“Mind The Gap!” – The life and times of a man on the move Episode 81

No more credit card deposits? Let’s hope… and a super viable, smarter and welcome alternative to Bloomberg Terminal heads straight for the FX industry!

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

Credit (card) crunch….

It was inevitable, however many years after the National Futures Association (NFA) in the United States, along with a series of CFTC commissioners and senators made the resolution that any OTC derivatives trading accounts operated by retail brokerages and sold to retail customers would not be allowed to be funded by credit card, the rest of the Western world is making similar steps.

The odd thing about it is not the clear intention by the regulatory authorities to outlaw the use of credit cards for the purposes of funding FX trading accounts, but more the ‘shock horror’ reaction by some of the smaller, more obscure brokerages who appear to be outraged by it.

Why? What’s so bad about a measure to make everything much more sustainable.

It has always been my opinion that MT4 white labels churning recycled leads that have done the rounds among other MT4 white labels with the intent of gaining a $200 deposit on the spot via credit card (debt fueling debt) is not trading, nor is it running an electronic brokerage.

That model is simply gambling, dressed in a shirt and tie – albeit a Matalan shirt and tie. It is also futile from a brokerage point of view. It makes no commercial sense to go out and get $200 deposits via hard sales calls, when it costs $1500 and upwards to acquire a new client through that lead/conversion method, only to see that the customer, usually a novice, has zeroed the account in 10 minutes – thats about how far $200 goes – and doesn’t have resources with which to trade, leaving the client at a loss, brokerage at a loss, and the regulator perplexed.

As an old timer who comes from the institutional infrastructure side of this business, it is anathema to me when I hear small brokerages with no trading infrastructure, based in non-first tier jurisdictions referring to clients as ‘leads’ or conversions, or CPA. This is not trading or brokering. It is also what has created the draconian stance by British, American, European, Australian and Asian regulators.

Rather than set out who is doing it right and who is doing it wrong, they simply create a rule for everyone.

This is not trading……..

This week, I had a few encouraging conversations about the credit card situation, and rather unsurprisingly, these conversations were with firms in top quality regions of the world who have invested substantial amounts of resources into getting their trading infrastructure and client base right.

As expected, most good quality firms are in agreement with the proposals, because quite rightly they view this as a further refinement of the industry, and a facilitation of sustainability – clients with large margin accounts who deposit via bank transfer are more likely to have a far longer lifetime value, be financially stable and take an analytical approach than desperados having a ‘flutter’ with a credit card and then losing $200, when they do not realize, neither does the person selling it to them, that $200 will not put anyone in a position to participate in the leveraged spot OTC derivatives market.

It has been discussed before, at our conferences and in the public domain, that many good quality brokerages nowadays only want the serious traders, not minimum balance credit card business.

There has been some dialog, coming from the regions of the world synonymous with low end, unregulated business or firms with main offices in Israel or Russia and a front office in Cyprus, that the UK Gambling Commission’s ruling on credit card deposits to gambling platforms would perhaps have an effect on the retail FX industry. I mean, what’s all that about?

Viewing gambling in the same category as retail FX is itself a faux pas, and actually whilst I agree that there should be tight controls on gambling, it is simply nothing to do with our industry, a mistake that has been made by many Israeli, Russian, and other offshore MT4 white labels that has cost an otherwise bona fide and technologically advanced industry in good regions of the world its reputation.

….just as this is not a proper ‘payment technologist’

Clearly the FCA will look at some point to implement this within the FX industry, however British FX firms often use bank transfer for client account funding, and are long established, with huge, loyal, domestic market client bases – unlike the lead-churners of the Middle East, which intentionally attack the unsuspecting in places which have no jurisdiction or recourse.

Mastercard and Visa know this, and view it as a very high risk for the provision of merchant services, and we have all seen the donkey jacket wearing, moustachioed, gum chewing reprobates with loud voices, greasy hair (if any hair at all) and broken English that run ‘payment technology’ companies, ‘payment technology’ meaning money laundering entities set up to trick merchant services providers into believing that funds are going somewhere reputable, when really it is just a third account, which is then transferred to the broker, for which the aforementioned moustachioed gum chewer receives – yes, you’ve guessed it – an affiliate commission or revenue share! Wonder what their background was before becoming an ‘innovative payment technologist’. Yes, you’ve guessed it – online gambling, or, how can I put this bearing in mind that ladies and gentlemen are reading.. lets say dubious “adult entertainment” sites.

A full move to cut off credit card use would see the end of the fraudulent payment moustaches, and would stop the churning by small companies, and restore the retail sector to serving only qualified clients with sustainable accounts, allowing brokers to continue to do what they do best – elevate their technology to suit the ever increasing astuteness of today’s first tier retail traders, and to provide access to live markets in an emulation of the institutional world.

One such executive I spoke to this week was Michael Buchbinder, Managing Partner at Scandinavian Capital Markets in Sweden.

He reacted to the UK Gambling Commission’s banning of credit cards for gambling accounts, and agreed with me as to what this has to do with FX.

Michael said “This should have been in place a long time ago. If it happens to extend to retail FX, those who are used to doing it the wrong way will just move to accepting Cryptocurrency instead, the rats!”

I replied along the lines that it won’t disable the industry though, quite the opposite. Most reputable firms in the UK have bank transfer and long term loyal clients – look at Hargreaves Lansdown – the largest retail electronic financial markets company in the UK, which is worth 6 billion pounds, they have clients who remain clients all their lives, and are all based in the UK and none of them use credit cards for any of their accounts.

Those painting a gloomy picture have an agenda here, that being to promote crappy unregulated brokers in Israel or offshore, or with offices in Cyprus and main operations in the CIS countries, and ridiculous cryptocurrency peddlers, as well as dodgy payment processors who will disappear to the gambling sector once we get rid of them from the retail FX industry.

Michael then said “I completely agree and this would be a welcome change from our point of view here at Scandinavian Capital Markets.”

He gave his viewpoint in detail, explaining “It is precisely noted in the credit card terms and conditions that using your personal credit card for the use of investment purposes is not allowed.”

“Trading forex is just that. How is it possible to be used to load up your forex trading account?” said Michael.

“Excessive use of leverage helps clients blow up their accounts faster than it takes to load their accounts via their cards. This is not trading. This is gambling, therefore the UK’s gambling authorities have made an important step moving towards improving the entire online industry as a whole.”

“Now companies that are thriving on the small clients will have to look elsewhere, and real traders know what tricks and games to look out for. We have already been seeing major consolidation in the industry. Now the heart of their business, the little guy is no longer a target for them” Michael told me.

“What will happen to their business plans? They will essentially become large marketing burdens and these companies will have no other choice but to shut their doors. Where will the industry go next? probably will move to accepting bitcoin or other digital assets. Coakroaches always find a way” he concluded.

That is probably right, they will, however as long as the bona fide FX and OTC derivatives industry remains free from that end of the market, it should be a good thing for a good quality future of longevity and good reputation building.

Are you InFront of Bloomberg?

Who these days likes Bloomberg Terminal? It is very very expensive, and has very few advantages.

Bloomberg is a data company, it is not a financial technology firm. Their main goal is to obtain as many leads and as much customer data as possible from all aspects of the electronic financial services industry, by hook or by crook.

My own dealings with Bloomberg at very senior level have really only led me to understand that they just want to mop up the intellectual property of small, specialist companies for free and then pass it off as theirs at a very high price.

Bloomberg Terminal has been the de facto analytics terminal used in Tier 1 banks for many years. JP Morgan, for example, spends hundreds of millions per year on Bloomberg terminal subscriptions.

Are you InFront, or BB-hind?

It may have been worth the money when the messenger was allowed to be used on an interbank basis, because this was one of the main tools used by traders in the ‘cartels’ that were caught rigging FX benchmarks a few years ago, resulting in gargantuan fines and landmark regulatory censuring of Tier 1 FX dealers by the American, Swiss and British authorities to the point of it causing tremendous damage to the balance sheets and annual results of the usually gilt-edged banks, as well as landing some of the perpetrators in jail.

In many bank trading desks these days, Bloomberg messenger is either blocked, or is only allowed to be used under supervision by superiors, hence its value is less, however the terminal is still widely in use. This shows how much institutions were prepared to pay to gain advantages by breaking the law! Thankfully those days are gone, but it does mean that things are now less progressive due to restricted messaging.

The pricing model is effectively a single price, and the entire suite of software available in the Bloomberg Terminal is then accessible.

But what if you are a smaller prop shop, or a portfolio management company, or hedge fund, or, these days, a high quality retail brokerage with a series of experienced and professional clients? The subscription to Bloomberg is out of the question for most.

There is, however, an alternative, and, like many innovative and clever things, it comes from Sweden.

On Friday, I walked along to Old Jewry, a small street next to Bank Station in the heart of London’s financial district, and met Henrik Nilsson, who is a senior executive at InFront Finance.

The company, which is publicly listed on the Oslo Bors, is a direct rival for Bloomberg Terminal, however its solution is a far better fit for the brokerage, liquidity provision, prime brokerage and trading platform sector, as well as small hedge funds, professional trading shops and portfolio managers.

The company opened its London office last year, maintaining its global headquarters in Stockholm, Sweden, and is looking to enter our industry in a big way, having gained huge traction among wealth managers and proprietary derivatives traders in its home market of Sweden thus far.

I will, over the next few weeks, be taking a close look at the actual analytics platform, which I have had a short but very interesting insight into, however what I can deduce is that, for a tenth of the monthly subscription to Bloomberg, your data is safe, you have the same level of analysis and data accessibility, and a messenger function which is secure and can be used on an inter-company basis without riling the regulators.

The system is also designed for use on the move, and can be used very accurately on a small laptop via wireless internet connection. Some Oslo Bors derivatives traders have been using it on Norwegian Airlines flights, which have free internet, and it has worked well. This is unique in the professional analytics terminal sector as far as I know.

Packages exist, therefore no firm is forced to pay a single SaaS subscription when some services may be extraneous or not relevant to the type of business, however the subscription begins at around $300 per month, a fraction of the cost of Bloomberg Terminal.

I’ll go into further detail as I look at the system closer, however the company was founded by two former Thomson Reuters executives, for the purposes of creating a comprehensive market analytics and data platform for equities and listed derivatives traders, and has done so with efficiency in mind.

This is the company’s core business, so there is no risk of data being used for other purposes either.

InFront Finance’s foray into the OTC derivatives sector is a welcome one – I will keep you up to date with it once I have studied its functionality in greater detail.

Wishing you all a super week ahead!

 

 

 

 

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