“Mind The Gap!” – The life and times of a man on the move Episode 83

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

The Australian regulation vs tech debate continues…

Last week’s very poignant public comments by Pepperstone CEO Tamas Szabo which quite rightly asserted that the recent proposals that have been set out by Australia’s regulatory authority, ASIC, are counter productive in that they ‘stifle innovation’ has created quite a discussion.

It is very much a hot topic at the moment, and understandably so.

Everyone who has spoken to me over the past few months knows my very defined stance and opinion on it, that being the need for large brokerages that have vast incomes to re-invest in their operational structure and begin to rival the large home-grown establishment.

For example, IC Markets, which makes revenues of approximately $500 million per month yet has none of its own infrastructure, over 20 MetaQuotes server licenses, and an IB network which act as representative offices is a case in point.

Here is a company which has managed to generate tremendous monthly revenues without any investment at all in its own infrastructure or diversified corporate intellectual property. Effectively it has managed to become larger than some of the publicly listed firms with their own sysstems architecture and a loyal domestic client base, without taking any step to develop itself as anything more than an affiliate system.

This is one of the bete noires of ASIC, and I single out IC Markets because an opportunity has now presented itself, and instead of taking that opportunity, the company decides to head to the Seychelles and continue the lead marketing/no IP strategy.

A company that size could innovate very easily, and not only innovate, but disrupt the entire Australian electronic trading market by developing its own equities and stocks platform, and its own bank.

The new challenger banks are trendy at the moment, and many of them have launched platforms – usually mobile led – that allow traders, investors, business owners and those with a diverse portfolio to manage everything from an app, including their personal and business bank accounts.

Companies like Dozens, Starling Bank and Tide are advertised everywhere and purport to revolutionize the banking sector, and take electronic trading to new levels. They have endless scope to raise venture capital, because the current buzzword is “challenger bank” . You only have to breathe that word in a meeting and $50 million lands on your desk, and then when they run out of money, they raise another round, and so on.

The euphoria and media coverage is missing one important factor here – these are ‘banks’ which have no money, and likely never will have.

Venture capital is not a gift, its a debt and has to be repaid to investors and shareholders, otherwise they either pull out and liquidate the company to cut their losses, or they force the sale after five years to get a quick exit. It is always like that, and these challenger banks and trading firms are no different.

Then, after the VC dries up and the challengers disappear, old school Tier 1 banks like Barclays and HSBC will continue as though nothing had ever attempted to challenge them, last look procedures and all….

A company like IC Markets could easily come along and take that market, running a whole end to end solution for retail investors, traders and bank clients, and it would have a huge advantage over the challengers in that it would have absolutely no debt.

Staying in Australia and going down that route would give it almost a monopoly on retail equities, futures and derivatives traders, three aspects in which Australia shines as its commodities and mining background dates back to the Macquarie days.

And there would be no competition.

Unfortunately lead churning and affiliate marketing is far too ingrained and that is one of the things that ASIC does not like.

I had a chat this week with platform developer Richard Goers, who, after an extensive career in risk consultancy for major FX and CFD firms across the world, founded ManagedLeverage, which develops software for professional traders.

He had seen the dialog between myself and a few industry executives which followed Pepperstone CEO Tamas Szabo’s on point and candid statement.

Richard told me “That was a very interesting debate on Mind The Gap Eposide 82.”

“I tend to agree with the commentary from Kevin Murcko of FXPIG in that there has been very little innovation which is yet to be defined in the debate by retail brokers, and  they don’t need to, as incumbents and with a 80% + loss rate by their clients , why innovate other than in client marketing? he said.

“However, that is a one dimensional debate. I think, and my reading in the ASX DLT strategy- it will do away with Registers, Custodians and stock brokers which are market participants” said Richard.

Based in Australia, Richard has witnessed a vast amount of discussion with regard to risk and the use of technology for dealing platforms, at regulator level, over the course of many years.

“Eventually the ASX will move toward P2P using distributed ledger technology (DLT), so goodbye to stock brokers or any broker that simply is a execution platform hence maybe why seeing brokers move to fund management or advisory services” he said.

“So P2P platforms in development in the retail FX broker space such as tradeconnect.io as well as unknowns as Hydrax.io and Fairom are multi asset platforms that allow P2P on and off the blockchain system. Traders can execute via a wallet which means that the broker only gets commission and there is no B Booking” said Richard.

“Also, where is the innovation if the journey for the retail client is to have a zero bank account?” he asked, referring to the b booking activities of some of the affiliate marketing/lead churning type of off-the-shelf broker.

“Innovation is with the brokers; risk management and pricing and quite often the “mug punter” is never a consideration” he concluded.

This is interesting and I have seen a few companies attempt to go down this route. One is Spectre, which had this exact idea, but in my opinion executed it incorrectly by trying to look for binary options or digital asset partners and introducing brokers, which is really simply NOT the way forward at all.

Spectre had developed this type of wallet-based distributed system which I looked at very closely whilst meeting with the firm in South Africa (it is a British firm, we just were in South Africa simultaneously) and thought that this was a very good path to transparency, and even more importantly, a cost saver in reducing the need for policing the custody of client money, because it is all on a distributed ledger, therefore no regulatory surveillance or internal staff are needed to police it.

It also meant that no b booking could take place. Why Spectre did not apply this to the FX and CFD sector, or stockbroking sector I have no idea. They would be huge now had they done that.

So, overall, I think Richard’s assertions have some weight, but this direction must come from the top quality, large and established FX and CFD firms, and not from the shady ‘blockchain’ sector which is far from a league of tech advancers, and more like Royston Vaysey’s League of Gentlemen.

Wishing you a super week ahead!