“Mind The Gap!” – The life and times of a man on the move Episode 61
Is full STP execution with good risk analytics the answer to the leverage woes? How to get better IBs and partners on board, and my next Guinness World Record attempt
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: Stress testing the stressed
The leverage debate appears to have attracted some very interesting attention this week, especially following my report which involved research pieces by academics, and some consultation from law firms, one of whom rather oddly reacted in a very nervous fashion by approaching me following the publication of the report in an attempt to stop their side being published even though they had published it verbatim on their corporate website!
Anyway, prior to that report, I was musing this with a colleague who said that the entire scenario resembles the same theme as that implemented in outer regions, and that the stakeholders are just dancing with the maths.
“There is a very interesting equation in play” said my colleague, a professional trader in Australia. “Each Australian broker’s management must stress test their operations for the benchmark risk factors and the impact on their balance sheet of three factors, those being 40% reduction in 80% of their clients losses while the 20% winners earnings remain the same, 25% reduction in turnover across the board and a 25% reduction in earnings.”
“Now this is based on 50: 1 leverage and at 20:1, I am not sure there would be a linear relationship in financial impact. Of course, most run a one dimensional B Book to go a hybrid STP in B Book and use A Book risk management [either full no A book hedging or all A book] and for most this is out of the question as there is no resources, no cash, no capital” he said.
“Therefore, maybe its time for full STP to make a come back, that way of course, they cannot offer turnover rebates to retail traders or IBs and then, of the 65 brokers [5 drop out as pure binary providers], if it follows the path as [per US [30 => 4] then which 8 – 10 brokers will remain?” he wondered.
“Some of those in senior positions are excellent marketing experts but have a lot less experience in risk analytics which is represented in some cases by repapering offshore to island licenses as an income. I understand that given FXCM, Gain, Oanda and various other US brokers reported their retail win:loss ratio quarterly and to any new traders, still stood around 80% losers which is what the academics in your report were referring to, however this metric didnt really change and hasn’t changed in Europe over the past 12 months, other than that many customers lost less, but still lost and we can assume the only IP most brokers have is ‘the sale price per active client’- I think gain paid $500 US per active client if they remained after 3 months for FXCM clients when they withdrew from US” he said.
“An offset is Japan, but Japan has had zero interest rates for 20 years [give or take] and so the retail clients has evolved to chasing returns – FX trading, FX carry and some digital assets. The US and Australia are entering this market regime of low interest rates, therefore the millenials who cannot afford a house may punt derivatives for no other reason than, better odds than casinos and the lottery, therefore my personal selection is about 20 well established companies will survive for various reasons – good management, diversified client and product base, tight cost controls and capital trading with 150,000 – 200,00 retail investors” he said.
THese firms include CMC, IG, Saxo, Plus, CityIndex-Gain, Pepperstone, IC, AXi [maybe], Rakuten, Thinkmarkets, PhillipCapital, Oanda, Hantec, Admiral, Advance, FPmarkets. “Give it 2 years and we’ll see how right I am” he concluded.
Wednesday: Relationships matter, here’s how to get the right ones
Friday: Got a Volvo? Let’s smash the record!
In March this year, I participated in an event in which the main aim was to raise money for the British charity ‘Breast Cancer Care UK’ by capturing the mind and soul of over 1550 car enthusiasts – or should I say absolute fanatics!
The event was held at Bruntingthorpe in Leicestershire, which is a vast test track used by car manufacturers and aircraft technicians, the entire point being to set a Guinness World Record on the longest procession of Volvo cars in the world.
Being a major part of that event was fabulous, appealed to my car enthusiast psyche and got over 1500 of us absolutely hooked, so this Friday the next one was unveiled.
To be held once again at Bruntingthorpe Proving Ground in Leicestershire, the event will once again attempt to break the world record and we expect over 3000 cars this time, so if you have a Volvo, come and join us on Sunday, June 28, 2020, this time to raise funds for the British Heart Foundation.
We have already had two superb pre-event meets, one at RAF Cosford in Staffordshire with over 300 cars and another at the British Motor Museum with over 500.
Those in London wishing to participate, I will be hosting a pre-event meet expecting around 150 cars in Regents Park, London NW8 on September 8 at 11.30am, where we will line the cars up along the Inner Circle in the park and then have a good social and head to Drunch on St John’s Wood Terrace NW8 for even more social and some lunch.
Before driving at Bruntingthorpe with 1500 fellow Volvo enthusiasts, my previous track experience there had been 23 years prior, in a then-new 1996 Volvo 850 T5-R racing car, with motorsport legend Tony Lanfranchi in the passenger seat.
A Formula 1 star, Mr Lanfranchi was a true gentleman, his calm prose still echoing in my ear via the intra-helmet communications system used that day, as I approached the very same straight at an indicted 168mph, which was a very symbolic speed considering that this is the ground on which the very last VC-10 touched down for the last time.
Just a few years earlier, I had received partial training for my BRDC racing license at Bruntingthorpe, in a new-at-the-time General Motors Corvette ZR-1 and Hennessy tuned Dodge Viper RT/10 Venom 660.
Of course, by its nature, today’s event will be more likely to be 30mph as it is a restrained procession rather than a race, however I’m not an impetuous 20 year old petrolhead anymore however a long driving career behind the wheel of high performance Volvo cars ensued.
Fond memories of the racing circuits of the North and Midlands will always remain, from a driving and social perspective.
Wishing you all a super week ahead!