Tired of the regulatory expense and bureaucracy? Start a prop shop!

FinanceFeeds Editorial Team

Proprietary trading companies are quiet powerhouses. Chicago, New York, London and even Amsterdam are awash with firms that trade tens of thousands of lots each month on their own account, and which do not need to deal with clients or be regulated.

Some of the main concerns for OTC derivatives brokerages are regulatory expense and bureaucracy, in which capital has to be kept aside, constant infrastructure directives are foisted upon brokers with even the most modest of means, meaning that valuable time and resources are constantly committed to ensuring ever-increasing compliance with MiFID II, and the curtailment of how CFD products are marketed and executed is at the forefront of the minds of many executives across all areas of the business.

In addition, once the regulatory remit and its ever-changing conditions have been mastered, there is the conundrum of onboarding new customers, which costs an absolute fortune for the majority of retail FX brokerages, only to find that the average lifetime value of a client is short.

A longstanding anomaly for which the solution is yet to be completely discovered is the cost of acquiring new direct retail customers compared to the initial client deposit amount and lifetime value, that being the length of time that a newly acquired customer trades before either switching brokers or cutting losses and ceasing to be a customer.

Other silent anomalies in today’s retail FX trading environment centre around execution practices and the extremely difficult variable to monitor from the outside, such as slippage, however, this is a secondary concern to many first time retail clients, as it requires some degree of commitment for many new entrants to retail trading to come to terms with the technical topography of electronic trading.

New customers and novice traders, however, are of great interest to retail FX companies, largely due to the continual need to onboard new customers to replace those who no longer trade.

The metrics are quite interesting. According to FinanceFeeds extensive research, the average deposit for first time retail customers to a MetaTrader 4/5 retail FX brokerage globally is $3,800. It costs between $1,300 and $1,500 to acquire one client, and the average customer lifetime value is 6 months.

In the United States, the average deposit amount is $6,600, and the lifetime value is almost a year, however with just two companies left, and a different client base which largely comprises experienced traders with diversified portfolios who are used to the futures sector, thus is less of a metric to consider when analyzing the return on investment from attracting new clients.

A few years ago, British experts in traditional investments have been airing their opinions with regard to how many retail investors should set aside for their first foray into trading non-bank financial services, a viewpoint which has largely not been taken heed of.

Rather surprisingly, the amounts suggested by longstanding traditional investment firms are considerably lower than FX industry data which very clearly shows the average deposits made to FX firms across the world.

Gavin Haynes, Managing Director of British independent financial advisory firm Whitechurch Securities started some four years ago that £50 per month was a ballpark figure for those wishing to invest regularly, whereas £1000 is a starting point for a lump sum investment. This remains correct today.

“Traditionally people will go down the route of investing in funds as their first port of call. It can provide a good level of diversity through collective investing, and you get the expertise of a professional manager” he said.

This is quite remarkable, as it is a very small figure, especially when considering the use of a portfolio manager. Comparatively, FX brokerages with IBs that refer managed portfolios are used to onboarding clients attached to MAM accounts, many of whom are investors rather than traders (the IB trades the accounts), with deposit amounts running into the millions in some cases. The stagnation of this metric over the past few years is equally remarkable.

It is very common in Western markets for small to medium-sized brokers to onboard a new managed portfolio with a $50,000 deposit, whereas for Chinese companies, several million being referred to Western brokerages and approximately 90,000 lots per month being traded is absolutely normal.

Mr Haynes continued to explain that his advice to new investors is that if they plan to begin investing in one asset class, they should make sure to diversify across shares, government and corporate bonds, and property. That is some feat with just £1000.

Adrian Lowcock, investment director at asset manager Architas, says the minimum investment levels on online platforms serve as a guide to how much money you need to get started.

He agrees with Mr Haynes that £50 a month is preferable if you want to invest regularly. When it comes to lump sums, he thinks it’s fine to start with £500 if you want to invest in funds because there are no dealing costs.

However, his opinion is that investors should have at least £1,000 if they want to buy shares because that involves shelling out fees every time you make a transaction.

For an FX brokerage to consider operation with such low initial deposit amounts is anathema.

The large difference between first-time customers of retail FX firms and those making their first steps in other traditional assets is the length of time over which they remain customers.

Many asset management companies in Britain expect a new customer to remain on their books for at least 5 years, and in many cases would remain longer.

Mr Lowcock said “Think decades, not five years, It’s your long-term future, not saving a deposit for a property. Five years is the industry standard, but is fairly short term if you look at what goes on in markets in terms of volatility and economic cycles.”

This is a very expensive and high maintenance business. Dealing on a regular basis with clients with a low investment value over a very long period of time is stagnating at the very least, whereas FX firms are able to maximize their opportunities, along with their client’s returns, quickly.

There is one thing to consider, however, that being the steady nature by which traditional investments are portrayed.

In this respect, considering that these matters still loom heavily over all brokerages and that regulatory bullying and costs have increased, causing brokers to have to expend huge resources redesigning their entire model, proprietary trading is a method of conducting huge volumes by skilled in-house traders without the regulatory coercion, costs and client onboarding issues.

FinanceFeeds today spoke to Roman Nalivayko, CEO of TraderEvolution Global, who explained “The TraderEvolution platform is known for its versatility and capability to be used for a number of different business cases and targeting different types of traders. One of such use cases is active day trading as a part of proprietary trading service.”

“For this use case TraderEvolution’s backend is responsible for two main workflows, first is market simulation Infrastructure for testing traders before they will be provided with the real money.
And the second one is the number of risk rules that aim to limit the user’s intraday activity from different perspectives and minimising possible losses” he said.

“The desktop application which is used by the end-users is equipped with four different widgets that have their own set of tools for quick trading that allows traders to catch quick movements, by analyzing level 2, volume, and tick data” explained Mr Nalivayko.

It is absolutely the case that some successful brokerages are already going down this route. Worth it? You bet. No pun intended.

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