The voice from within: Senior industry executive dissects Belgium’s FX & CFD ban in detail

“If there is a surge in demand for STP brokers, and individual traders cease trading with market making focused brokers, then these brokers will be forced to change their way of working or face going out of business”

Last week, FinanceFeeds broke the news that Belgium had become the first country to ban retail OTC FX, CFDs and binary options. This ruling manifested itself as, in our opinion, a blanket reaction to damage caused by a few warehouse firms from unregulated jurisdictions, and also by the retail OTC binary options brands that have conducted nefarious activities in various regions globally.

Opinions vary on the decision by Belgian authorities, and speculation as to whether a precedent has now been set has accrued. FinanceFeeds spoke to various senior executives in the industry, and also maintains the perspective that it is down to us, the real and reputable FX industry participants to remain dominant over the minority of unregulated companies that cause damage for everyone.

Today, FinanceFeeds met with a very significant FX industry executive, whose anonymity is being preserved, who has substantial institutional experience and a wide and detailed understanding of where order flow is being executed, and who is warehousing and who is not. His perspective is as follows:

Industry leader goes into great detail

It certainly does seem unfair to tar FX and CFD providers with the same brush as Binary Options firms, but as you mentioned it could well be due to the unscrupulous market making focused brokers that are incentivised by clients losses and just using price feeds to make markets from.

In reality though for a pure STP broker operating solely in the retail space it is extremely difficult to make money if you do not at least internalise some of the flow, so although the practice of market making is a direct conflict of interest between the broker and their clients, they are at the end of the day a business that needs to make money so they can in turn offer the most competitive trading conditions to their clients to benefit from.

If any type of broker is working with low volumes/margins then inevitably the spreads they offer will be widened, which has a negative knock on effect to the traders too. So overall it is very tough to say that all brokers should operate on a pure STP model, as the traders will invariably start seeing higher spreads and lower leverage, which is arguably bad for the market in general.

There should be a middle ground found whereby the hybrid model is used for the retail market, with the brokers using real liquidity feeds from the banks and LPs, and partially executing on both A and Bbook models, with the Bbooked flow using the actual real market prices and available depth, to keep things as fair as possible for the end client. An example of this is how certain integration technology providers that have now built up their business on liquidity management provide service, one example being the design of PrimeXM’s XCore BBook engine.

This example is relevent because anyone Bbooking via XCore (and possibly other bridge technologies from specialist vendors) are able to use the real live market pricing from their connected LPs, decide what type or size of trade they wish to Bbook and then execute in the same manner as an Abook order, using the same depth of market and pricing available from the LPs. If b book systems offered by tech providers work like this, I feel it is ethical and fair for both the broker and trader.

From the traders point of view, it really should not matter too much if their broker is a market maker or not. They need to know their funds are secured so should only consider regulated entities and as long as they get good spreads and good quality execution with as minimal slippage as possible and are able to withdraw their funds quickly and easily whenever they wish to, then this is really all they should be concerned with.

Depending where an STP broker sits in relation to the key banks, where the majority of liquidity originates and is cleared, their flow can at some point be internalised by another entity along the chain, so there are no guarantees for an STP broker client, that their trades are indeed executed in the real market, in any case.

At the end of the day, apart from the regulators ever changing stance and rulings, the way brokers operate in the short to medium term will be dictated by what the trading community demands. If there is a surge in demand for STP brokers, and individual traders cease trading with market making focused brokers, then these brokers will be forced to change their way of working or face going out of business.

This is not something I would expect to happen any time soon though, if at all.

To summarise, there will always be jurisdictions that will allow FX trading, so even if more countries adopt the same stance as Belgium, I do not see this being a massive problem to the market in general. Some of the big banks could also be influencing this, to get rid of many smaller players in the market.

Regulations on the whole are tightening up and this is a trend that is likely to continue, putting an ever tighter strangle hold on the smaller players in the market. I expect that in the coming years there will be fewer and fewer start-ups being able to meet the standard requirements set by the regulators and therefore the bigger players will become ever more powerful.

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