“Mind The Gap!” – The life and times of a man on the move Episode 94

What if you could keep your MetaTrader platform, and become a major force in listed derivatives and futures trading, moving up to servicing the highest level of traders and away from the unsustainable and costly process of churning leads? And what if the major exchanges and platforms were all on board? Well…….

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

Juggernauts. And not ones with wheels.

I was always interested in why a large truck, known as a ‘semi’ in North America, has been referred to as a ‘juggernaut’ in the United Kingdom.

It is quite common for a driving instructor, or nervous passenger to say “watch out for that juggernaut” and for the driver of said car to know without questioning that they are referring to a truck, and not the dictionary definition of the word juggernaut, which is “a huge and powerful overwhelming force.”

I think if middle class Englishman was traveling on a country road with his family, and one of the passengers said “watch out for that huge and powerful overwhelming force”, the response would be somewhat different, and very likely result in a detour to the mental health clinic.

However, this may seem amusing once pointed out in literal terms, but it is actually a ‘juggernaut’ effect that has caused the smaller white labels or small offshore or island based b-book brokers in the retail FX sector to stick firmly to offering spot FX via standard – and somewhat obsolete – MetaTrader 4 platforms to an ever decreasing pot of $200 non-traders in third tier jurisdictions which are far from trading entities and more lead churning affiliate marketers.

Leasing standard platforms, and in many cases MetaTrader 4, has become as much of a millstone as it has a standardization tool for smaller retail FX firms.

They cannot seek to onboard a higher quality of client base, because the platform and its provider are geared toward an affiliate marketing-orientated race to the bottom, for those who remember as far back as 2004, MetaQuotes was not in the business of building bank platforms or specialist trading systems for institutional clients or corporates, it was in the affiliate marketing business, looking to approach the underworld casinos in grotty south Tel Aviv or some of the southern CIS regions and give them somewhere else to churn their burned out gamblers, and then turn the handle against them on a different premise than pure outright gambling.

Great trading environments do not come from such origins.

The only reason that MetaTrader is now used by even the most reputable of companies in the retail sector is due to the adaptations made to it by external specialists that have built liquidity management systems and bridge software which meant that MetaTrader 4 could be connected to a live pricing system, and then brokers could have the ease of keeping traders on a familiar and ubiquitous platform, but offer them a good quality trade execution service according to genuine pricing via prime brokerages, non-bank market makers and Tier 1 banks, thus emulating the environment of professional trading, for a fraction of the cost.

Brilliant indeed, but still focused on a non-multi asset product range, and in order to elevate a broker from the doldrums of lead recycling and affiliate marketing and into the proper world of genuine high quality traders and established global exchange listed derivatives with long term portfolios and a comprehensive understanding of the topography of the market and its infrastructure, brokers need to offer their existing spot FX via MetaTrader, and thousands of listed derivatives including futures, on the same MetaTrader platform.

It has been a long process to get this in place but it is finally approaching and I will be looking at the finished product next week.

A long term advocate of this being the absolute savior for many smaller brokerages, the launch of this multi-asset solution will be a boon for the retail sector, offering exchange trading without the cost of exchange membership and clearing – both very prohibitive for most retail traders – and offering brokers a chance to onboard better clients without having the risk of changing to a different platform.

The juggernaut here is MetaTrader. Many brokers know that they need to move up from the low-level small deposits from one-off chancers in third tier regions of the world with no capital markets economies, and the focus on calling humans which are regarded and referred to as ‘leads’ – for example “What are you doing today John?” asks the sales manager. John replies “I’m just calling these leads” – as if leads were something you can call rather than humans.

Calling ‘leads’ and then getting deposits is not what the electronic trading sector is about and never has been. The ubiquity of MetaQuotes and the way it has encouraged smaller firms who do not come from the capital markets business to look at trading as ‘leads and deposits’ via cold calling is something that has gone hand in hand with its 85% dominance of the retail market.

Many brokers know this, but are afraid to move away from the spot FX/MetaTrader model in case it alienates existing traders, whilst struggling hard to replace the short lifetime value efforts that come and go, often at huge cost to the brokerage. Equally some of the smaller firms are not technicians and do not want to get involved in platform/execution related matters, instead concentrating on customer-facing priorities.

If you look at Japan, which is a country in which 30% of all retail FX order flow takes place among domestic market companies only, there is no MetaTrader at all. This is largely because traders in Japan have longstanding relationships with one of the large Japanese giants, and trade long term, manually without using cobbled-together unrecognized Expert Advisors (robots which work with MT4) or bizarre and conflicting social trading nonsense.

Japan went multi-asset some time ago. Click 365 has been around for absolutely years and years, and is, as Alphaville once sung equally long ago when Filofax and pinstripe suits adorned the city streets, Big in Japan.

So, it has always been there and the demand has always been a bugbear for established exchanges, so now we have the synergy which will suit retail traders.

The new development comes as a collaboration between DriveWealth, Chicago-based institutional software and integration company CQG and the newly established Markets Direct, an Australian entity with highly experienced backing from some of Chicago and New York’s founding forces of the FX industry. Now, there is also no conflict between brokers, technology providers and MetaQuotes itself, as MetaQuotes is onboard with this project, representing a huge leap forward.

There had been some initial moves toward this, and I have spoken to many of them over the past few years as far afield as China, and with some very good quality potential integrations in mind especially NetDania which was involved in a project of this nature until the untimely and very unfortunate passing of founder and CEO Stig Brylle, but naturally the full solution has to come from the home of exchange trading – America.

Going back five years, Marc Spaelti, COO at Dukascopy Bank SA discussed this with me at a meeting in Geneva, Switzerland. Mr. Spaelti understands the infrastructural requirements within institutional banking in Switzerland, having spent several years at Swiss Banking Corporation, as well as having led the establishment of retail brokerages and the supply of white label solutions to broker partners.

Mr. Spaelti said “In the infancy of electronic FX trading, many brokers saw that exchanges were somewhat expensive, could be inefficient, and did not contribute an OTC market that had huge amounts of liquidity, and this view was held for a long time.”

With the Swiss National Bank event having happened last year, and the ongoing fragmentation of the market which constitutes a proliferation of non-bank liquidity providers, and the idea of a central exchange model perhaps has some merit if it could be made cost-effective.

Mr. Spaelti said “I am coming a bit from the other side, having a background in investment banking, trading spot FX over the counter for years, I quite like the diversification that we currently have with each bank effectively free to quote their prices to their clients, I see some problems of course that the FX market being a global market, as to where to place these exchanges.”

“There may also be difficulties associated with size, as the FX market is so vast, in which trillions of dollars are traded every day, and I’m not so sure that an exchange could so easily handle that, and then there is the question of fees and who is actually going to own these exchanges” – Marc Spaelti, COO, Dukascopy Bank SA

At that point, the subject of a virtual, dedicated exchange was invoked, emulating an exchange and perhaps operated by an exchange provider, or indeed a non-bank infrastructure or liquidity firm was brought up as it cannot be capitalized under the current model of exchange systems.

Indeed, FastMatch introduced an OTC exchange called OTCX which is an electronic exchange without a physical venue, had very low fees, did not have a physical presence but was set to act as a type of central point between two parties.

With regard to how this type of system may have functioned, I had a conversation with an at-the-time senior member of the leadership team at Divisa Capital, who explained “Under this type of system, the central counterparty will carry out credit line & trading approval processing, much the same as if it were a bi-lateral arrangement but in this case, all parties only have to carry out this process once and when a new prime broker comes to clear business for a new client to OTCX, there is only one firm, the central counterparty, which has to do anything.”

“This type of system would be a big relief to all the other prime brokerages on the platform, and additionally, it centralizes counterparty risk on OTCX and over the past 8 or so years, this is something everyone has to pay attention to. Since some platforms are US hosted, all of their business globally is matched in one location so all of their business globally is being competed for with a US matching engine, for example Currenex and Integral” Ryan Gagne, Sales, North America at Divisa Captial UK

“Other firms that have realized that regional matching engines are more efficient for end users or as I like to call them, participants” he said. “US based clients can still trade abroad to facilities like LD4, BATS/Hotspot made that realization and have made strides to come up to speed” he concluded.

Since then,things have changed dramatically and a massive attempt to regain the retail trading client base by exchange companies has taken place via huge mergers and acquisitions – even FastMatch has gone that way, away from its Credit Suisse/FXCM joint venture and well and truly into the hands of exchange giants.

As have many others including Hotspot FX, 360T and a whole host of similar entitites.

Quite simply the exchanges want the retail clients but cannot afford to give them cheap membership fees, and the retail FX sector wants to offer exchange trading and futures but is afraid of having to go into infrastructure production/support or moving away from that large Cyprus-based comfort blanket which is MetatQuotes.


Read this next

Institutional FX

Invast Global ramps up its offering with 10 soft commodity CFDs

Sydney-based prime-of-prime provider Invast Global has expanded its offering with the addition of ten soft commodity CFDs, which increases their index and commodity CFD offering to 35 instruments.

Retail FX

FF Simple and Smart Trades says Goodbye to CySEC authorization

The Cyprus Securities and Exchange Commission (CySEC) confirmed that it has wholly withdrawn the Cyprus Investment Firm (CIF) licenses of FF Simple and Smart Trades Investment Services Ltd.

Crypto Insider

Shining the Light in Crypto’s Dark Places

Something changed in regulators’ minds after the November crash of the FTX crypto exchange.

Executive Moves

Financial Commission Adds Sam Low to Dispute Resolution Committee

The Financial Commission (FinaCom PLC), a dispute resolution service that caters to the financial services industry, has appointed Sam Low as the newest member of its Dispute Resolution Committee (DRC).

Digital Assets, Uncategorized

De-facto owner of Bithumb exchange arrested in South Korea

South Korean prosecutors have arrested Kang Jong-Hyun, the anonymous chairman and owner of the country’s largest cryptocurrency exchange, Bithumb, on charges of embezzlement and stock manipulation.

Retail FX

Interactive Brokers volumes snap three-month losing streak

Electronic brokerage firm Interactive Brokers LLC (NASDAQ:IBKR) said its trading volumes rose in January, an indication that investor confidence in the financial markets is rebounding after having been fairly mixed over the past few months.

Digital Assets

VVF invests $5 million in Everscale, a potential Layer 2 solution for Venom blockchain

“For us, this is a strategic investment aimed at the technological development of projects and teams around technologies that we focus on and actively develop. In particular, we are talking about the Venom blockchain project and its ecosystem, which is planned to be launched soon and for which Everscale is a potential Layer 2 solution.”

Institutional FX

FXSpotStream volume ends string of declines on January rebound

Trading volumes on institutional FX platforms surged in January as traders increased their bets on central bankers’ policy with evidence mounting that inflation and economic growth are both losing momentum.

Industry News

DeFi firm Aurox launches SEC-compliant crowdfunding campaign on tZERO

“This is a great opportunity for us to raise capital from our community and the broader public on a leading fully regulated platform. We are confident that the tZERO Markets platform will provide us with the exposure and reach we need to attract a diverse investors to support our business growth.”