The social trading days are over. Today’s retail clients are as sophisticated as professional traders. We take an opinionated and comprehensive look at how this happened and what has now transpired
Social trading, social media, social…. well pretty much everything.
That was the overwhelming buzzword of the early part of this decade, however it is clear that today’s environment is completely different.
The ‘social media’ era of just a few years ago was largely led by those who spent their adolescent years in front of an X-Box whilst listening to fifty pence, or whatever his name is, instead of picking up a spanner and making things out of pieces of metal or wood.
It was the brainchild of those who, having exhausted the riveting permutations available by sitting on a sofa, headed off to one of those ‘enlightened’ universities that nobody has ever heard of to spend the ensuing three years cultivating an extraordinary amount of facial hair and styling it in the way that a gardener would approach topiary, whilst spending their parents’ money that they are ‘entitled’ to on tattoos and fair trade coffee in a repulpable paper cup.
It was entirely possible to view such individuals, once their three years at facial topiary school were over, occupying ‘co-working spaces’ – effectively desks and lighting that cost more and are worse quality than those that exist at home for free, marking themselves out on their own self-branded social media networks as leaders, and looking for “social media warriors” or “SEO Ninjas” to join them.
What on earth those are, is to this day an unknown quantity. I am quite certain that covert agents or mercenaries in feudal Japan did not join peer to peer internet groups, but call me old fashioned…
This ethos grabbed the attention of the retail FX industry, its MetaTrader 4 brokerages wanting to achieve two objectives, those being to provide a specific value proposition to traders that will engage them more and differentiate them from the sudden influx to the market of a vast array of newly established brokerages at that time which paid $5000 for a MetaTrader 4 white label license and thus were competing for the same business with the same fixed spread, warehouse brokerage product, and the other objective was to remove the nervousness felt by novice traders (retail FX trading was relatively new 7 years ago) and empower them by allowing them to follow who they perceived as successful traders with lots of loyal followers.
The result, it was anticipated, was longer lifetime client values and less expense in acquiring new customers or retaining existing ones.
Those days are now over.
Never mind the catastrophic failure of social publishing forum Medium this week, which laid off 50 employees in non-engineering positions and closed down its New York and Washington DC offices.
Medium’s competition includes social networks used by publishers and individual creatives to distribute their work, and other blogging platforms like the 800 pound gorilla in this particular sector, Automattic’s WordPress, as well as Facebook, and companies closer to Medium’s age, like Patreon, the blogging-meets-crowdfunding platform where creatives get paid directly by subscribers before publishing a news feature, web comic or anything else online.
Medium had raised $132 million in three outsized rounds of venture funding from firms including Spark Capital, Andreessen Horowitz and Greylock, according to Crunchbase and yet it still did not bring home the revenues.
The creaking future for social trading was initially demonstrated three years ago when OANDA Corporation, a technology-led and very well established North American electronic trading firm, ditched its fxUnity social trading platform, shouldering all of the development costs, and then under the leadership of at-the-time CEO K Duker, then proceeded to purchase what was an already ailing social trading platform, Currensee.
Just one year later, with OANDA Corporation by that time under the leadership of Ed Eger, the firm closed Currensee down altogether, thus not only having to write off the development costs of fxUnity, but also putting a red line through $9 million that it cost them to buy moribund Currensee.
In 2014, OANDA Corporation stated “Today, we have notified all participating parties that on October 31, 2014, Currensee and the OANDA Trade Leaders Program (OTLP) will cease operation. Following a strategic review including feedback from our customers around the world, self-directed trading remains their priority.”
External social trading platforms are now passe, it seems.
This week, Tradency, a very well established company which invented the Mirror Trader concept in 2004 made its most recent round of redundancies, this time involving the vast majority of the firm’s staff and included many senior executives across sales, marketing and product development divisions.
This is a great shame to see, as Tradency is a stalwart in this type of retail FX technology and had done its utmost to engage with brokerages, switching to a licensing model and away from the old-school ZuluTrade-style volume commission model which involved in many cases adding a pip to the trading account spreads. Imagine that these days? No trader would ever pay 1 pip.
Tradency maintained the same Mirror Trader product for 12 years until it launched RoboX last year, which took the data collected over the period since Mirror Trader’s 2004 launch and automatically selected more appropriate strategies led by lead traders in order to engage clients.
It is apparent that the market share among firms offering this type of copy trading is no longer based in nations with developed financial markets economies.
Last year, ZuluTrade, one of the very oldest social trading networks, was fined $350,000 for opening accounts for customers located in countries that are subject to US government sanctions.
ZuluTrade has an NFA membership, therefore is subject to US rules and regulations, however the interesting part in this was that ZuluTrade had been onboarding customers from Iran, Sudan and Syria.
A look at the CRM data at a retail brokerage using social trading platforms such as this seven or eight years ago would have shown that most of them are in Asia, the Indian subcontinent and Africa, not Britain, Australia, Europe or America.
Nowadays, the base of traders in Western nations, as well as in Japan and China, are highly experienced and possess a detailed understanding of the topography of trading infrastructure.
They do not need to use a cumbersome external platform to follow an unaccredited trader who happens to be a customer of a retail brokerage, rather than an algo or a quant.
In China, vast portfolio management companies exist, which use fully automated professionally designed software to assess the markets and risk profiles, and in many cases 90,000 lots per month are being traded on behalf of regional clients of introducing brokers via in-house developed trading systems, with IBs themselves having businesses worth several hundred thousand dollars. Not a social trading platform in sight. Nor an unusual beard, for that matter.
In Japan, which is home to 35% of the world’s entire retail FX order flow, almost all customers trade only with domestic firms, and there is absolutely no reliance on EAs, social trading or automation because Japanese clients often trade manually, and always have done, hence MetaTrader 4 being unpopular there as there has never been a need to standardize a platform to accommodate EAs.
Today, companies such as Spotware Systems can build a bespoke trading platform for brokerages, with algorithmic capability and automated trading systems built into the platform, and firms such as SkyDesks can provide a fully integrated web trader with built in EA capability and a latency-reducing VPS. These firms are operated by longstanding technological and development professionals, committed to understanding how market connectivity operates, how to integrate their traders with price feeds and conduct risk management, how to structure algorithms and where to place the trader’s connection to the live market.
By contrast, social trading platforms in their own right were spinoffs from the affiliate marketing and gaming industry, which is, as FinanceFeeds continues to maintain, completely incompatible with the FX industry in any shape or form. Many of them took the gaming and affiliate model, mixed it with social media because that was the buzzword of the time, and proceeded on that basis.
Nowadays, traders want to see full charting facilities, be able to execute trades via algorithms just as proprietary traders in large firms in Chicago and New York would do. Traders are able to understand the methodology behind retail platforms, and in some cases are becoming equal.
An example of this is the current drive toward exchange traded multi-product systems for retail customers.
Speaking to Ryan Hansen, CEO of Tradovate in Chicago last year, FinanceFeeds learned that a the average deposit size in that sector from retail clients is $50,000 and that this is a burgeoning market for retail participants.
“Essentially, the platform itself is not being labeled as retail or professional, as we are not making that distinction and can provide it to all participants. We spent a lot of time building in key aspects of futures platforms, such as the depth of market (DOM) order ticket, so that traders can see the order book to place trades, in the form of a price ladder” said Mr. Hansen.
Mr. Hansen explained that Tradovate’s ethos is focused on an attempt to make things simple and easy to use. “This sounds remedial but in the futures space technological disruption among platform vendors and brokers is not the norm. This is usually very much a traditional Windows XP experience. We want to look at the design principles and make things easy to use for all users, whether they are new traders or professional traders.”
Brokers themselves have been passing on top level knowledge to their customers.
FinanceFeeds met recently in London with Saxo Bank senior executives Lucian Lauerman, Head of API Business, and Peter Plester, Head of FX Prime Brokerage.
Mr. Plester explained “We are focused on adding value for our clients; from helping them access liquidity, to optimising collateral to reducing risk.”
“This is a value added service” he said. Mr. Lauerman then explained it in detail.
“This is something that we implemented within our own market making business which was established in 1992” said Mr. Lauerman.
“We have designed a series of tools to optimize our flow to the market and we use that technology to benefit our clients. We are able to show them what their flow looks like and how the liquidity providers that they are accessing view their flow. We have regular conversations and understand what metrics the sources of liqudity use to evaluate flow and we have built similar reporting and analysis ourselves so we can show clients how their flow will be viewed and handled by liquidity providers” – Lucian Lauerman, Head of API Business, Saxo Bank
“We work closely with clients to make sure their liquidity access is sustainable. This is not alchemy, it is about creating an environment where clients have reliable and sustainable access to liquidity” he said.
Mr. Plester then explained “If a client was to develop those tools internally, there would be a lot of cost and resources and the client would spend a lot of time talking to several liquidity providers. By outsourcing that to us, we save them time and money.”
“Because clients were used to having direct relationships with liquidity providers they could have lost a lot of feedback and data but they still get it because we do it for them whereas if a broker went to a prime of prime that didn’t provide that, it may be that the broker begins to feel devoid of information” – Peter Plester, Head of FX Prime Brokerage, Saxo Bank
Some of our clients put between $20 million and $40 million with us, and I wouldn’t be surprised if some prime of prime names themselves have less capital than even that. If you have a client with that amount, and it is 4 times the capital of the prime or prime then there is no capital there to make the client whole. Looking at MF Global and what happened in the past, – it always pays to make sure that a prime of prime is well capitalized. It is actually largely their capital that you would have some recourse to and these days there are not many around with a decent amount of capital” said Mr. Plester.
Long gone are the days of enticing retail clients by charging them one pip extra for an external social platform which is often then attached to the brokerage via an IB agreement. Long gone are the days of social trading in its original format.
Here, in 2017, are the days of trader astuteness, and the brokerages and technology firms leading the way are those which clearly understand this and are continually modernizing and advancing their cause.
I wonder if those beards have been shaved off yet, and if coffee is beginning to be consumed from a regular porcelain cup….
#FX Prime Brokerage, #metatrader 4, #OANDA, #robox, #social trading, #social trading platform, #tradency