“Mind The Gap!” – The life and times of a man on the move Episode 90

The debate on the FX industry’s incredible opportunity continues. This is a very candid and direct conversation. Are we just ranting, or can we REALLY challenge the status quo and empower millions of people around the world to trade and make an independent future for themselves?

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

Multi-asset, challenger banks and the Drew Niv debate… Is this a rant or are we going to break the status quo? 

Last week’s dialog between FXCM founder Drew Niv, a few wizened executives with a long career in this industry and one particular wizened old crone – me – has actually sparked quite a debate.

Since I highlighted the intricacies of what was said, a few of the more thoughtful among us have sent me their perspectives, which have been in many cases very detailed.

I actually agreed with Drew, for the most part, however I did have my say quite vocally which spurred mixed views to appear on my desk.

One particular dialog – or perhaps diatribe – that took this matter further was that of Richard Goers, CEO of professional trading platform development company ManagedLeverage.

Richard’s combination of several years at senior level in risk consultancy for many brokers and institutions in the Asia Pacific region and technological development skills are quite a comprehensive background from which to look at this problem. Well, I say problem, but could that mean problem, challenge or opportunity to innovate and dominate the new wide-ranging online financial services industry as per Drew’s initial rant… er…… i mean perspective.

“This issue needs more depth and debate, I love it!” enthused Richard.

“I have a degree of respect for Drew Niv” said Richard. “FXCM started FXCM Ventures in about late 2013 and ManagedLeverage was going to pilot its product with them for an equity stake, the mandate of FXCM Ventures was to buy into platforms that were aligned to FXCM busienss model in the APAC region, until 2015 which brought the Swiss Franc escapade to the world markets, soon followed by FXCM’s US misadventure and then it slipped into the darkness” he said.

“I go back a long way, having also worked with the Australian branch of the company. My opinion is never waste a crisis” said Richard.

“So my thinking on this has drawn me to an opinion. You put forward an idea, along the lines of a previous Mind The Gap editorial that you did regarding brokers funding newbie accounts to get them trading. There is always one problem, that being who pays the winners or someone has to lose, or the ‘Pareto principle-law’ which is a bastardisation of the rule but the principle applies to 20:80 and with leverage 1:99″ he said.

“Andrew I think you have hopes indeed if you think the market maker model that exists today can become straight-through-processing (STP) so the retail traders can make money, as this is very unlikely, the win lose dial doesn’t shift, and no matter if more retail traders start, it remains the same structure” he said.

That was a reaction to my perhaps utopian but in my opinion quite realistic and practical thought that we can become an industry that now empowers the millions of people around the world with no livelihood due to the recent global government brutality which has been sold as ‘necessary lockdowns’. I believe we are in the right sector to give people the empowerment to become financially independent by trading the markets if it is done correctly, as I said two weeks ago with full detail of how I see it working.

Richard said “That is why retail FX Market Makers exist. They cannot make the same money dealing against institutions taking the other side of the trade, and also hedge funds wont take the counterparty risk against FX margin brokers”.

Richard is right, but the world is a different place now to what it was just two or three months ago, and adaptation is the key. If a commission model became universal for spot transactions, and access to stocks and exchange traded derivatives was widespread on retail platforms, all brokers would gain huge new client bases of very skilled people who would learn to master the markets, and then THEY would create the market, we would just be the software and systems providers, connectivity agents and facilitators, for which traders pay a commission.

It would be equitable, and would benefit all of us as well as millions of people who had never traded before or had any intention to trade, who are likely to be very good long term clients if they’re given the right environment, many of whom are used to running their own small businesses (small businesses have been the biggest casualty of the brutal lockdowns) or been laid off from very high level professions, meaning they are educated and experienced people.

“So, all these brokers are making money at the moment on the b-book, but I dont see how you think a market maker can evolve from anything other than a retail broker whose earnings come from retail losses, their management has what background? Marketing, not risk management, not Funds management, NOT running a bank whether neo or old school, and affiliate marketing is not the basis of a good brokerage” he said.

“Most of those are a world away from the UK brokers, including Nordic-Asian Saxo Bank and the Japanese, and these UK and Nording/Asian firms are slowly moving to High Net Worth retail clients, not so much institutional, but higher equity retail market” he said.

“Who can support their trading with any capital in the longer term? So, same space, smarter thinking which is to attract the HNW retail or semi experienced traders with larger instrument universe + leverage, meaning that we turn the industry into a form of wealth management, but the cycle of disruption remains” said Richard.

“As far as neo or digital banks relating to to old school banks and where the FX industry can take this up as per Drew’s original message and your editorial prior to that, platforms in the new alternative asset space funded by tokens building out experimental distributed ledgers, the drive is cost cutting through P2P trading which cna be at least 50% cost reduction. Even the big boys, who make say $400 million in earnings per month scrap in $5 million in after tax profit, or about 5-6 pounds per Lot traded [this $ per Lot amount is the industry standard for market maker brokers – FXCM, GAIN, IG, CMC and then the smaller MT4 firms around the world, $10 per lot or there abouts. FXCM and GAIN Capital public documents back to 2012 show the same numbers year in year out” said Richard.

Richard then asked me why these numbers are so consistent, and hence why we all need volume and turnover, which is another one of those equations inherent in the business model.

“Some business models will survive, as with evolution, and if past is any guide, so too is the future. Therefore given the right time, if this crisis may create the catalyst for P2P platforms, and that seems in the near future this may be the case, then then Tradeconnect, Sythetix, Spectre, Genesismarkets and so forth can survive in the same way that the Japanese car makers moved into the Americas in the 1970s and built their factories there and took over to domination with a totally American product, built in America, by Americans, appealing totally to an American audience, by a totally Japanese company” – Richard Goers, CEO, ManagedLeverage

If this happens, Richard sees that they have multiple service providers which are already well organized in our sector to help them integrate their systems into the market.

“So it isnt the technology as such DLT for the sake, but that traders will evolve to trade from wallets into any instrument at leverage into digitalised assets, so CFD was the future, now the benchmark for new products” said Richard.

“We can also see this in the Australian Stock Exchange (ASX) experiment. Iif taken to its logical conclusion it will be P2P, removing any execution only platform, custodians, registries then ASX make $300 million per year on these services however they wont move too fast but just think if they partially succeed, then they will be copied and for some regional exchanges they can move the DLT, and offer digital shares such as the Gold platform selling Perth Mint gold [PMG token – change gold to shares, FX => stable coins as an adapting product” he said.

“Then if Central banks move to digital assets, then what happens to banks as retail clients can open deposits at the central banks, then it would just be the lending bit I dont know about. So driving cost out of the platform, offering more instruments, P2P or trading from the wallet given COVID19 seems to be a way forward” said Richard.

“As far as the neo banks are concerned, well, we need simply to watch JFD as a small player and Saxo as the gorilla and how this plays out will be fascinating but seems rather like a stockbroker moving to fund management. A natural progression. Are they going to be a bank [payments, lending] or manager of funds on deposit?” said Richard.

Richard also thinks that many stockbrokers are going to zero commissions using HFT to execute the trade. “Robinhood – and there were 3 of these before the GFC so it’s not revolutionary, but using HFT would be” he said.

“I think stockbrokers moving to fund management seems natural and I think the 10 year cycle that seems to be the life cycle of many businesses and the model for FX margin brokers on MT4 rented technology as marketing forms is ending. It’s like a weed dying in the drought, when it rains they come back as sun flowers like Saxo, like IG, like Tickmill, like Rakuten or a weed to be pulled out by regulators and natural evolution” he said.

“Andrew do you think ICmarkets owners want to run a bank and to do good? I think not. Just show them the money” asked Richard. This was in response to my analogy that here is a company which makes revenues of $500 million per month, could easily outpace all the challenger banks and does not even need any VC funding so when the challengers all run out of VC and go to the wall, companies like IC Markets would be like a global version of Hargreaves Lansdown combined with Revolut, with NO DEBT!

It’s a mentality thing I would say. Instead, they continue to churn the leads, and make off to the Seychelles.

Richard then said “I had a relook at FXCM public documents from 2014 when they were number two in global FX turnover. The results showed the top 10 brokers and ICmarkets was nowhere. IC always copies Pepperstone, even in website design, then in about 2016 they hit on their current model which took a while into 2017 and 2018 which are approx timelines – and now dominate. They got the reach into China and South Africa, and good on them, but nothing special, just rented infrastructure with MT4 MT5 cTrader and zero commission but not the cheapest in total cost in spreads. Maybe they rode the wave of automated trading but still internalise 80% of exposures, therefore the same dog with fleas, just different stripes.”

“Which ever way you look at it, this is again the 80% rule – natures equation – like the golden rule. Thus I have no idea how things will evolve in this space – like the markets it is good to speculate but I have skin in this business. In Q3 ManagedLeverage will promote its CCPP platform which provides continuous capital protection to active fund managers, self directed investors, family offices via a global distributor” explained Richard.

“Overall I see the world as fragmented into products or platforms and I agree more retail traders will trade margined products as a side hussle, but for most the journey it is a loss. The retail trader has to make money, and they can but not in the aggregate, usually in the minority so we are always playing to the few” he said.

I still believe we have a huge opportunity here if we work together and get it right. What do you think, Drew?

Wishing you all a super week ahead!

 

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