Mind The Gap!” – The life and times of a man on the move Episode 60

Use your data wisely – and your wallet; AFX Group’s $28 million black hole, and Australia’s CFD providers do the right thing

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: Data, its value and the hot air that surrounds it

Today’s online financial markets businesses have reached a very important milestone in that the environment in which they operate has become advanced and somewhat saturated at the same time.

Additionally, the now long established firms have to deal with an onslaught from the challenger banks and the new, application based all-in-one companies that promise everything on one platform.

One of the financial services industry’s Achilles heels in the past has been its inability to make the most of client data to the point of the word ‘dead leads’ having been a common phraseology in retail brokerages for some years now.

Recently, the words ‘enrichment of data’ have begun to filter into the corporate vocabulary, with some individual people, often from outside the FX industry, charging brokerages an absolute fortune for what they market as the cure all solution for a very important issue, that being the inability to make good return on investment from the client data that is already languishing on the CRM of a brokerage.

I have met one or two of the individuals who are self-described experts at refining and enriching data, but the reality is that the Montgolfier brothers would have benefited from that much hot air whereas the brokerage sector really does not.

During times of low profit margins, it is very easy to fall for the smoothness of a marketing orientated person who, for a fixed contract rate of an absolute fortune per month, will promise to refine and maximize client data to the extent of providing an ability to target people based on their interests, behavior and consumer requirements.

I have yet to see any value in any of this, and in some cases have witnessed data enrichment ‘gurus’ attempting to steal leads from brokers or even approaching me for databases of email addresses which is an absolute breach of GDPR regulations and is also a revelation of the limitations of ability.

The reason that it is important to get data enrichment right and not to be tempted to pay tens of thousands of dollars per month to a snake oil salesman with no credentials is that the smart money is now moving in and the new, app based challengers, flush with their massive venture capital investments are going down the in-house data enrichment route.

On Monday, this was demonstrated to me in the form of Tink, which despite its very odd name, is a clever FinTech company which purports to be the ‘rails and brains of open banking’.

One of the core activities of Tink, which connects major banks as its customers to a series of services via an open API, is data enrichment.

The company states that categorisation evolves continuously to ensure a more complete, accurate and useful capture of a user’s financial information. Machine-learning model use population-wide and individual preferences to generate the highest quality data. Tink promises to transform raw data into tangible insights for banks and financial services companies to utilize in order to prevent churn, and maximize their cost effectiveness when approaching the right customers, extracting the real value from financial data.

Indeed, many of these new app based solutions and FinTech disruptors are still using their venture capital fund and many do not have any capital of their own, meaning that the valuations which currently appear very high are elevated by the influx of seed investment, thus the true staying power of all of these entities will be evident once they have to survive on their own revenues.

However, it is important to note that there are now dedicated solutions for financial services firms to connect to a well-funded solution that is operated by teams of programmers and analysts rather than one-man-band chancers, many of whom have been lead marketers in previous jobs, who will sit in your office for tens of thousands per month promising to turn your client database around whilst doing nothing of the sort.

Perhaps the FX industry’s larger, more well capitalized companies should look at this direction and actually begin to establish in-house departments of software engineers and database administrators who can emulate the service provided by Tink and some of the other firms, this way they reduce their marketing costs, keep clients longer, provide more aligned services to customers as they know their behavior, and not expose themselves to external ne’erdowells.

Wednesday: AFX black hole is concentrated largely in Cyprus

As pariah FX brokerage AFX Group finally shuffles off the financial coil, I was contacted by many respected colleagues here in London on Wednesday who had effectively seen the extent of the damage done by the profit sharing antics of AFX Group.

Yes, AFX’s management tried to cover it up and when I was the first to expose this house of cards two years ago, the phone line was red hot with attempts from those with a vested interest to attempt to silence the detailed research conducted by FinanceFeeds.

AFX Group’s main office was here, on the sea front at Limassol

We have really gone into detail on this so I won’t labor the point here, however I do think it is important that all retail brokers have this information and take it on board so that they always make sure they are dealing with a proper prime of prime brokerage when looking for a liquidity partner.

There are only a very small number of genuine prime of prime brokerages with actual liquidity facilities provided via Tier 1 banks, those being INVAST Global, IS Prime, Saxo Bank, Swissquote, Advanced Markets, and CFH.

Aside from these top tier companies, there are some firms that sell liquidity but really it is not market liquidity, it is their own channel on their own dealing desk to provide execution facilities to retail brokers. It is not always bad of course, but it is almost impossible for a retail broker to figure out the method by which non-prime of primes operate their capital and if profit sharing is involved.

There is also a fair bit of incentivization being offered to brokers by b-book ‘liquidity’ providers in non-aligned jurisdictions with no financial markets infrastructure such as the Middle East and parts of South East Asia. My advice is, if a brown envelope is offered to your brokerage if you sign up with a firm for ‘liquidity’, go elsewhere.

I know that AFX Group has left a $50 million hole, which is the biggest assault on the sensibilities of the retail FX industry since the Fortress Prime scandal a few years ago, however on Wednesday I discovered that in AFX Group’s home country of Cyprus, that is where the majority of damage was done.

$28 million worth, to be exact.

Friday: Lots of furore in Australia, but many brokers take the sensible route

Australia is a very sensible place indeed.

So much common sense exists in the Antipodean former British colony that life is very comfortable, everything works without a modicum of drama, and it sits almost always at the top end of statistical reports detailing the nations with the highest quality of life.

Effectively, since 150 years ago when the British forced indentured labor on able-bodied men who faced poverty in their home nations of Scotland and Ireland by commandeering them onto a ship, relocating them literally half way around the world and then making them work the term of their certificates in a regimented and somewhat harsh fashion, Australia has been built and refined into a regulation-orientated, law abiding and highly efficient nation.

Sydney is a highly respected and diversified business environment. It is good to see the quality firms bolstering their sustainability

This level of work ethic has been applied to every aspect of Sydney and Melbourne’s modern business sector, financial services being no exception.

Australian FX brokers are in most cases operated by very astute professionals who dot the Is and cross the Ts of everything they do, and the regulatory authority ASIC, with its electronic surveillance system for compliance and its detailed understanding of the technological topography of the FX world is quite a combination of prowess.

This week’s inevitable proposal by ASIC to restrict the way that CFDs are sold, however, was considered a blow and a negative effort by the regulator and I spoke to many industry professionals who also thought that this would be detrimental. Some firms have already taken a totally retrograde step of going offshore, which as I said this week, is the wrong thing to do.

Others, however, have absolutely taken this seriously and according to many voices in Australia are cautiously welcoming the new regulations.

“We expect ASIC to use its new powers to address some of the concerns it has identified in the industry,” says Kevin Algeo, CEO of CFD provider IG Markets Australia. “IG Markets fully supports initiatives that are designed to strengthen client outcomes. We continue to be in close and regular contact with ASIC, supporting its efforts to introduce robust and proportionate regulation in the margin FX and CFD sector.

“We agree that for retail clients, leverage at 400:1 or more is excessive and needs to be addressed. We fully support ASIC in this approach and believe robust and proportionate regulation that strengthens client outcomes is in everyone’s best interest.”

Adam Smith, CEO of online trading house Saxo Capital Markets Australia, supports ASIC’s position. “We welcome a review of the leverage levels currently offered to investors and traders through CFDs and margin FX products. Leverage caps deliver better outcomes for clients, provide them with better protection and bring Australia into line with the rest of the world.”

This has to be admired, especially on IG Group’s part, which under the leadership of previous group CEO Peter Hetherington in London, worked with the FCA in Britain and ESMA in Europe to consult with the regulators when they decided to have a go at CFD advertising, leverage and provision methods, the upshot of which was lowered revenues for many large FX and CFD firms in the UK.

By working with ASIC and keeping their prestigious foothold in Australia, long term sustainability will be the eventual outcome.

Tamas Szabo, CEO of extremely successful electronic trading firm Pepperstone, has said that the CFD sector has already introduced a range of measures to ensure clients trade safely and it is prepared to make further changes to support this. “It is important to understand these products have been around in their current form in Australia for 17 years; they are not new.”

Mr Szabo has concerns about ASIC’s new powers. “It is unclear how ASIC’s product intervention powers are the appropriate approach when the power is meant to be one of temporary last resort.”

These are the companies that will do well long term, and as I said last week, it only takes a look at Japan’s leverage restriction some 7  years ago, which had absolutely no effect on brokerages other than clients putting in more margin capital before carrying on as normal.

On the other hand, I was approached on Friday by an industry participant who does not agree that eschewing the quality and structure of Australia for the oblivion that is an offshore island is the wrong way to do things as I categorically inferred last week.

“I disagree with the you on a number of fronts” said this particular commentator.

“Firstly, I disagree that any of the big name brokerage firms can have a sustainable business with a local audience especially with low population center locations. The margins in this business are decent but not enough to be sustained with a massive reduction in trading volume. Add a 20 to 1 leverage and the infrastructure likely will have a tough time with both less clients and less volume per client. Note the publicly held brokers in the EU have reported 60 percent reductions in revenue and this is with far more liberal conditions than what has been proposed by ASIC” he said.

“Additionally, the regulatory body is treating the symptoms not the illness. Note ASIC asserts that there have been more complaints this year than in previous years. This was largely attributable to the flash crash of January 3 and the mini crash on the GBP USD a few months earlier. This type of crash can be minimised by circuit breaker regulatory framework that has been used in equities” he continued.

“Lastly, according to the latest data the EU regulations that went into effect have not changed the amount of people losing money in trading so while you make a case for staying with the current regulatory framework none of the synergies you discuss such as ancillary products has any proof that it currently works or that it has a prospect of working.”

“You can take a look at the USA marketplace and not one broker has internationally recognized low cost of trading or the ancillary services he believes will occur. In fact the opposite has occured, more churning of clients, hit and miss profitability and no improvement on the ability for the clients to be successful” he said.

I am not so sure about that. Look at Interactive Brokers. They keep well over the capital required to satisfy the NFA’s regulatory requirements and are continually going from strength to strength with loyal customers who will simply not go anywhere else. The antithesis of churning and unsustainability.

Island life is simply not the way to go. Unless it is one of the new residential islands in the Thames next to Canary Wharf, or the aforementioned large island continent in the Antipodes.

Wishing you all a super week ahead!


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