“Mind The Gap!” – The life and times of a man on the move Episode 41
Brokers need to fork out a small investment to preserve and expand, Private Ryan can be saved, It’s all over for Aussies in China, and what is GKFX doing in London?
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.
Monday: China Crisis. Not the one from Liverpool.
Monday’s interaction with some very knowledgeable professionals that have been doing considerable amounts of good quality business in the Asia Pacific region demonstrated that for most retail FX firms that are not of either Chinese origin or have specialist, wholly owned Chinese entities, the end of the road has been reached.
It was of course inevitable, as China is very much its own massive economic universe, completely isolated from the rest of the world due to the communist national structure, yet vast and totally self sufficient on every level.
Importing and exporting of foreign products runs absolutely counter to the core ethos of communism, and this most certainly applies in China which blocks the internet from its populace, providing its own government-supervised and highly sophisticated electronic framework which employs over 2 million civil servants and is totally integrated into every aspect of life from buying newspapers at a kiosk to conducting mergers and acquisitions.
The government’s all seeing eye knows everything. Every person’s daily life is remotely viewed, the data it creates being the absolute property of the government and a main source of instilling the single-party state’s absolute power over its own domestic borders.
There are very few single party, communist nations left, largely because most of those that adopted it in the 1920s have not been able to empower their populations and have been exposed as anti-business and anti-freedom, leading to free market revolutions and amalgamations with other nation states, however China’s system is incredibly self-empowering for Chinese people in all strata of society, and blocking foreign business and influence is in their interests.
Until recently, many retail FX firms have made tremendously successful business enterprises in China, largely having done so via networks of local partners, whilst maintaining the client bases and trading activity from their non-Chinese base, mostly in Australia, Canada or the UK.
Australian FX firms have been absolute benefactors from the vast amount of Chinese managed FX business that portfolio managers and introducing brokers like to place with reputable, long established non Chinese FX firms, largely because of Australia’s commercial and social alignment with the Asia Pacific region, its high standing as a location for extremely well managed and well regulated brokerages, ASIC’s deservedly good reputation as a modern and technologically advanced regulator that actually understands our business, and 500:1 leverage.
Chinese investors who entrust their local IBs with large portfolios which are often traded automatically via MAM accounts by the IB’s permanently employed brokerage staff, absolutely trust large Australian brokerages, and as a result, many of the firms in the Antipodes have made hay where the establishment in other regions have recently suffered losses.
It was inevitable, however, that the Chinese government, which internalizes every aspect of business from manufacturing to finance, would eventually draw the line according to its existing premises, that being very simply that if your company is Chinese, feel free to expand, develop and prosper in China.
If your company is not Chinese, however, it’s curtains.
This is not an assault against the FX industry, it is simply China’s assertion of its communist policy that applies to all other business sectors.
This Monday, ASIC’s data reporting rulings came into the conversation. “Given the ASIC directive on offshore retail clients as well as new data reporting, hands up who broke the law” said one brokerage executive in Sydney. “All of em, as everyone has a China desk via IBs” he said.
“The music hasn’t slowed down, so to speak, it has stopped. This is the end. Well not quite the end as there is more to come in product restrictions. Clients loss percentage justify selling these MT4 products as they is suitable to retail clients in the eyes of many. Forget retail for FX, go institutional and multi-asset as you have been calling” he said.
It certainly appear that ASIC itself is beginning to assist in putting an end to IB-based business from China.
There are now two choices. Either be a Chinese company, or go multi-asset in the free market economies and offer a larger product range suited to the middle class investors in Western nations.
Tuesday: The guns have turned
There is a considerable amount of dissent from some of the platform providers and technology developers with regard to the lack of advancement in retail platforms and therefore the inability for retail traders to advance their own cause, which in turn leads to an obsolete market which does not provide for good quality client bases, only for lead churning and house vs single-deposit CPA.
This Tuesday I met with two developers, one from a specialist platform provider which makes institutional trading tools, and another from a large, well known electronic trading technology provider that provides bespoke platforms to investment banks in London.
The conversation began with one such professional explaining “The current status quo is rather like the opening 9 minutes of Saving Private Ryan, particularly the Omaha Beach scene where retail traders were guided by brokers [or IBs] in the German machine gun nests to get slaughtered” he said. “Nowadays, however, it is now the brokers who face the onslaught, but the ‘Germans’ [Europeans] manning the machine guns are the regulators.”
“What a good trading experience they were having crawling up the beach getting hammered, but some marketing departments in some of the white label brokers would show blissful beach scenes, with retail traders sitting in the sun with a cocktail” said the other programmer.
“There is blood in the streets at the moment, but many brokerages and their clients cannot see it yet. Think of the lower end brokerages from New Zealand or operating offshore with Australian ownership therefore being able to tout an ASIC license as you reported last week, bragging ‘openly’ that they are going to Europe with Easter Show bags of goodies for the great unwashed. 500:1 leverage with a reputable regulator, so the regulator now is on Border Patrol and watching for those attempting to do this in Europe. “We determine who will be let into Australia” the political overlords say and so any immigrant [offshore retail traders] must be detained at the border which is draconian to say the least” he said.
“Brokers still seem to think they have to right to slaughter the great unwashed retail trader which is a misguided output from predatory capitalism and a misuse of any form of capitalist economics” said one of the intrepid software engineers.
“Although I did notice an interesting event” said the other. “Skilling.com which is a retail margin broker starting out to state to retail traders that FX trading is made easy, and is backed by VC money, therefore either the VC sees that a retail broker can seek and create opportunities [with a slick marketing catch cry] and that all a retail broker needs is a capital buffer, plenty of capital to ride out this epoch to then have greener pastures to troll for the fish, rather like the scene from Forest Gump with the shrimp boat in that nothing will change, just last person standing, or the VC is dumb money thinking retail FX margin broker model is easy money in a short space of time, which it is not.”
“Therefore for VC, the second best decision is to buy into a retail FX margin broker, the best decision was to get out like the VC who funded Pepperstone which is a highly successful company, and got out a few years ago at just the right time, however think of the VC who bought into Plus500. This is really a bad example of what I am suggesting. Some got out, but some stayed and doubled down on a bad trade like the retail trader is taught to do here – the Martingale trade!” he said.
Thursday: London will lead the platform revolution
Sitting under the arches at Waterloo train station on Thursday this week with a highly experienced FX industry senior technology developer who has just become responsible for the company’s entry into London’s retail and professional brokerage scene, it is absolutely clear that for those brokerages which want to free themselves from the shackles of MT4 and the Cyprus-base merry-go-round that controls their IP and their business model, London is the place.
I have been saying for many years now that in no other software-dependent, technology led business sector, literally hundreds of companies would allow an island-based monopolist to control their entire client bases, intellectual property, product range and corporate direction via 14 year old legacy infrastructure.
The mere notion that most small to medium sized retail brokerages are utterly dependent on one man, and whose product range cannot be expanded to onboard a higher quality of client in Western nations via multi-asset trading, is anathema.
My conversation with this particular professional, whose opinion I value very highly and who understands our business very clearly indeed, was indicative that London’s brokerages and hedge funds, along with the banks and prime of primes that work with them, as well as a discerning domestic market customer base which will not tolerate the ‘rigged casino/marketing CPA’ means for which MT4 was initially developed, will forge the next trading environment for all brokers.
“Andrew you know well that MT4 was never designed to be an open platform, and was from the outset intended to be used for people from any marketing sector to get any leads from anywhere (not traders, just any leads) and then take their money and tell them they lost. This, as you’ve been saying for years, is not part of our industry” he said.
Quite right. When I asked for a measure of my opinion that now is the time for even the most dogged and stubborn island-based brokerage to begin to realize that carrying on down the same route is equal to obsolescence, my colleague said “You are right and have been for some time. We are now seeing that this is the time to approach retail brokers and ask them to begin to invest in their future.”
“Many have the capital base now, and can either do the wrong thing and cancel their license, move their registration to some offshore unregulated region which is not the way to move a business forward, or they can spend something like $300,000 and have a custom platform developed, which will help them maintain specific, loyal customers that are actual traders with good knowledge and portfolios rather than getting inexperienced telesales people to grab arbitrary deposits from people who should never be trading” he said.
I agree totally. The problem to overcome this far has been the commercial idleness of some of the smaller to medium sized MT4-dependent brokerages which are not based in financial markets centers and whose leaders do not understand our industry, and have not invested in any corporate infrastructure, technology or product range, instead turning the handle on CPA-based deposits before running away after a few years with no exit.
This is not how a financial technology business should operate, and now the crossroads is ahead, with brokers needing to spend something like $500,000 to get a custom platform of their own from a proper British technology company whose main clients are banks and hedge funds.
This breaks down to $250,000 to $300,000 for the platform and then a further amount for internal support, server farm installations and proprietary databases.
Ergo, this would be a scaled down version of the same type of topography that I used to work on at banks and management consultancies for many years, even before the retail FX market existed in its current form.
“I see now there is an interest in going down the multi-asset and custom platform route from retail brokers, as finally they realize that it is time to make the investment to diversify and preserve their business from oblivion” said my colleague.
“I have even found that some of the Cyprus-based firms that are hellbent on marketing-over-substance white label models are now starting to understand that they have to change their ways and move to a trading system that is more suited to better quality clients in regulated regions and gives them longevity and control of their own business” he said.
This is very encouraging indeed. “I find that most of the firms on the islands do not care about liquidity management or trade execution, or maintaining long term client bases, they see some revenue from their lead marketing and they don’t bother looking ahead, hence they cannot scale their businesses and end up with a terrible reputation” he said.
This pretty much echoes my own experience. “Now, even some of the firms that would have held that view a year ago, mainly firms that will not spend one cent on anything unless it is lead acquisition, are starting to realize that they cannot go on taking small deposits from inexperienced non-traders in third country jurisdictions and then living from these deposits before trying to get more from the same diminishing pot of conflicting interests, and want to spend a small investment to get their businesses to a proper trajectory” he said.
This whole conversation was very refreshing indeed, and London’s developers are the ones that actually know how to build trading infrastructure.
My opinion is that if a broker with a good capital base wants to stop kowtowing to an external party that does not really belong in our industry and wants to become a genuine financial markets facilitator with its own IP (and subsequently perhaps publicly listed stock) then $300,000 is well worth it. Let me know if you’re interested, and I’ll put you in touch.
Friday: What is going on at GKFX? Something, or nothing?
GKFX is a force to be reckoned with. It is a very large retail CFD and FX firm, which may well have its origins in strictly regulated Turkey, but has expanded across the United Kingdom, and perhaps more importantly, China.
GKFX is a massive market participant in China, and has been for several years. Many of my trips to the offices of medium sized introducing brokers (IBs) in second tier development cities across China has revealed longstanding and unshakable relationships with GKFX which was (until China began asking some of the bigger firms like FXCM to leave) the fourth largest international FX representative in China.
Indeed, they have done well and continue to appear to do well however a rather odd message appeared via email on Friday.
From what I can gather, there is no truth in it, as it cannot be verified and I have contacted GKFX UK CEO Rob Woolfe to ask his perspective on it, however he did not reply.
The email notice in question denotes that the firm has ceased to onboard UK clients, however there is absolutely no notice to this effect on the company’s website.
If, however, you (like me) are based in the UK, and operating from a non-VPN, direct IP address, and you try to open a demo or live account, it will not let you, something that has been equally verified by several British colleagues of mine.
As GKFX UK did not reply to my question on this matter, speculation has begun to mount.
Perhaps the firm will use its UK FCA license and office to service its vast Chinese client base. Chinese IBs trust GKFX very highly indeed, and an FCA license and London address goes a very long way in the esteem of Chinese commercial partners.
Perhaps the firm does not want to handle the CFD related leverage wrangling, however considering that the FCA finally began to listen to sense and have stopped penalizing perfectly good FX firms, that is unlikely, and why would any firm with a long established London office decide to service ESMA-jurisdiction clients from… ahem…. Malta?
You could, of course, blame “Brexit” as this notice does, but that is absolutely a smoke screen.
Post-Brexit, it is not as if all of a sudden the vast retail FX and CFD market in the UK is going to go to Greece or Italy, is it?.. That would be like selling an immaculate, mortgage-free white-columned mansion in Kensington and taking a mortgage from a failing bank to buy a dilapidated barn in Organi and then expect your entire family to invest in its regeneration.
Perhaps it is not genuine, however it came directly from the firm so therefore it is difficult to rule out originality. If I find out more, I will be sure to report it in its factual detail.
If only there was more transparency. That’s what is needed. That and a good quality multi-asset platform.
Wishing you all a super week ahead!