“Mind The Gap!” – The life and times of a man on the move Episode 95

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 ravishes of addiction

Whilst it is certainly the case that the odious association in the minds of some affiliate marketing-orientated chancers from third tier regions in the Middle East between gambling and retail FX is dwindling, there are still some smaller companies that seem to think that the way to run an electronic trading brokerage is by buying lists of gambling leads and then attempting to sell the heavily addicted and under-educated a dream, knowing that they won’t ask too many questions and will simply deposit a small amount of money and lose it within a second.

This is absolutely not what retail FX trading is about, and although most reputable firms have done whatever they can to distance themselves from the Israelis and island-based ne’erdowells who parade around with their shirts half unbuttoned, chewing and swaggering and talking about bonuses and deposit totals whilst displaying a flashing red light in call centers and cheering every time an unsuspecting prospect who knows absolutely nothing about FX and has been given the hard sell deposits $100, there is still an element of that around the ragged edges.

And that is without mentioning FX industry ‘lawyers’ (and I use that term loosely) involving themselves in gambling and binary options and fancying themselves as early 1980s pop stars.

Indeed, you may not ever see that mentality in London, Sydney, New York, Singapore or Chicago, but you certainly would in the filth-strewn backstreets of Ramat Gan, or the bleak no-questions-asked backwaters of Kazan.

Many of the nameless MT4 white labels that have continued to propagate damaging business strategies have been doing so in regions with introducing brokers being at the core of the retail FX business, specifically in parts of Africa and Asia.

I have spent a lot of time with many good quality IBs in South Africa, mostly around the Highveld region that surrounds Johannesburg, which incidentally is one of my favorite cities in the world.

It is a beautiful place, with some of the kindest and most friendly people anywhere, an enviably high standard of living, great opportunities, amazing food and absolutely first rate modernity.

However, like many nations where an interest in a specific type of investment suddenly becomes widespread, there have been some companies that have gone into South Africa with bad intentions and created a nasty aftertaste.

At some of the FinanceFeeds IB Seminars in Johannesburg, I have spoken to many IBs who in many cases manage the funds for clients, or use automated systems that they have programmed in order to trade MT4 accounts on behalf of clients, and many of them have told me similar tales of woe about the same small FX brokers that have taken the monies deposited by IBs, leaving IBs to answer questions as to why their clients cannot withdraw.

This week, I received a series of photographs from a neighbor of a member of the South African public who typifies exactly this demographic – an inexperienced trader who has addiction related issues and has been sold a dream, hence moving from the slot machines of Montecasino and the online gambling world operated thugs from the rented concrete crap holes of South Tel Aviv to the retail FX platforms run by the same type of people.

The photographs, and the comments that went along with them were quite shocking.

I approached some colleauges in the retail FX sector who were not surprised by the photographs, one particular well respected sales executive told me “Yes, this is quite common, especially among managed accounts”.

When I expressed surprise, he said “Yes, people with addictions often place all their faith in managed accounts operated by people with similar addictions. A lot of the poor quality boiler-room type brokers know this, and they prey on these IBs who have addiction problems, and then encourage them to recruit clients with similar issues, or buy gambling leads and give them to an IB to convert to sales, then rinse the accounts dry, meaning no need to pay IB commission, as the commission is part of the MT4 account, and then several accounts can be rinsed dry in one go.”

Quite disgusting really.

At a conference in London three years ago, a rather obnoxious Israeli salesman who is based in Cyprus addressed some of the institutional liquidity providers and talked about bonuses and casino-style ‘gamification’, resulting in a London-based institutional FX sales executive to vocally express his disdain for this mentality. Approximately the words were “Don’t come here to London and talk to us about bonuses and gaming. We have done everything we can to keep away from all of that seedy world, and the FCA would go nuts if they thought anyone here was even entertaining it.”

In the case of the photographs that I received this week  showing a graphic example of the result of this, the young man concerned had commented “$5000 and wife all gone because of forex”.

Having lost $5000, he then took a blunt instrument and proceeded to destroy the interior of his home, in quite a comprehensive fashion.

We must not be fueling the addiction of people who should not be trading. It is not what our industry is about. Our industry is the constant fruit of the hard work and incredibly clever thought of its dedicated and tenacious leaders.

We are the beating heart of the financial technology and electronic trading sectors, in which innovations from the OTC derivatives sector eventually filter into the mainstream financial world, rather similarly to Formula 1 racing car technology which costs millions to develop and keeps design teams working night and day to strive for the next, most accurate and refined piece of technology to win highly competitive races by fractions of a second that finds itself standard equipment on an ordinary $10,000 hatchback just a few years later.

We should be proud of our achievements as a global industry and look favorably at the enthusiastic manner in which all of our professionals in all sectors and capacities are highly committed to their work, and to continual further development into higher levels of trading environments such as the inclusion of multi-asset exchange traded futures, the adherence to regulations via fully automated technology and the cost-effectiveness of good quality execution that has come about from years of honing and development.

I have said before that lead recycling, churning and approaching irrelevant client bases is not just bad for the public and the reputation of electronic trading, but it’s also a race to the bottom for the brokers engaging in it.

Most importantly, however, aside from the 1231 near-identical MetaTrader 4 retail entities that currently exist, is that the execution model required nowadays means that brokers should do what brokers are supposed to do – charge a commission for processing trades to their liquidity provider and provide their clients with an aggregated price feed consisting of prime of prime liquidity from Tier 1 banks and non-bank market makers.

This is excellent for customers if conducted correctly, but means that brokers pay a dollar-per-million charge for their liquidity management system and market liquidity, and can charge a commission rather than have the vast margins that had been the case within so many smaller brokerages several years ago which resulted from the profit and loss model that many operated.

The brokers that came to market in the middle of the last decade with a profit and loss model (living from client losses) were never able to gain market share among quality jurisdictions where the established competition was already operating a good quality trading environment for clients – and rightly so, nobody laments the passing of firms which do not have their customers’ best interests in mind – instead coming from the affiliate marketing and media buying sector.

Now, many of those entities have adopted proper execution, facilitated by the market infrastructure specialists and prime of prime brokerages that serve the retail FX industry, but their marketing techniques in many cases remain in the mid 2000s, and in the retail FX industry, the mid 2000s is akin to the dark ages.

The fact of the matter is that high CPA of today requires ambitious goals when it comes to the client base, which means having enough available funds to embark on large marketing operations and have a unique value proposition to lower the CPA.

The quest for differentiation may also lead to the in-house development and maintenance of proprietary software despite the obvious costs because in addition to promoting their own platform to their clients and increasing the rate of client retention as they grow accustomed to an environment they will not likely find elsewhere, these brokers can also reduce their costs or even make profit out of offering white labeling solutions to other firms.

Simply, buying leads and hoping for sales calls to convert them into live clients is futile.

This is because the same leads are being recycled between brokers, the same leads are being targeted by firms offering similar propositions, and the media buying cost vs the actual conversion rate is as low as 1% in the retail sector.

Hence, one-off retail clients from non-aligned countries, with very little capital and in some cases no chance of being able to satisfy compliance requirements are depositing between $500 to $1000 as a first time deposit, and the cost of acquiring the customer is now past $1500, with a lifetime value of just three months.

Whichever way that is viewed, it is a loss.

One of the reasons for the high cost and lack of efficiency is that, according to two London-based media analytics firms that have provided digital marketing data to FinanceFeeds, the potential customers are in many cases no longer potential customers because these are leads that have been to over ten brokerages, hence the same people are being bombarded by the same calls from almost identical companies, and many have lost their initial deposit with the first company, and are therefore now worn down by the repetition of calls.

Anyway, for those who really want to see, here is the graphic and quite disturbing imagery that I viewed this week. Even more problematic is that many people have seen this before many times.

Let’s keep the good standards up, and continue to flourish and empower, and distance ourselves from the underworld as much as possible.

Mind how you go, and wishing you all a super week ahead.