“Mind The Gap!” – The life and times of a man on the move Episode 88

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

An interesting observation caught my attention this week, which was actually instigated by Drew Niv, founder and former CEO of FXCM, one of the world’s longest established FX companies with a very interesting history.

Throughout its long, 30 year life, FXCM, with Mr Niv in the leadership position until quite recently, has gone through many periods of change, including developing its own proprietary trading systems, becoming the world’s largest retail FX company quite early on in the retail FX sector and maintaining that status until 2017, founding its own institutional division (FXCMPro) before ceasing it and restarting it some years later, and owning a stake in FastMatch, one of the most innovative non-bank ECN platforms in the world alongside Credit Suisse before selling it to Leucadia, an incredibly dramatic scenario around the 2015 Swiss National Bank EURCHF peg removal, a bail out done on a handshake, striking off by the NFA, a public listing, a delisting, another public listing and subsequent delisting, global expansions and a massive domination in China that lasted over 11 years.

Therefore, this is a company whose staff and management really know their stuff.

Life at FXCM was never one in which anyone rested on their laurels, or sat back and allowed corporate corpulence to seep in and dilute the ever changing, fast paced Downtown Manhattan nature of what is recognized as probably the largest and most eventful impact on the retail FX industry in history. Indeed many former FXCM executives who I know very well that are now at less volatile, large firms in the UK , North America and Switzerland have over the years told me that beginning their careers at FXCM was a huge mentoring experience and gave the tools to get ahead in big companies later on.

Drew Niv and the company he founded are polarizing forces in the electronic trading business, a Marmite combination. A man and machine that you either love or loathe, therefore any opinion, rare as it may be, that comes from Drew or the company has to be taken seriously, because, without putting too fine a point on it, he is one smart and knowledgeable gentleman.

Drew’s message was succinct and clear, reminding me of our face to face chats in the past, in which I always enjoyed this notable straight-to-the-point prose.

“Unlike most businesses the retail FX/CFD sector has done really well in the past 8 weeks and that streak of success is likely to continue in the near future perhaps as much as the next 6 to 12 months. This is a great time to store capital, clean up any issues on the balance sheet and just capitalize on the success.”

“The most important thing though is to understand that this success is going to be temporary and not to lull your self into thinking that this year will repeat itself as inevitably the world will heal and come back stronger than ever” Drew observed.

“In late 2007 volatility picked up and lasted 3 years through the financial crisis and beyond, we used that elevated financial track record to take FXCM public (Dec 2010), take lots of money off the table and fortify the balance sheet. But then the easy life of high volatility and soft regulation ended and a much more difficult period started especially by 2012 as government began to crack down on the sector in a very serious way as part of its clamp down on the financial sector” he said.

“This cycle is likely to repeat itself just in a shorter more violent way. Vol wont last as long as post 2008 and the crisis has only encouraged governments world wide to pursue wider powers as people look for strong central governments in times of crisis. This is unlikely to end well for sectors of the economy that are not favored by regulators, and while it looks like the sector has been punished enough in the past few years, I don’t believe that its over and is likely to get worse in a post covid19 world” – Drew Niv, Founder FXCM

“As an example, many more Emerging Market countries will run into deeper economic trouble and unlike large western countries cannot print their way out of it. This will result in more capital controls and real restrictions on movement of capital. Given reliance of sector on many of these countries the long-term view isn’t greatand thsi si one small example” concluded Drew.

I of course weighed in with my viewpoint, as this struck a chord with me.

I responded by saying “You’re right Drew. Times like this are a good opportunity to reinvest to make the company more acquirable. As I said about 2 years ago, nobody has been able to list their company if they don’t have their own infrastructure, even huge firms like IC Markets ($500 million revenue per month ) can’t, because no auditors can value a company whose IP is on someone else’s platform (MetaQuotes).”

“If retail brokers are doing well now, a reinvestment in their own infrastructure and the ability to offer a diversified product range to users of the entire online financial service sector would be a good move as it will create a valuation opportunity for retail firms” I continued.

“As you say, and I have also said many times , the synergy between our sector and challenger banks and online stock brokers is very much there. Therefore firms with capital can develop holistic systems that give clients what these firms do and more – perhaps to the extent of a combination of Hargreaves Lansdown’s Vantage system and a banking platform . This way loyal domestic market customers are acquired and retained” – Andrew Saks-McLeod, CEO, FinanceFeeds

“The advantage some of the larger FX firms have over the challengers and the startup stock firms is that most challengers have absolutely no money. The challenger banks are doing VC round after VC round and when the Vcs see that they don’t make money they will pull out , whereas the fx brokers don’t need VC, they could easily be the first genuine challengers , with no debt and a huge knowledge of the online financial sector. Multi asset brokers with full diverse solutions including stocks, banking and mainstream financial products would be a good evolution and strengthen the valuation of the retail sector” was my final anecdote on this matter.

And it was not just me.

Ingmar Mattus was next to weigh in. Ingmar is Co-Founder and Executive Director of ever-expanding electronic brokerage Tickmill. He told Drew “Challenger banks and stockbrokers is a tricky call. I bet regulators are going to be quite aggressive on challenger banks as they are quite relaxed when it comes to AML and compliance. At the end of the day they will become as slow and unsexy as ordinary banks. I would argue that the strategy of most of them is to either go public or get acquired before they become slow, ugly and just expensive. Like with FX firms it was fun until the sector became a hot topic among the regulators.”

After this, the perspectives from the technology sector began to arrive, with  Richard Goers, a longstanding conversation partner of mine based in Australia, who owns ManagedLeverage, a professional trading platform software development company, who spent several years as a risk consultant to brokers across the APAC region, replied by saying “MT4 brokers as money managers should stick to their knitting – living off the fat of the retail losses. As far as CFD brokers who can take advantage of this crisis – listed UK brokers or the largest Japanese – the most interesting are the platforms have adopted distributed ledgers and are making them work, both from the alternative asset space and from the OTC FX space, so they can wash out 50% cost and allow P2P from wallets living off commission. The big boys can move into broader asset classes and fund maangement like Saxo, whilst the rest must eat their clients for lunch to survive” was his direct punch.

“Interesting call on vanilla stockbrokers. Many are moving to zero commission with stock exchanges moving to DLTechnology to reduce cost, it allows P2P trading – an evolving platform in the OTC space. DLT will remove any middlemen or platforms that just allow execution, therefore me thinks there is no value in this path. On your fourth point Drew, the standard MT4 market maker broker will get eaten alive by institutions – they only exit because many retail clients lose money, but as you well know challenger banks means upselling leveraged trading products.. Ummmmmm maybe, maybe not! – Richard Goers, CEO, ManagedLeverage

From an institutional perspective, Hormoz Amir Faryar came into the conversation. Hormoz is Group Global Head of Institutional Sales at FX brokerage Equiti. “This is thought provoking, Drew. So we the have cash-rich / profit-rich financial segment (FX/CFD brokers) in an environment where the overall market outlook (in 2-3 years) looks bad. The other 4 segments you mentioned are doing pretty well too. The challenger banks will be touched by the massive bailout money spraying around, by becoming take-over targets of major banks. So we will have inflation in valuations. Essentially one needs to merge a challenger bank with an FX retail broker and sell it off to a bailed-out bank” he said.

Drew replied “Not just bailout money. Many large regional banks all across the world need to digitize or die in the next decade and the best plan for that is to acquire something and start the transformation there as these institutions are too conservative to innovate on their own in a dramatic way. There are hundreds of buyers with multi billion dollar balance sheets waiting to buy out the right digital assets thats why the valuations are high as demand far outweighs supply. Given that digital banks and brokers cross borders very easily its also a way for an ambitious regional bank to make a global play. I think Equiti is definitely exactly in the group of firms my viewpoint here is relevent for.”

So, with brokers doing well and in some respects making hay whilst the sun shines because volatility is up, traders are at home and cannot travel, therefore can concentrate, millions of employed personnel across the world are now out of work, and businesses have collapsed and will be unlikely to reopen, surely the retail FX industry is onto a massive winner.

Yes, and no. Yes, because of the aforementioned, but no because many firms are so grateful to be in a relatively unique position in that they are doing well whilst the rest of the world is going destitute, and in the process the FX industry is empowering people to become traders and to be financially independent, make themselves money via trading the markets whilst the global economy is on neverending hold, and get ahead in life – which is all excellent.

No, because whilst the current situation is great for brokers and the traders that are making profits, there are still over 70% trader losses on B-book platforms which is why the B-bookers are doing well, but what nobody has paid attention to is that these are all existing traders. There are hardly any new signups from new customers.

So, we have to look to new products and new solutions to entice new traders and investors to use electronic platforms to empower their future in this increasingly online, isolated, economy-free world. On this basis, Drew, and the other commentators, make a very good comparison between our industry and the challengers, except we are in a better position to beat the challengers and give clients a far more stable and reliable platform than near-bankrupt, VC-heavy challengers that are 2 minutes old and will flop when the VC thinks that ‘challenger’ is no longer a cool buzz word. Whatever that is.

The future is well and truly in our hands. We have the abilities and knowledge to make a huge difference, and an almost captive audience globally.

Let’s do it.

Wishing you all a super week ahead!