Mind The Gap!” – The life and times of a man on the move Episode 59

Very detailed debate on Chinese business in Australia and vice versa, regulatory allusion in Canary Wharf, and an AFX Group IB and money manager speaks out

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: It works both ways between China and Australia

Ever since Australia’s financial markets regulatory authority ASIC began to put a stop to its license holders activities with overseas retail clients, which as far as Australian brokers had been concerned, that meant largely networks of retail traders referred to Australian brokers by introducing brokers in China and surrounding Asia Pacific region nations, a massive kneejerk reaction has taken place.

The reactive measures by certain large brokers in Australia has been to take their business to offshore islands, which as all those who know me well will already know, I consider to be a very retrograde measure.

On Monday, I spoke at length with a senior partner at a large Chinese-owned FX brokerage which had business in Australia, thus representing the opposite direction of business than is usually the case between Australia and China.

This particular company is very large, and is owned by a mainland Chinese bank which belongs to the Communist government, yet has some outlets in Special Administrative Regions, Hong Kong being one of them, so that it can onboard a number of international clients.

Indeed, China is its core business region, but it was interesting to look at how ASIC’s clampdown on the entire margin FX business and its cross border opportunity has affected things from a Chinese point of view.

“I use my own expereince as a guide to what can happen to similar brokers in Australia, the majority of which are using an affiliate marketin strategy and providing MT4, and what will unfold for this majority of the brokers who have the 80% of illegal clients needed to survive” he said.

“I can see what is happening and beyond the numbers there is a personal story where I work. People have been let go and a few in management have milked the cow for personal gain and can walk away” he said.

This is effectively a result of fear of lack of sustainability and a short term ‘survival’ culture has come into play in my opionon.

My Chinese colleague continued “I have back flipped with double piked sommersaults multiple times on the morality of some of the b-book brokers and have matured to see that retail margin brokers simply feed on the base desires that exist within retail traders in this region. Even after all this time, people are easy to manipulate and there is a massive amount of technological development into these techniques including some of the psychological methods that are used regularly over here.”

“There is an interesting discussion around how to manipulate people to do things that is not in their best interests and teaching these people how not to be distracted or manipulated and to control their base desires, but around here, and within these big companies is what Mark Zuckerberg said about people giving away private information for free.”

I explained this to 400 Chinese FX executives in Shanghai, 2016

Indeed, Mark Zuckerberg, himself very much a pariah in this industry as I pointed out when the real reason for Facebook’s banning of FX and CFD ads came to my attention, uses this method to obtain users’ names and contact information through their friends and monetize it.

During our conversation, I was made party to the internal information relating to this particular company which was extremely interesting indeed and will be usable for research on the relationship between Australia and Chinese clients should anyone wish me to compile that data for them on a research consultancy basis.

I write this more as a possible case study for what is about to happen for the majority of the 60 margin brokers in Australia who either hand back their Chinese clients or send them to the islands as repapered products.

We discussed probably outcomes, and looked at the possibility that some firms open up the NOP exposures and maybe to go fully unhedged to extract every ounce of juice from retail losses or they go fully hedged until they figure out what the outcome of all of this is likely to be.

“In the end, they will all get whacked by ASIC toxic product rulings which will be to follow ESMA to low leverage as well as ASIC being active in ensuring onboarded clients are legitimate. Some brokers onboarded illegal retail clients from black listed countries so they handed ASIC the gasoline and the matches, we saw this from within China and the Chinese goverment knows all about this method, and therefore will likely work electronically with ASIC to stem flow between the two nations” he said.

“I would suggest ASIC will undertake persistent spot checks on brokers to ensure they are meeting their license conditions, but more that they report breaches of AFSL, as the New Zealand FMA is doing in the land of the long white cloud and if they dont, kiss goodbye the their AFSL like AxiTrader did in New Zealand with their derivative issuer license” he said.

From an Australian pont of view, it may be worth responsible managers or compliance officers looking to go an Australian bank as there is a lot of alignment in terms of how regulations are navigated and how restrictions and their impact can be minimized in a clever way.

“Now lets talk about repapering Chinese clients to an island” said my learned friend. “This is not an AFSL license issue, but ASIC knows the trail and so will the Chinese regulator, thus the beast of the puppy dog ASIC to the beast of the Chinese regulator would be how the relationship would work.”

“It is likely that the main excuse from compliance would be ‘it wasnt the brokers fault, it was the client who broke the law’ however this is about to get tested. Also that brokers here are stating on their web page they will offer any retail trader the same conditions in trading as per their AFSL obligations even if they are non Australian residents is likely to be changed” he said.

“They are really pushing buttons here and I think they underestimate ASICs resolve. To this day we see brokers [even ex STP] now banner headlining 500:1 leverage and opening up European Licensed shops to what on-board retail customers to Australia. That stops when the leverage is lowered in Australia but perhaps they are but a one trick pony and some of the FX margin brokers that target Chinese business appear to be in a death spiral having lost their horizon? he said.

So we will see how regulatory disruption plays out, how the industry responds and forks to new business models. If you go back to 2014 and 2015 the Europeans and ASIC had been flagging what they are currently doing so maybe this will end up going back to the methodology of 2005 when CFDs were just opening up in Australia to see the number of retail brokers and the number of clients they serviced to see the playing field.

It is very interesting that Investment Trends recent estimates put Australian clients at less than 50,000 in total. This is bit of a difference to the suggested 200,000 in ASIC survey, thus China has been a total golden cash cow. The great thing is that we are now also seeing hybrid platforms that offer multiple options in investing, one of which is leveraged trading therefore in a period of low returns and zero cash rates, this is a catalyst to push innovation.

Wednesday: Paranoia creates some interesting associations!

All the talk of Orwellian regulatory measures recently causes the mind to come up with some creative associations.

Here in Canary Wharf, there is a street which leads directly from the Leamouth Road in the relatively poverty-stricken area of Poplar into the world’s most high producing commercial estate with the highest number of global Tier 1 banks and high earners in the world – Canada Square.

The street has a name which would make anyone stop in their tracks and think of the draconian German regulator, which insisted on making every FX firm a bank, and attempted to insist on ‘latency floors’ in non-bank market making ECNs to give everyone a fair chance!

Yes, there is an extra F, however perhaps that reflects the majority view from with the industry as to what the acronym should really stand for, and indeed the street is named after Baffin Island in Canada, because Canary Wharf was built by Canadian Jewish architect Paul Reichmann hence the Canadian references in many of its streets and complexes, but still, when seeing this street sign, and then looking up at Deutsche Bank’s FX trading desk directly ahead of it, ironic connotations are likely!

Friday: An IB and money manager speaks out!

It was really inevitable that following FinanceFeeds comprehensive coverage of the disaster that AFX Group has created, and was accurately depicted by our original expose into the firm’s operations which can be read here, my inbox would receive some very detailed stories from the inside.

Aside from the vulgar and frankly very low class written threats which were sent to me by an internal person at the firm from which, despite my reasonably broad vocabulary, taught me some new words, I have been contacted by many people affected by the whole AFX saga, and on Friday, an introducing broker who is also a money manager shared his view.

“As an FX money manager, I had onboarded a few clients on AFX UK in 2018, following one of my brokers by simple friendship” he said.

“I understand my mistake now as my due diligence has not been great with regard to looking closely at how the company operates. On your website, you give some precious information that I struggle to get from the FCA and this is helpful to better undertsand such a situation, so I thank FinanceFeeds for this, it is valuable” he said.

IBs and portfolio managers using Algos are very interesting to retail brokers.

“I stopped my algos there on July 9 after visiting their offices in London and in Limassol and advised my investors to withdraw their balance immediately, but unfortunately none of the requests have been processed. Then, we know the following. At least the FCA should compensate £85,000 by account in case of fraud, which is fine for all of them but I don’t really know about the delays and we are all losing a lot of money in the meantime” he said.

I will likely spend some time in London with this individual to discover more, largely so that I can help other IBs and partners who are in the same position.

There are plenty of good quality prime of primes and B2B partners to use – actually around 6 of them, please feel free to contact me if you are an IB or partner, or retail broker wanting to know which Prime of Prime or institutional partner to use. I know them all personally and have a massive array of information. Go careful out there!

Wishing you all a super week ahead

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