“Mind The Gap!” – The life and times of a man on the move Episode 57

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: The big hitters require big cash

The beginning of this week represented a milestone in the seemingly unstoppable rise of the new-age FinTech and challenger sector, in that it became quite apparent that in order to succeed and gain widespread traction in what has become a powerful and somewhat competitive marketplace, a huge amount of capital is required.

Even to a bystander or commuter who has no connection with the electronic trading or financial technology business, the plethora of new mobile app-based banking systems is hard to ignore as London’s entire underground network, local press and even some restaurant tables are adorned with new names, a picture of a smartphone with a one-app-that-does-everything, touch of a button solve-all solution which promises to enhance the way retail customers interact with the financial world in every sector from mortgages to share trading.

Indeed, there have been some tremendous success stories, and being the buzz of the moment, the large venture capital ‘clever money’ investors are heading down this path with vigor.

I have made several attempts to research which banks are the most friendly toward OTC derivatives firms, whether it be to open a custodian account for clients, or to gain a direct Tier 1 prime brokerage agreement for trade execution, and over the years have experienced the same levels of trepidation and ultra-conservatism. “The computer says no.”

However, if you are a little-known startup which promises an app-based method of keeping all financial accounts in one place, tens of millions of OPM (other people’s money!) can be accessed with ease.

And therein lies a potential problem which dawned on me at the beginning of this week. So ready and free is the flow of capital into these new age challengers to the FX industry and to the banks that the young and astute founders of such firms have begun to accept that as the norm.

It is entirely possible to start an FX or CFD company with just $500,000. Whether you like them or not, IC Markets is a good example of that. The firm hasn’t even got its own infrastructure and is completely reliant on MetaTrader, meaning that it does not even own its own intellectual property due to its client base being on MetaQuotes servers, however the firm has a huge monthly revenue of over $500 million. That is nothing short of astonishing.

I personally do not approve of the firm’s unwillingness to scale, and its decision to run off to the Seychelles instead of comply with ASIC rulings on cross border business and reinvest some of that vast revenue into its business in order to modernize – heck, IC Markets could easily become a challenger bank with absolutely no need for VC investment and could compete with the likes of Revolut!

However, what we can see here is that it is possible to build an FX brokerage with small initial outlay, and then bootstrap it until it becomes huge and highly profitable, yet the challengers are looking for the big VC funds.

This is in my opinion a generation thing rather than a necessity. Over the 29 years that I have been in the electronic trading business, it has largely been people my age or slightly older that have gone into retail FX and built brokerages and technology firms that form today’s ecosystem. The environment at the time of growth, that being the 1990s and early 2000s was a time at which entrepreneurs used the little cash they had and then grew on a revenue reinvestment basis.

By contrast, today’s challengers want big money up front. Just a few days after having made this conclusion, the unfortunate demise of London’s Pipster came about.

The company’s website is still live and there is no information to this effect on the website, but by the end of last week, Pipster had sent emails to its clients explaining that due to ‘external factors’ the firm is closing its operations.

This is the first casualty in that sector, even the bond operators such as Chilango which is a Mexican restaurant chain in London and Manchester which offers its own bond, is still up and running and got another $3.7 million investment in April due to being oversubscribed.

Pipster did things the sensible way. It was founded by a senior interbank FX technologist who had worked for several years at Canary Wharf’s large Tier 1 banks and had everything going for it. The difference is that its owner took a small VC investment and had been founded in conjunction with Japanese FX giant GMO Click’s UK division Z.com Trade, rather than go all out, break away from the trad FX firms and get a massive round.

This got me thinking. Yes, the limelight is currently dominated by the likes of Dozens and Revolut, and large numbers of people consider them to be totally invincible.

They do not have the balance sheets of the old banks though, and do not have the pragmatism. It is currently a euphoric high for the founders but they are using huge VC – some of them well into the $50 million levels in terms of rounds of funding.

Pipster had everything going for it. Perhaps its demise was due to its owners’ pragmatism and carefulness. I do hope we aren’t entering an age of reliance on overly generous investments which will run out in the end, but will take longer than two years.

Wednesday: No man is an island, but many can live on one

For those who value their spare time and also like a nice environment, a very interesting new idea has now come to fruition in London’s docklands, which is the area in which Canary Wharf, home to all of the world’s Tier 1 interbank FX dealers, along with Thomson Reuters FXall, Currenex, EBS (Mile End) and many more institutional liquidity providers and market makers.

I have always been a fan of the Docklands ever since it was built in 1987 and the now iconic One Canada Square was built, itself full of fintech, regtech and professional services consultancies dedicated to interbank and retail FX.

Living in the Docklands was always an interesting choice, especially in St Katherine’s Dock between Tower Bridge and Canary Wharf, or in Wapping which has rode a wave of trendiness since the early 2000s, however on Wednesday I visited London City Island, which is not only a new development of magnificent homes and private meeting places for residents only, but is also a new concept in terms of space and environment.

This particular island is a man-made land reclamation in the River Thames, and has been designed as a very tranquil living space with small gardens and no traffic – there is a large parking lot for all residents – and yet it is very near Canary Wharf.

I found the land reclamation aspect very interesting indeed and an emulation of the type of construction that is currently very popular in Hong Kong and Singapore.

No commuting, and a nice environment does a great deal of good, plus lots of good quality attractions within reach. I can see this becoming a popular place to live among our industry professionals.

Friday: Twitter is now copying odious Facebook!

Those who are familiar with my adversity toward Facebook’s obnoxious campaign of banning advertising from OTC derivatives firms on the false grounds that they do not meet the standards for advertising despite being fully regulated and bona fide financial institutions, and then only a few months later it came to light that the real reason is that Facebook wants to launch its own non-backed, totally unreliable digital currency and monopolise it.

At the time, I defined this as an attempt at establishing a ‘currency and internet dictatorship’ by Facebook.

This week, it appears that Twitter is following a similar course and is attempting to block the accounts of many financial services firms without notice (I have been contacted by many who have had their accounts simply disappear for no reason).

On Friday, it became apparent as to why this is. Simply, Twitter is not becoming a self-emposed regulator or pseudo advertising standards authority, but yes, you have guessed it, wants to sell ‘compliant’ accounts to big banks and funds, then offer them exclusivity for a high price.

Thus, the supposedly open social media platform is far from open, unless you pay them a fortune. This has about as much to do with ‘compliance’ as thermonuclear fission has to do with cheese, and as if the beardies who work at Twitter know anything about compliance anyway?

It is simply a clever buzzword which sews a seed of legitimacy in people’s minds. hence everyone subconsciously accepts this absurdity and corporate injustice by thinking “compliance, OK, yes that is fine”. Bull-twit.

Wishing you all a super week ahead!