Thinking of going AI for payment solutions and compliance at your brokerage? Although it is the future, this week has heralded some horror stories

The combination of leading edge technological advancements and quality access to global financial markets with fully automated interaction with clients appears not only very much the direction of the electronic brokerages of the future, but also a golden goose in an equally golden age of internet technology which solves a now age-old problem, that being […]

The combination of leading edge technological advancements and quality access to global financial markets with fully automated interaction with clients appears not only very much the direction of the electronic brokerages of the future, but also a golden goose in an equally golden age of internet technology which solves a now age-old problem, that being the need to reduce operational costs.

Automation and machine learning may well be somewhat passe, that existed long before the now ubiquitious MetaTrader 4 platform, and was being utilized by infrastructure development companies such as PA Consulting’s mobile infrastructure development division at Cambridge Science Park in the early 2000s (I was a senior R&D engineer on the 4G project for financial institutions whilst MD of Palmira Solutions – Ed) and also within connectivity for fixed line infrastructure such as PBX switches that connect venues to hosting data centers and route traffic since the mid 1990s.

That particular method of automation was very scantily embraced by the retail FX industry, with its application having been restricted largely to customer database optimization, largely centered around retention, however today’s completely revolutionary Artificial Intelligence (AI) systems that are now available and can be tailored for multiple purposes are far more interesting than previous automation methodologies.

AI can quite simply replace human resources in many back office positions, can learn compliance procedures and carry them out in a textbook fashion which not only reduces costs for brokerages saddled with the ever decreasing profit margin dynamic created by the 1231 firms currently offering the identical platform and trading environment to each other.

Adopting an AI solution means that retail brokerages can concentrate on directing their capital toward growth and customer experience, and avoid the costs of back office procedures, administration, and compliance, especially when ESMA’s rulings and other regulatory evolution has created an opaque environment which is widely misunderstood by many administrative staff hence AI could be a means of conducting trade reporting and satisfying the remit of the competent authorities in a by the book fashion which is a cost saver in that it mitigates fines for arbitrary administrative errors.

Indeed, an entire brokerage could be automated in its operational functionality, leaving the human element to concentrate on customer relations.

Whilst this appears somewhat utopian, there is a very serious downside, which has made itself present this week, that being the data security breach that has plagued some major multinational companies, caused by a weakness in cyber security bat software service provider [24]

Technology firm [ 24], which provides online support services for Delta Airlines, North American department store giant Sears and discount clothing store Kmart among other companies, has admitted that a cyber security incident affected online customer payment information of its clients, with over 100,000 clients having had their data exposed. Perhaps the most concerning element with regard to this is that the data breaches occurred during September and October 2017 and were kept quiet till this week.

For many retail FX brokerages, the customer database is their only intellectual property, hence this is the intrinsic value of their companies, thus exposure could render their entire business valueless, hence the security risk of outsourcing to third party technology firms that automate procedure and handing everything over including customer records, payment functionality and compliance documentation should be a very important consideration for brokerages.

Delta Airlines said it was notified of the “cyber incident”March 28 by online chat service provider [24] From Sept. 26 to Oct. 12, 2017, “certain customer payment information” for clients of the online chat service including Delta may have been accessed.

This is very poignant, as online chat is used by almost all FX brokerages to interact with customers, hence a plethora of information is stored on such servers, mostly relating to customer trading accounts, and with regard to payment information, should that be exposed, regulators may well take a swipe at firms which failed to secure customer assets and payment channels, even though a breach was the result of an outsourced firm’s failings – ultimately the regulatory and client security responsibility lies with the broker.

Last month, FinanceFeeds spooke with Paul Foley, an experienced CIO working in Financial Services, based in Cyprus, the home of retail FX. Mr Foley is a senior executive at TCG Europe, which acts as a shareholder for companies working in IT, real estate, legal services, commodities and portfolio management. He explained “I think it’s safe to say that we all understand that in the brokerage world there are numerous strategies at work and they all work around the notion of either A-booking or B-booking clients – or a combination of the two.”

Thus, the view that AI could absolutely enhance the functionality of operating a brokerage.

Mr Foley continued “If we look at the typical brokerage we see that the support function has a live chat option and a telephone number for clients to call – so two channels through which the client might get support. There’s a problem with this support model though – inconsistency. Depending on the time of day support may be busy and the skill level of the available staff might vary.”

“The smarter broker will have augmented these two channels with an automated online presence – this then allows the brokerage to prioritise clients, use channel switching as a strategy to manage the incoming clients based on predetermined criteria and to provide an overall better client support function” he eaid.

Many firms have advocated the use of chatbots, and this has not just been restricted to retail firms, as many large institutions have been developing their own in house chatbot solutions.

In Japan, AI has been a central priority for large banks and technology investors alike. In February this year, FinanceFeeds reported that SMBC Nikko Securities, a subsidiary of Sumitomo Mitsui Financial Group, Inc. (TYO:8316), had begun to plan to tap the capabilities of AI to enhance its internal compliance operations.

The company unveiled its plans to implement a new speech recognition solution developed by NextGen. The solution which is set to be adopted by the end of March this year, harnesses the power of deep learning and is set to precisely convert speech into written text, with the service set to offer high-precision conversion of voice data to text and thus enhance the efficiency of internal compliance operations.

Automation also allows the firm that operates it to have ‘power’ over your brokerage. Should a dispute arise between the broker and the AI provider, the AI provider could simply make the broker’s life uncomfortable until the broker submits, especially as the code and entire system topography is the property of the AI provider.

Last night, in London, FinanceFeeds was having this conversation with an FX industry senior executive whose neighbor had commissioned a software firm to design and implement Internet of Things (IoT) in his house. This ranged from the ability to heat or cool the house, turn lights on and off, change television channels, and listen to music remotely via apps, and use an AI solution to learn behavior within the house to automate certain things such as lights and air conditioning. The house owner entered into a dispute with the provider over payment, so the AI provider decided to take manual control and heat the house to intolerable levels, turn the music on at high volume early in the morning, shut window shutters in the daytime and simply make life intolerable until payment is made.

Hence, IoT is super, I for one am an advocate and a user, but it was coded by me on my own Unix boxes. This rather unpleasant story emphasizes the need for self-determination over what is automated, and that automation and AI may well appear to increase freedom and lower costs, but puts brokerages at the mercy of their providers.

Automation and AI may well be the way to go, however caveats should be considered, and those caveats include the potential exposure of the entire intellectual property and customer database of a brokerage, and its payment solution channel.

Mind how you go.

Read this next

Retail FX

ThinkMarkets expands CFDs lineup to over 4000 ETFs and shares

ThinkMarkets has expanded its service offering by incorporating 2500 new CFDs on shares and ETFs on its ThinkTrader platform.

Retail FX

France regulator warns investors of Omega Pro,

France’s financial markets regulator alerted investors that scams related to Omega Pro Ltd are beginning to circulate, with the blacklisted firm capitalizing on the situation to run a range of “unrealistic” offers.

Digital Assets

Web3 platform Grand Time paid $2 million in token earnings to date

Community-driven Web3 platform Grand Time said its offering – which includes a multifaceted platforms and its native token – has been gaining significant traction highlighted by impressive operational metrics.

Institutional FX

FX volumes at MOEX halved in April as ruble gains gorund

Currency trading at Moscow Exchange (MOEX) halted its upward route in April as monthly volumes nearly halved from a month earlier.

Digital Assets

FTX US adds stock trading, fractional shares to crypto platform

FTX US, the American subsidiary of crypto exchange FTX has kicked off stock trading feature to its customers in an effort to compete with popular platforms such as Robinhood and eToro.

Industry News

UK FCA empowered to remove brokers’ permissions in 28 days

Businesses with permissions they don’t need or use, risk misleading consumers. These new powers will enable us to take quicker action to cancel permissions that are not used or needed.

Industry News

CFTC charges $44m Ponzi scheme but millions may have fled to foreign crypto exchange

The CFTC alleged that defendants transferred millions of dollars to an off-shore entity that, in turn, may have transferred funds to a foreign cryptocurrency exchange. None of these funds were returned to the pool.


Saxo Bank deploys Adenza to address Basel and EBA requirements

The integration of ControllerView will enhance Basel-driven capital calculations and reporting at Saxo Bank in support of the bank’s multijurisdictional capital and liquidity reporting requirements throughout Denmark, Switzerland and UK, with plans to expand into the Netherlands.

Executive Moves

ComplySci appoints CTO, CPO, and CLO to further regtech’s product expansion

ComplySci offers compliance software used by more than 1400 global institutions to identify risk and address regulatory compliance challenges.