Retail FX – a relationship business, or a branding and marketing business? – Opinion
Despite its online nature, this is not an online business in terms of its ultimate success. It is a relationship business through and through – and in my opinion, long may it remain that way. I take a look at the difference between those who engage yet offer a familiar product, and those who go the idiosyncratic route
What was the market like right at the very beginning? Very exciting. In the late 1990’s the Asian currencies melted down – specifically the Thai Baht, Malaysian Ringett and Indonesian Rupiah, which helped propel USDJPY from the mid 80’s up to the mid 140s and then back down again amidst volatility that the FX markets have not seen since. Shortly thereafter, the Nasdaq and related equity markets exploded reaching their infamous apex in the spring of 2000″ – Josh Levy, Co-Founder, Matchbook FX
This is the man who pioneered retail FX trading.
From its very innovative genesis as Matchbook FX stood out as the retail traders’ foray into the institutional world, came a very standardized, uniform array of brokerages some years later.
From Josh Levy’s enthusiastic reminiscence which precedes these words, it is clear that he, and his colleagues, all of whose careers had been shaped in the engine rooms of some of Wall Street’s vast institutions, considered a link to the real market to be vital to the attraction to electronic trading by retail clients.
In 2005, the deluge began. MetaQuotes took its MetaTrader 4 platform to market, and a myriad of online trading companies suddenly went into business, offering the same service, via the same platform, to a global audience.
In its initial years, MetaTrader 4 was never connected to a live environment. Instead, it was specifically designed to include a dealing desk in which orders were internalized, prices were set by the brokerage and there was no external price feed. Despite this, the MetaTrader 4 brokers of the latter years of the last decade prospered and Matchbook FX, with all its ingenuity and good intentions, is no longer.
Some high quality pioneers stood above the plethora of retail firms that ran their own closed market and offered a ‘me too’ product in which lead lists were bought, then-naive (but now very sophisticated!) customers were encouraged to deposit and there began the profit and loss model which is now the bete noire of not just regulators globally but all of today’s retail FX industry leaders.
Mr. Levy has very fond memories of some of the stalwarts of the industry. Speaking to FinanceFeeds recently, he said “I give a lot of credit to Peter Cruddas of CMC Markes, as well as Drew Niv & William Ahdout and their colleagues at FXCM”.
“What FXCM did was pivotal in terms of encouraging the explosive growth of retail FX” – Josh Levy.
Hailing Drew Niv’s contribution to the acceleration of the retail FX industry, Mr. Levy said “Drew was brilliant in that he simplified the concept of trading FX to the benefit of the growth of the industry. He took a product that was complex and esoteric and made it accessible and palatable to a wider retail trading audience.
FXCM standardized the notion of a spot FX contract into bite-sized mini lots where the risk of loss was much lower and residual currency P&L was always reconciled in USD, regardless of which currency pair traded. This practice is commonplace now, but it was innovative back then. By contrast, when Matchbook FX was introduced, it was more of an institutional-minded product where if you wanted to trade in USD or in YEN, for example you could trade either.
“Think of it as a souped-up EBS interface on steroids. In conventional FX trading, participants trading a set USD amount of USD/JPY were left with a Yen residual which they’d eventually have to translate back into USD for profit-taking or accounting. This was too complicated for retail. Retail traders wanted to buy low, sell high and did not want to manage residual currency profits and losses, or trade in position-sizes that would generate too much risk” Mr. Levy explained to FinanceFeeds in New York recently.
Today’s firms – a marketing exercise, or a relationship business?
Whilst the MetaTrader 4 brokerages have evolved significantly and are now connected to live markets via highly developed integration technology, the end product of one is very similar to another. This, in many other industries, would result in a sort of blandness of product which would induce consumer apathy and cause the audience to seek out something more special that they can identify with. Not so in the FX business.
In the 1980s, Japan was busy importing new compact cars into Britain whilst the ‘workforce’ at Longbridge, Cowley and Ellesmere Port were on the picket lines. Japan succeeded in capturing a market ready for reliability, affordability and good service – everything that the consumers in Britain were not receiving from the home grown products.
Toyota expanded its presence, so did Nissan. The products were completely forgettable, and one looked and behaved exactly the same as another from a different manufacturer, but still, market share was multiplied in no time at all.
French and Italian manufacturers maintained their idiosyncratic approach to engineering. Citroen aligned itself with complex hydropneumatic suspension and DS-inspired ‘chic’ lines, whilst Toyota and Nissan got accountants to design their products. The result: Toyota increased its profits by 10 times the previous decade, whilst Citroen (PSA Group) went bankrupt 3 times.
Toyota then licensed its manufacturing technology to other factories, charging them by way of monthly lease.
The Toyota Corolla became the world’s best selling car, yet it had the charisma of a wet Sunday afternoon in Manchester. The Toyota Corolla is the automotive industry’s MetaTrader 4.
Higher up the price range, the Toyota Camry (designed and built in North America, for North America) outsells European products of the same size on the North American market by a vast percentage. JD Power’s customer satisfaction survey puts the Camry right at the top, and the unreliable Mercedes Benz E-class near the very bottom, despite all of the brand-coveting that is associated with Mercedes-Benz products dating back to the industrial revolution period and the invention of the motor vehicle in the first place.
Creating a very illustrious image is either the route to the absolute top, or an expensive white elephant
This shows that simplicity, uniformity, ease of transfer from one product to another without requiring familiarization is paramount. In the world of trading platforms, where electronic execution is taking place at a fraction of a nano-second, familiarity absolutely does not breed contempt, indeed familiarity engenders security and peace of mind.
The vast majority of highly advanced electronic trading firms in London, all of which have their own very sophisticated trading infrastructure ranging from proprietary platforms with ultra-high tech user interfaces, to in house, secure and ringfenced servers connected to the live markets via constantly maintained secure network infrastructure, also offer MetaTrader 4 for those international clients that want the quality and industry experience of a British firm, mated to the familiarity of the platform that they are used to.
Dukascopy is a very interesting case in point here. A visit to Dukascopy Bank SA’s Geneva headquarters is an exercise in magnifying the difference between the mainstream and the specialist. Dukascopy commits most of its time to developing its very own systems, the JForex platform, an instant messenger service, a Swiss banking license, inhouse servers and infrastructure, and perhaps the most incredible, highly polished television studio facility with some of the highest level of attention to detail I have ever seen from any production staff anywhere worldwide.
The result? Tiny annual profits and very little global market share. The relationship aspect of the business is non-existent outside of Switzerland, and the branding aspect is non existent outside of Russia and the CIS countries where it has a small amount of loyal followers.
In Switzerland, Dukascopy holds monthly events, however the emphasis is on fashion and luxury (it is at the prestigious Four Seasons Des Bergues Hotel after all!) with token references to Dukascopy platforms on display stands in the corner of the room whilst models strut down the catwalk displaying the latest $70,000 jacket to a Russian audience.
In many regions globally, there is no reach. No appreciation for the vast sums of capital poured into the very advanced systems and the magnificent Swiss branding that adorns every product, all of which are bespoke. Indeed, most of Dukascopy’s white label partners use MetaTrader 4, and the company does not advertise its brand on industry portals, nor do its executives attend industry networking events or conferences.
Conversely, FXCM has vast reach in regions such as China. FinanceFeeds visited some of the largest IBs across the Tier 2 development towns in China last year and found that the majority of them were using FXCM and FXDD. This is all down to relationships that have been built and maintained by those two companies. In China it is vital to continue to be face to face with strategic partners on a regular basis, as personal relationships are key to business in China’s very polite, hospitable business culture.
In this case, FXCM succeeded whereas the bespoke firms did not, yet FXCM to Walmart as Dukascopy is to a Genevoise delicatessen.
Most executives in this industry know each other personally. That is due to the frequent and committed efforts that are made to ensure that relationships are maintained among every executive from every component of the industry from platform providers to bridge technology developers to the brokerages themselves and ancillary service providers such as signals, social trading and marketing specialists.
The executive team at the vast majority of firms knows and has good, longstanding relationships with those at all other firms, yet the majority are offering the retail customer a similar experience via a similar platform with similar corporate prowess and experience. These are the successful companies.
Those which have a niche product and an idiosyncratic image or approach, yet have fostered no relationships outside their existing circle, are the ones that have not managed to gain global traction and whose executives are not perceived by their peers as industry leaders and pinnacle figures.
Think of a pinnacle of the industry and the real leaders that come to mind are those whose entire company builds itself on maintaining relationships with other firms in the business, whose product is not confusing and has a degree of warm familiarity, and whose regular appearances are always welcomed at events and conferences.
Despite its online nature. This is not an online business in terms of its ultimate success. It is a relationship business through and through – and in my opinion, long may it remain that way.