“MT4 brokers need robust systems to help them to cope with the unexpected”

By offering retail FX traders the best quality liquidity and execution, brokerages are keeping up to date and doing the right thing. We take a very close look at how to continue to provide excellent service, whilst managing risk during times of extreme volatility

liquidity

There are brokers that value a high quality liquidity management system, and there are those which do not.

Quite remarkably, even in these times of extremely high technology and elevated knowledge among those which lead innovations that have honed the execution systems that now provide retail traders with a trading environment that echoes that of the highest level of London, New York and Chicago’s institutional trading desks with order flow management systems and market connectivity and integration that can make the once-closed circuit MetaTrader 4 platform access Tier 1 liquidity and execute live trades within a fraction of a second, there are still firms that choose to take the old view and make their own internalized market.

GOLD i 2015
Tom Higgins, CEO, Gold-i

In May this year, five technology company senior executives, all industry leaders, assembled to discuss what needs to develop in terms of technology in order to allow brokerages not only to address current matters, but to ensure longevity of their businesses.

Andrew Ralich, CEO of oneZero posed the instrumental question in a meeting with FinanceFeeds recently, asking CEO Andrew Saks-McLeod “Will the legacy aggregators such as FlexTrade, Currenex and Integral Development Corporation be able to engineer their services to cater all the way downstream to the retail broker, or will the providers such as oneZero, PrimeXM and Gold-i which have grown up in the retail space, be able to adapt to this specific institutional functionality to be able to move upstream for their clients?”

Harpal Sandhu, CEO of Integral Development Corporation addressed an astute audience encompassing the senior level of the FX industry at iFXEXPO in Cyprus in May, explaining “There needs to be concentration on the number of micro partners that offer global solutions in the FX space.”

“Depending on where they are in terms of their own maturity as brokerages, firms which use such services need to be aware of their ability to understand things like regulatory evolution and, for example, changes in major factors such as leverage” said Mr. Sandhu.

“Brokers also have to navigate the credit contraction post-Swiss National Bank removal of the 1.20 peg on the EURCHF pair. As a result of so many factors that now exist, alternative sources of liquidity are needed” said Mr. Sandhu, concurring with many executives which spoke to FinanceFeeds during a networking event that preceded that particular conference.

Getting execution right, and ensuring that brokers provide live market trading facilities, whilst minimizing risk

On the other hand, there are some participants whose client bases are brokers which do not connect their system to live markets, that continue to eschew the important developments that revolve around liquidity management and prime of prime connectivity. One particular technology provider that we spoke to holds the opinion “Brokers don’t care about speed of execution, hedging capabilities and other such technicalities, and if I needed to bet on it, I would say the trend is going more toward marketing and sales”, not only demonstrating the type of customers that he has, but also that this legacy mentality still pervades certain elements of the market.

Furthering better prime of prime relationships via technology in these times of restricted credit by Tier 1 banks is vital, yet this is also being misunderstood by many brokerages.

The more astute among the brokerage world know this well. A recent discussion among very experienced professionals in the prime brokerage and institutional sector bore this out. Francois Nembrini, who spent 12 years as Managing Director of FXCMPro, FXCM’s institutional division before joining AFX Capital’s QuanticAM division to lead institutional relationships explained to FinanceFeeds “Effectively the tier 1 banks either will no longer extend credit, or they will request much bigger balance sheets. $250,000 would easily get a prime 5 years ago, we are now talking about minimum amounts in the $15 million if not $25 million or $100 million in some of the large primes.”

“For this reason, 2016 has become a year in which prime of prime services and the connectivity providers that facilitate their link to the live market and to retail brokerages have had to innovate substantially in order to provide better prime of prime relationships and access to best execution for the brokers that use the services” said Mr. Nembrini.

unnamed-16-e1464336114142
Institutional FX expert Francois Nembrini

Indeed, Citigroup recently published a report stating that according to its research, the extension of credit to non-bank OTC electronic trading entities carries a 56% potential default rate.

Today, FinanceFeeds met with Tom Higgins, CEO of Gold-i, to further examine why a highly developed liquidity management system is critical in today’s modern retail FX brokerage.

“The Swiss National Bank event taught us that brokers and technology companies need to be extremely well prepared for unexpected events. This was a lesson learned in time for Brexit, which was an expected event with unexpected results. The preparation most companies made put them in good stead and there were very few casualties” Mr. Higgins explained to FinanceFeeds.

How can they plan agile strategies when they can’t see the key metrics that are driving their trading business? – Tom Higgins, CEO, Gold-i

Events such as the Swiss National Bank’s sudden removal of the 1.20 peg on the EURCHF pair and the ensuing market volatility which in some cases created such vast negative client balance exposure that it saw entire brokerages off, such as Alpari UK and Liquid Markets, and created vast black holes in the balance sheets of others, including IG Group which was exposed to approximately $30 million, Saxo Bank, which was exposed to $107 million, and FXCM which was exposed to over $250 million and ended up taking a $300 million loan from Leucadia to cover the capital outage.

Capture
Tom Higgins talks to Andrew Saks-McLeod about integration technology, Geneva, Switzerland 2015

Looking at geopolitical events is vital these days, especially for brokers who are conducting their business correctly and offering a live market rather than a “trader vs house” environment.

“Many brokers protected themselves from Brexit fallout by increasing margin requirements dramatically and warning clients not to trade. This worked for Brexit but you can’t tackle every potential financial crisis in this way. You need robust systems to help you to cope with the unexpected” Mr. Higgins explained to FinanceFeeds today.

“The key to managing a brokerage successfully during volatile periods is having great visibility into your risk exposure and having the right liquidity management tool to be able to offlay your risk effectively when you want to and how you want to” – Tom Higgins, CEO, Gold-i

“The combination of our MT4 business intelligence tool, Gold-i Visual Edge and our modular liquidity management system Matrix 2.0 are exactly the kind of tools which can help brokers” explained Mr. Higgins.

In conclusion, events that create market volatility which mean that not only sophisticated order flow management and risk controls should be in place, but also bearing in mind the counterparty credit risk assessments by major Tier 1 interbank FX dealers at the moment, brokers are finding themselves at a juncture that represents a double-edged sword.

Mr.  Higgins concluded “There will inevitably be more unexpected events – as the failed coup in Turkey showed us. Brokers need to be properly prepared.”

“I’m still surprised by the fact that only about 20% of MT4 brokers use business intelligence software to gain a complete real-time overview of their trading operations. There’s so much data in a brokerage that there’s no way a human can analyse it quickly enough to have a real-time sense of any impending issues, opportunities to make more money or reduce risk. How can they plan agile strategies when they can’t see the key metrics that are driving their trading business?”

Read this next

Executive Moves

TopFX promotes Omar Al-Janabi to head of sales and business development

Prime brokerage firm TopFX has strengthened its Middle East operations with the promotion of Omar Al-Janabi, who is taking on an expanded role as global head of sales and business development.

Retail FX

Plus500 says 2022 revenue to be ‘significantly’ ahead of analysts’ estimates

Israeli-based, but London-stock market listed Plus500 said it expects annual revenue and earnings to be ahead of analysts’ estimates even as trading levels normalised from record volumes in the first quarter.

Digital Assets

Crypto derivatives giant BitMEX launches spot market

Crypto exchange BitMEX is looking to branch out of its singular focus on crypto derivatives with a suite of new product offerings. Although derivatives are to remain at the heart of BitMEX’s business, the popular platform will add spot crypto trading as it aims to aggressively grow their user base.

Uncategorized

PrimeXM reports mixed trading volumes for April

PrimeXM has reported weaker trading volumes for April 2022, in line with other institutional and retail platforms that saw the activity of their clients dropped compared to a month earlier.

Digital Assets

DLT Finance approved by BaFin to support brokerage and custody of digital assets

DLT Finance is already partnered with big names within the digital asset space, including Kraken, Bitstamp, B2C2, and Bittrex.

Institutional FX

LUKB taps vestr to launch actively managed products, AMCs

The partnership with vestr goes to show the growing importance of digitising the active investment management space.

Digital Assets

Jewel taps Tokeny to launch stablecoin-as-a-service solution on Polygon

Jewel aims to offer a stablecoin-as-a-service solution to other digital asset and financial institutions B2B, allowing those businesses to provide cheaper, easier and near real time payments with stablecoins issued and redeemable directly at the bank level at Jewel.

Industry News

SEC charges $410+ million Ponzi scheme with pre-IPO shares

We allege that the defendants deceived investors about the pre-IPO shares they held, how much they were charging in fees, and who was controlling the business—all while paying themselves more than $75 million.

Industry News

FNZ taps data analytics GIST to address ESG ratings bias

The allocation of capital is critical to driving the change required to transition to net-zero and building a more sustainable economy and society.

<