“Mind The Gap!” – The life and times of a man on the move Episode 8

Revenue share rip-off, Bob Dylan and London’s eclectic musical history, CEO earnings and fusion cuisine, the cheap way to travel, and do you live in a Tipi or an apartment?

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: The rev share stand-off

Q: How do you get absolutely nothing done and pay for no service?

A: Stick rigidly to revenue share agreements.

This may appear mildly sarcastic, however it is such an elementary mistake in modern business that really needs ironing out.

On Monday, my long-held thoughts were compounded whilst having a casual conversation with two service providers whose firms collectively provide ancillary solutions on a business-to-business basis to retail FX brokerages.

Our conversation took place in Cornhill, one of London’s most famous and long established financial industry locations, and it was not long before the moot point of remuneration models was raised.

Certainly, this is likely to resonate with many executives, especially those who have committed substantial time and effort toward developing genuinely innovative systems and solutions which expand the appeal of retail FX platforms and therefore benefit brokers – ironically usually those who have never committed one R&D dollar toward developing their own trading environment.

Thus, there is a correlation in my opinion between the current lull in forward progress within the retail FX sector in terms of attaining new client bases and expanding the product range and the way in which service providers are remunerated by retail brokerages and in some cases the liquidity providers that serve such brokers.

Ever since the arrival of MetaTrader 4 some fifteen years ago, the influx of affiliate marketing networks into the retail FX business in massive numbers created a top-down addiction to revenue share models, which have been vigorously applied to every aspect of commercial interaction between companies throughout every component of the entire business.

In an ideal world, this is how it should work. However, it doesn’t

This is not healthy at all, and adds to the lack of value experienced by many retail FX industry participants, creating a double-edged value reducing situation.

My colleagues in Cornhill and I discussed this at length this Monday, and concurred that several aspects of the omnipresent revenue share model are counter productive to modern business relationships.

Firstly, the dominance of third party platforms which are remunerated on volume/spread charges rather than per-seat license fees has turned the retail trading business into a revenue share model in itself. MetaQuotes therefore holds all of the intellectual property of 85% of the retail FX brokerages in the world, hence, as I have mentioned previously, by default created an environment where not one brokerage using such third party platforms has been able to list its stock on a public exchange regardless of size or revenue, because any due diligence inspection prior to IPO would note that a firm whose intrinsic value is on someone else’s platform is not able to be valued for sale.

The current environment demonstrates that very clearly. All of Britain and North America’s large retail trading firms in all sectors are publicly listed companies on major exchanges in major financial centers such as London and New York, whereas every MetaTrader -based brokerage is privately held, even though some of the large ones with offices in Australia, the UK and Cyprus have up to 15 MetaTrader licenses and revenues of over $500 million per month, easily outstripping the trading revenues of some of the largest three-decade-established household names.

No doubt there have been attempts to list, however none have come to fruition, my guess being that there is nothing to value if the client bases and platforms are owned by a third party.

This in itself should be enough to dissuade companies from employing revenue sharing models in other aspects of business.

Many firms, whether facing a retail audience or selling liquidity to retail brokers, still attempt to enter into non-committal revenue sharing agreements with vital service providers.

Introducing brokers are often given the short shrift by not being paid retention fees, hence many are continually chasing their tails to provide the business that the retail firms want (batches of customers in specific locations in one go without having to gain them via lead purchasing or individual sales efforts) only to be remunerated on paltry revenue shares and then discarded when no new customers arrive, with the customer base then becoming the property of the broker.

Suppliers of vital B2B services and commercial introductions often approach brokerages with a partnership proposal that makes perfect sense, even by offering shares in the firm so that a common interest for the common good can be engendered, only to walk away with a non-committal revenue share deal, which is really a way of saying “We will sit here, you do all the work, we will invest nothing, and if something comes in we’ll give you £1.”

This is no way to do business and no way to bring quality results via long term partnerships.

In the institutional and interbank sector, outsourcing of certain services became massively popular in the mid 1990s, and whilst providing contract services to companies which included BT Radianz, UBS, Macrovision, PriceWaterhouseCoopers and PA Consulting to name a few over the 18 years in which my consultancy firm existed, the modus operandi was to pay consultancy fees on a monthly or daily basis for specific services.

Back in 1998, whilst working on a server migration for Bloomberg in London, I can recall SAP engineers being supplied at £2000 per day with SAP being on a long term renewable contract. The same applied to other outsourced technology providers. PA Consulting had a contract with Barclays to develop the 3G mobile terminal for its trading desks, with 1000 staff working on the project at PA’s Cambridge Science Park facility in 2001, all paid for by pre-determined annual contracts.

BT Radianz operated on the same principle during my tenure there and also offered outsourced services which extended way beyond hosting before its acquisition by Radianz which included service desks for banks and building societies, all of which were remunerated monthly and subject to specific service level agreements.

In the early years of this Millennium, Steria, Capita IT Services, Fujitsu-Siemens and Accenture began providing outsourced solutions architects who would be on site at the financial institutions to develop and support internal systems. No revenue share took place otherwise such firms would never accept the tenders.

The only way for the retail sector to elevate itself from chasing the same leads and getting into the same rut is to genuinely emulate the institutional business and actually properly partner with suppliers and outsourcing firms via conventional norms such as software licensing fees and consultancy rates or investment in partners. Revenue sharing is a dead model and is, rather like the M25, a long road to nowhere.

Tuesday: Not just a financial capital, but a global music capital too

There is no doubt that North America’s contribution to the world of music and arts is vast and all-encompassing, all the way from ballet and classics to post-music hall jazz in the 1920s, through to the creation of rock and roll in the 1950s and then onto popular music of the 1970s and 1980s, rap, hip-hop, house and dance music leading to street names in Chicago echoing pioneers of the genre, to today’s varied and global music scene.

However, there is really only one music capital, where culture and music is centered in one place, and that is London. Yes, other parts of England have tremendous music scenes and have made iconic contributions, however even fifty years ago, the Beatles did not remain in the Cavern, Liverpool’s tiny and crowded nightspot, instead venturing to St John’s Wood’s Abbey Road just outside Regent’s Park to allow Brian Epstein to produce what are now world-famous odes to the first ever boy band.

One of the photographs displayed in Daniel Kramer’s new book

The outlines of the Beatles do not adorn Sefton Park, instead being part of Abbey Road’s signage. Classics, pomp and circumstance are also very London-centric, this Tuesday being another night at the Proms, which made itself noticeable via the windshield of my car whilst driving past the Albert Hall as the line of elegantly dressed attendees lined up along the main streets of South Kensington.

This Tuesday, London’s musical contribution was reinforced in my mind when walking past Waterstone’s in Regent Street, which displayed a new book by Daniel Kramer capturing Bob Dylan’s transformative “big bang” year of 1964-65. Through vast concert halls, intimate recording sessions, and the infamous transition to electric guitar, nearly 200 images offer one of the most mesmerizing photographic series on any recording artist and a stunning document of Dylan and rock’n’roll history.

Bob Dylan may well hail from Duluth, Minnesota, and had enjoyed enormous fame and a cult following in his home country, however London adored him and many of his critics and observers were British, writing odes and memoires from their studios in arty Notting Hill.

Daniel Kramer himself is, rather like Bob Dylan, American born and Jewish. His attraction to, and understanding of London’s place as a world center of culture is apparent in his profession, having been appointed Artistic Director of the English National Opera in April 2016.

Daniel Kramer’s book release in London and its pole position in the windows of London’s premier book sellers in the West End’s theater district demonstrate London’s passion for iconoclastic influencers. It is this combination of arts, culture, modernity and business prowess which has been built on the recognition of leaders from all over the world that have influenced London’s landscape that makes the city one of the most cultured and sophisticated on earth.

Long may that continue.

Wednesday: It’s a great time to be CEO of a listed company – but also to work for one!

Hopping off the Northern Line at Moorgate on Wednesday alerted me to another metric that shows London’s business environment is continuing to go from strength to strength at large corporate level.

The interest by fellow commuters as I observed the usual morning’s digestion of free tabloids picked up from stands at London Underground stations appeared to be very much centered on a report that was issued that morning showing another increase in the remuneration packages for chief executives of listed companies in London.

The general consensus of the report is that pay for chief executives at Britain’s biggest listed companies rose more than six times faster than wages in the wider workforce last year as the average CEO’s pay packet hit £3.9m.

Chief executive pay at businesses on the FTSE 100 index surged 11% on a median basis in 2017 while average worker earnings failed to keep pace with inflation, rising just 1.7%, according to the High Pay Centre’s annual review of top pay.

Thousands of venues like this exist, and are continuously inhabited by under 30 year old middle management

The left-leaning press managed to make the usual comparison that gives the impression that the gap is widening between the C-level decision makers who have shareholder responsibilities and vast corporate empires to manage and middle managers, which is quite simply not the case at all.

The Guardian, a notorious anti-business and anti-capitalist organ stated that an employee on a median salary of £23,474 would have to work 167 years to earn the median annual pay of a FTSE 100 CEO– up from 153 years in 2016, the report showed. The gap between bosses and workers widened despite government efforts to hold companies accountable for runaway pay.

The reality is that in today’s Central London, prosperity is noticeable in every area in every sector. I lived in Central London for 12 years, and in 2008, things were very different indeed. Today’s Central London retains that intrinsic high-end sophistication but the then-middle class, very ordinary offices, establishments and residential areas have given way to a whole new array of modernity. 25-year old career seekers in 2008 were perhaps grabbing a quick snack and then back to an anodyne office to make ends meet.

Today they adorn fusion restaurants, are as well versed in global commercial culture as their seniors, and live in ultra-modern apartments which put most other cities in the world to absolute shame.

Put simply, lifestyles for the middle earners and young highly educated people at the beginning of their careers has escalated tremendously in just a decade and a half.

Yes, CEOs of listed companies are being remunerated highly, but that is clearly a testimony to productivity and the continued even keel of most British FTSE listed firms. Professionals from all over the world flock to work for them, which leads to further prosperity at every level.

Andrew Ninian, director of stewardship and corporate governance at the Investment Association, which represents major fund managers, said on Wednesday “Investors have repeatedly highlighted their concerns with excessive CEO pay, so it is frustrating that the message does not appear to be getting through to some FTSE 100 boardrooms. This year we have seen more FTSE 100 companies get significant votes against their remuneration reports than in previous years.”

It is perhaps not obvious by looking around, but subtlety and sophistication has replaced the gregarious, in-yer-face nouveau riche of 30 years ago, therefore the size of one’s bank account in today’s London or New York is not gauged by how much of the sun’s light is eclipsed by giant wallets and on-display lifestyle accessories.

Intelligence, modernity and innovation have replaced decibels.

Indeed it was possible to make a £1 million annual remuneration in pre-stock market crash London. Before Black Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin, it was possible to rise from teenage pennilessness to extreme wealth within just one year in London.

The bleak 1990s passed, and the global towers of strength rebuilt their vast institutions.

In 2010, in New York, a first-year trader generally earned an annual base of slightly more than $64,000 with a bonus that brought total compensation to approximately $85,000.

Commodity and currency traders median wages, according to the U.S. Bureau of Labor Statistics’ 2010 survey, were $60,980 per year with a median yearly salary of $104,000 earned by the top 10%.

Firm profitability and trading volume still today makes a big difference to bonuses. Experienced traders at a major trading house can make base salaries of approximately $100,000 to $120,000, with bonuses bringing them to $150,000 to $250,000 or higher in total compensation.

Today, those figures are still quite similar for young traders, however those at directorship level, or heading specific sales teams within banks that concentrate on certain asset classes whether FX majors or other spot derivatives, are able to earn more than $600,000.

In London, the salaries are even higher.

A testimony to the technologically advanced nature of today’s institutional financial structure is that compliance officers in London are now in such demand, due to the need for not only the regulatory requirements to be fully underststood by such professionals, but because of the highly sophisticated reporting systems that companies are using, and the high-tech approach now being taken by regulators, that day rates of up to £1200 are not uncommon for medium-level compliance officers.

That is more than some traders.

In 2015, Managing Directors in London (most institutions have several Managing Directors, each responsible for their specific channel of business within the institution – this is not a CEO position and sometimes is not a board position – it is a senior level manager of a specific department) earned an average of $898,000.

That translates to £677,000 and by all accounts is substantial remuneration for a demographic that is in the 30 to 50 year old age range and still has some levels of the corporate ladder to climb. The previous year, the same level of staff received an average of only £250,000.

Interestingly, traders at some of the large institutions, including Bank of America Corporation’s London office and Citigoup’s Canary Wharf headquarters displayed considerable discourse to their employers with regard to their bonus amounts in 2015.

45% of Bank of America’s front-office traders expressed dissatisfaction with their bonus, and 42% of Credit Suisse staff were also vocal about their lack of gratitude for their bonus, despite Credit Suisse having made huge losses last year – indeed the bank’s first loss for 8 years.

In 2016, bonuses tend to fluctuate across each trading desk, depending on the focus of the bank with regard to risk and wishing to drive certain products forward over others as well as paying traders more for dealing with more complex financial instruments.

This year, traders receive bonuses ranging from 40% (for repo traders) to 113% of their annual salary for flow rates traders.

This year, a trader in a non-directorship position, with no board membership and who works on a city desk is likely to earn an average of £221,000 in London.

Working as a non-senior executive at an institutional non-bank firm this year will usually result in a salary of between £100,000 and £150,000 for those who are skilled at maintaining strong relationships with Tier 1 banks and with liquidity takers.

Onwards and upwards, chaps.

Thursday: No grimness for young professionals

Following on the theme of creating very interesting brands that portray up to the minute imagery of fashionable lifestyle choice rather than necessity, another interesting method of solving a problem that did not need solving came to my attention on Thursday.

By solving a problem that did not need solving, I refer to disruption, and disruption is the key to modernity and innovation, which is an intrinsic part of London’s key demographic of 25 to 35 year olds from all over the world.

Once, renting apartments in London was grim. Owning a very expensive, white column-fronted residence in Chelsea or Knightsbridge was the preserve of the establishment, and those who were disenfranchised could spend years seeking their fortune to little avail within the confines of a poorly converted 1970s separation of floors in the form of a pre-industrial revolution red brick house that now served as three small apartments, usually in varying states of disrepair.

Those days are thankfully gone, and the fully connected, online lifestyle has permeated the apartment rental sector. The amusingly named Tipi.com has placed display advertisements all over West London and The City, saying “Au Revoir, Lazy Landlords” loud and proud as its slogan.

The service, which appears to be very much a derivative of the same business model as Airbnb or Amazon in its web-based middle-man approach, is clearly aimed at the young, ultra-modern professional who has come to London either following a career move or finishing university.

Tipi goes one step further than established early-Milliennium sites such as Rightmove, in that it calls itself “red carpet renting” which alludes to the all-inclusive nature of the purpose built apartments.

There is a single payment and all other services and bills are inclusive, and the apartment condo buildings feature social spaces and appear rather similar to a residential version of co-working spaces such as WeWork, also the darling of trendy Millennials.

Most certainly, lifestyle is key these days. No young Millennial in London would tolerate a lack of Yakitori on the menu just a push-button away, or anything that did not resemble access to the latest streaming at high speed or social activites on tap.

Thursday’s attachment of billposters across London’s hotspots alerted me to the service, so I thought I’d take a look at the blog (example on the left here). Very interestingly, it is centered around social activities and not around the usual landlord/tenant relationship.

Brilliant. Wish I had thought of it!

Friday: Wizz. Cheap and not so lacking in cheer.

Friday this week meant another flight. This time the standard and very familiar 5 hour journey (which is really 8 hours if considering the airport experience) from Luton Airport to Tel Aviv.

I used to use EL AL or British Airways, depending on availability, but these days easyJet or Wizz. There is not much to say here other than I have to admit that Wizz, for a quarter of the price of a ticket from British Airways or EL AL , is not that bad at all.

Many technology providers and ancillary service firms are based in Tel Aviv, along with some of the head offices of Cyprus based retail brokers, hence sometimes (although much less now than a few years ago due to a massive exodus from Israel of the successful firms) a trip to Tel Aviv is necessary by a London based institutional service provider.

Cheap and cheerful

Budgets are tight at the moment across the industry, and when I hear firms say that they need to pay thousands of dollars to fly two executives to Israel for a meeting that, if life in Israel has served enough experience, may be canceled at the last minute without notice, or may be a folly and a triumph of words over action, I balk tremendously.

For $200, Wizz can, er, whiz you to Israel and back. Yes the equipment is an old Airbus A319 with small confines and vinyl seat coverings reminiscent of an early 1990s Manchester underground nightclub, but the service is efficient and fast, and it is cheap.

And today, cheapness matters!

Wishing you all a great week ahead.

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