Retail FX brokers can provide institutional execution experience, without the cost
There has been a growth in retail demand for automated algo trading compared to the home-based EA programmer who simply wants to set up a straight forward automation strategy and connect it to MetaTrader 4 and let it run, as had been the case a decade ago. Offering clients a value proposition along these lines is a great differentiating factor and aquisition and retention tool in today’s enlightened market
The retail FX trading topography has evolved from its de facto status 10 years ago in which a MetaTrader 4 platform was generally connected to a warehouse brokerage dealing desk. This generated a fixed-spread you-against-me environment. Today’s ultra-precise live market accessibility now provides real time pricing via the precision of integration and bridge software companies and the prime brokerages that they connect to. Traders today expect to be closer to real markets.
Ten years ago, prime brokerage services were strictly the preserve of hedge funds and large professional trading organizations, however today a retail trader with a deposit of $5,000 often expects to be able to access liquid markets provided by aggregated feeds from Tier 1 banks.
This modern normality has elevated the expectations of retail customers to the point at which today’s MetaTrader 4 user is more akin to a proprietary trader, and will approach brokerages armed with an extensive understanding of what to expect from a broker, not just in terms of deposit and withdrawal practice as would have been the case ten years ago, but more importantly in terms of exactly how and where the trade will be executed.
How and where are important considerations, however, there is another metric which should not escape consideration, that being ‘when’.
Now that there is such a high level of understanding among retail traders with regard to how a trading system should be structured in order to maximize market access, there is a market gap in some respects that could be taken advantage of by brokerages, especially in a retail sector that is proliferated with MetaTrader 4 platforms, many of which are white labels, meaning that many brokers need to differentiate themselves from several others, yet do so without huge cost.
Trader engagement has been attempted, in some cases successfully, and in others not so, by providing extra tools or networks that are aimed at ensuring longer and more confident trading, however as pointed out last week, some of these methods are now passe. Social trading, for example, is no longer the darling of the retail trader, as demonstrated by the waning of some of its largest developers.
Self-empowerment has superceded social trading, hence an even greater need to provide an institutional-grade trading environment exists.
Many professional algorithmic traders or high frequency traders work from firms that have invested heavily in colocation of servers.
This means that they often take a lease on rack space at data centers where equipment, space, and bandwidth are available for rental to retail customers.
These colocation centers, or ‘carrier hotels’ are provided by large infrastructure firms, such as Equinix, and BT Radianz, and the leasing costs can range between $75 and $400 per server, per month.
Implemetation can cost over $3,000 depending on the numbers of servers being migrated to a data center, however a retail trader often does not have server infrastructure or the ability to strike a commercial deal with a large colocation center, as most of this type of infrastructure is provided on a high volume basis to large institutions, making the cost prohibitive to retail traders.
Today, FinanceFeeds spoke to Sheldon Gardner, President of SkyDesks, who explained how a service which provides a virtual private server (VPS) to retail traders as well as an automated trading system that is fully built into the MetaTrader 4 web server is a means by which retail traders can operate automated, algorithmic trading methodology and have the advantage of executing orders with no distance from the major venues, without the prohibitive cost or cumbersome operational issues.
“Cloud automation should feature as one of the components that will constitute the next generation of FX VPS” he said.
“Our VPS is the first system for this purpose that has been built on cloud automation. For traders using a web browser rather than a downloadable MetaTrader 4 platform, a cloud hosted automated system is the best way to open the door to an institutional level for retail traders.”
“One of the important ergonomic considerations is that Expert Advisers (EAs) should not just be a MetaTrader 4-compatible component, but should be fully integrated within the trading platform and switched to other EAs or turned on and off with just one button on the user interface” explained Mr. Gardner.
In the early 2000s, high-frequency trading still accounted for fewer than 10% of equity orders, but this proportion was soon to begin rapid growth. According to data from the NYSE, trading volume grew by about 164% between 2005 and 2009 for which high-frequency trading might be accounted however this has increasingly become an interest among retail traders.
There has been a growth in this type of activity compared to the home-based EA programmer who simply wants to set up a straight forward automation strategy and connect it to MetaTrader 4 and let it run, as had been the case a decade ago. Today’s developers are going the fully automated and HFT route in a complete automation of their system, thus brokerages can capture this audience by using specialist systems, meaning that they gain larger volumes, less attrition and subsequently save money on increasingly expensive client acquisition and retention campaigns.
Mr Gardner understands that stability and speed are vital when it comes to providing a system that gives traders a VPS so that they can execute at close proximity to important venues combined with fully integrated automated trading capabilities if such a system is to emulate the large prop shops of Chicago or New York.
For this purpose, Mr. Gardner believes that using the LINUX operating system is a key factor. “Unlike Windows Server, the current standard, SkyDesks VM runs on a LINUX OS offering enhanced reliability. This helps the system be user-friendly and intuitive, as it is based on a dashboard paradigm, as well as avoid any stability or latency issues.”
“Unlike other web-based trading systems, SkyDesks MetaTrader 4 includes autotrading” explained Mr. Gardner. “SSL file uploads directly to the Virtual Machine are allowed, as are downloads of performance reports. File downloads, however, are not allowed in order to protect the intellectual property rights of those who developed specific EAs” he said.
“Currently, three types of subscriptions are offered” said Mr. Gardner. “These are Basic, EA installed, and signals. Shortly, another signal provider- Bluucore- will be online and we have several others are planned for 2017. Forex investors will be able to trade or choose to copy
trades from signal providers. Today, the green toggle turns the EA on or off. Other options will be available to control EA and signal risk parameters from a web page very soon” concluded Mr. Gardner.
With systems such as this, the trader pays the subscription, which means that brokers wishing to offer the service to their clients will not have any additional costs, and will not need to alter any trading conditions to be able to provide it.
Value proposition, for certain, lies within differentiating factors that engage traders and enhance their experience.