all interbank FX order flow.
With Sajid Javid now elected Chancellor of the Exchequer, the City and Canary Wharf along with London’s incredible world-empowering technology sector, is set to boom.
Mr Javid had an 18-year City career where he rose to become a Board member of Deutsche Bank International.
He joined Chase Manhattan Bank in New York City immediately after graduation, working mostly in South America. Aged 25, he became a vice president. He returned to London in 1997, and later joined Deutsche Bank as a director in 2000. In 2004, he became a managing director at Deutsche Bank and, the following year, global head of Emerging Markets Structuring.
In 2007, he relocated to Singapore as head of Deutsche Bank’s credit trading, equity convertibles, commodities and private equity businesses in Asia, and was appointed a board member of Deutsche Bank International Limited.
He left Deutsche Bank in 2009 to pursue a career in politics. His earnings at Deutsche Bank would have been roughly £3,000,000 a year at the time he left and the Evening Standard once estimated his career change would have required him to take a 98% pay cut.
Now that is a set of credentials that renders Mr Javid absolutely qualified for this position, especially considering London’s avantgarde, capitalist and ultra-modern efficiency.
On a personal note, the civility, sophistication, modernity, and unlimited opportunity combines with London’s beautiful surroundings. Watching the calm, nonchalant and confident people go about their day whilst driving in Central London contrasts to the furnaces of corruption, incompetence, illiteracy and neighbourly person-to-person violence of the Middle East demonstrates where the future of all industry, education, longevity, personal development and civility lie.
Feel free to call me up any time, I will happily spend as much time in your offices as you wish. I will be minding the gap, and it is truly great to be here.
Wishing you a super week ahead!