“Mind The Gap!” – The life and times of a man on the move Episode 42

Monday: Is it about responsibility or restriction?

This week’s furore which was created by the Australian non-bank financial markets regulator ASIC, centering on issuing notices to brokerages not to onboard overseas clients has raised many eyebrows across the region.

Australia’s very well recognized and respected regulatory framework has been held in high esteem by retail brokerages and institutional partners across the world, largely, and quite rightly, due to its highly advanced technological integration with the brokerage industry, demonstrating an understanding that most ‘blazer brigade’ authorities lack in the electronic trading industry.

ASIC also carries the self-earned accolade of being very well organized, properly run, very strict yet able to facilitate a great quality trading environment for companies which get it right.

Add this to a region which has one of the best economies and talent bases in the world, top quality leadership and is on the doorstep of the all important Asia Pacific region and you have a winning formula.

Then there is the 500:1 leverage, which carries this winning, reliable formula of high end brokerages and leverage which suits very high asset-under-management MAM users in mainland China. This is a clear reason why Australian brokers have done so well recently, compared to the downturn elsewhere.

I was asked this Monday by a prime of prime brokerage executive in London whether volume data can be obtained, to see if any of these rulings can be correlated to impact on global retail trading data.

Right, but under the almost all the west regulator, you are not allowed to freely choose. Just what the great leaders decided on your behalf. Let´s see the inconsistency – CFDs and leverage on FX are restricted on US. However, you can trade intraday E-mini S&P 500 futures contracts with a mere $400 collateral. So, on futures a 300:1+ leverage isn’t a problem.

My response was that yes indeed it can, and that overall percentages show that that Japan still represents 30% of all retail volumes but they are internal to Japanese market only. The leverage restrictions that took place in the highest volume retail trading environment in the world almost 8 years ago made absolutely no difference.

Other than this basic yardstick of where volumes are distributed, most volume reports are really not genuine because many firms report double or triple or both ways to try to bolster it.

Thus, it is very hard to know how these new rules will impact firms on a statistical basis, but one thing is for sure, and that is the tide is turning when it comes to easily being the region of choice for Chinese order flow.

Those days are long gone.

Tuesday: Where next for retail?

Whilst in the City, at a meeting near Bank station this Tuesday, the conversation regarding Australia’s plans continued and was resounding across London, right the way around the other side of the earth.

“As I pontificate the state of the ‘industry’ – essentially considering the recent events in Australia and generally with the regulatory agenda” a colleague told me over a morning coffee. “The observation I draw is to observe that the industry is progressing in developing tools for the broker. That means more efficient methods to extract dollars per lot, be it better LPs, efficient bridges, risk management tools, onboarding, more offerings in technical trading [graphics, execution choice, prettier colours] lower spreads, EA options and API links” he said.

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Said colleague is a senior algorithmic trader at a London prop shop.

Another learned colleague explained “this is more ‘product’ development, as the core focus remains in developing better product, does that follow to make a better trader – I dont see that link.” This particular professional is a programmer within an Australian platform company.

“Thus, a ‘better trading experience’ is not aimed at making a ‘better trader’ so, in this space of ‘better trader’ it is more the educators which is about 2 things, the first being teaching the trader about the tools, leverage, platforms] and secondly behavioural platforms” he said.

“The first one in my opinion is a about the ‘product as it simply aims to enlighten the trader in how to use the ‘product’, the second is about making the trader a better trader which I suggest will be marginal in the aggregate which won’t turn the main metric which is the retail win loss ratio. There is also the adoption rate, and persistence in using it, once rules learnt by the trader the drop off rate and it costs brokers at many levels to offer this product” he said.

“I suggest these digital behavioral platforms being adopted by brokers simply to be seen to offer a tool, more to show the regulator than as an effective means to make their traders better [but that is simply the cynic is me]. The adoption rate is the key metric here as the platforms could simply be hidden in the dross in the broker platform, for example some Australian brokers only offering educational and behavioral platforms to European clients where leverage is low, seems rather meaningless other than token economics” he explained.

“Therefore, I wonder that ‘to make a better trader’, what does the broker have to offer? If such platforms or extensions to platforms [external tools] exist, will the brokers adopt them? Maybe the tide is changing as brokers search for new meaning in their business model which means, as you have said often, expanding product ranges toward multi-asset, self built platforms, but multi asset platforms is simply a better ‘product’, better spreads [product] transparency [product], research [product], API [product] and transparency is a great something, but in the end, to make a better trader requires more and the end point is more about the trader achieving their trading objectives, not just a better journey” he quite rightly said.

“So in these times of the plague descending on the industry, as some neanderthals move to the islands, maybe something will emerge to evolve the platforms but I sit and wonder, of the 4,000 MetaTrader-based generic marketing platforms, how many are looking at evolving to a platforms that makes the trader a better trader, as making a better product has not worked?” he said.

These are basically re-organizational times, and just a few days before this very interesting meeting, I discussed with DevExperts just up the road at Waterloo how their newly expanded London base is looking to provide comprehensive retail platforms to retail brokers, which are fully multi-asset and totally custom. Yes, it will cost, but investment in the future and away from the off-the-shelf and inflexible MT4 is the only way forward.

Yes, that is a company which designs platforms for banks and specialist hedge funds, but surely that is the way the retail sector in the electronic trading business needs to now go, and wave a very distinct goodbye to high leverage and zero-control island based affiliate platforms.

Wednesday: Talking about leverage…

Heading down the A3 last week with the Square Mile in the rear view mirror and magnificent Richmond Park separating my rear window from the civility of Central London, the autonomous driving system was engaged, so I was able to pay attention to a notification from an astute observer of the current draconian stance by regulators on leverage.

Whilst my own personal view is, and has always been that leverage should not really be part of trading, as high leverage has really been the brainchild of b-book marketing-orientated MT4 you-against-the-house entities that do not operate a live or correct market, hence their bounding off toward the Caribbean and the Seychelles rather than improving their experience.

The message, sent to me by a very experienced Chicago-based listed derivatives trading company owner, was responding to research by FinanceFeeds on ASIC’s letter to brokers in Australia warning them not to attempt to circumvent the new restrictions on offering CFDs overseas.

“Right, but under the almost all the western regulatory structures, you are not allowed to freely choose. You are only allowed to do what the great leaders decided on your behalf. Let´s see the inconsistency. CFDs and leverage on FX are restricted on US. However, you can trade intraday E-mini S&P 500 futures contracts with a mere $400 collateral. So, on futures a 300:1+ leverage isn’t a problem.”

That is a very good point indeed, and once again points to the notion that the exchange and listed derivatives giants of Chicago, and probably London and Sydney too – both ASX and London Stock Exchange are highly influential and want the 30 years worth of retail trading back that they are unable to attract due to high costs, massively higher latency, slow technology adoption, and inability to offer a competitive service to retail traders.

It has been suggested many times by several senior executives in our industry that the good quality, regulated environments such as London with its 30 year established, publicly listed and totally transparent FX and CFD firms with their own very high quality infrastructure – has anyone had a chance to look closely at CMC Markets’ Next Generation platform? It cost $100 million to develop and is outstanding – have very loyal client bases and are well and truly dominant in the retail world, so why the regulatory interest?

Why not nail the island based fraudsters offering massive leverage in a casino-style lead churning telesales model, who aren’t regulated and don’t mean well?

The reason is that the FX and CFD business in its genuine form is a technological powerhouse, super efficient, now vast and offers clients what they want, that being very cheap and very fast access to live markets with excellent customer service and very high quality user experience. New entries such as Revolut and Dabbl are now forging the next generation ahead, which clearly will not only take business from the derivatives exchanges but also from the banks.

XTX Markets, a mainstay of our non-bank FX industry, is now the largest liquidity provider in the world, higher than the Tier 1 banks. This is telling indeed.

The wood-paneled Paternoster Square walls will probably echo with the commentary that high leverage on exchange listed products is not so risky as there is a central counterparty.

But leverage is leverage, isn’t it?

Friday: Happy holidays to you all

A night flight and a 300km drive to a remote and biblically significant region on Friday morning set me in stead for Passover, the annual week long holiday in which celebrate the exodus from the land of Egypt some 2000 years ago, having prepared for it by purging our homes of leavened products.

This year, Passover and Easter fall on the same day, meaning that many of us are now giving thought to the different meanings depending on our individual ethnicity in this fabulously international business that we have the privilege of being leaders of.

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If any reflection on any form of exodus in modern business which can be related to the exodus from Egypt all those years ago can be made, perhaps it should be on the need to free your brokerage from dependence on restrictive, legacy platforms and move toward the ‘exodus’ and freedom of having your own, well deserved trading infrastructure.

Why is this night different from other nights? The markets are closed, and time to look ahead is of the essence! Let’s build forward!

Wishing you all a super holiday period and a great week ahead!