Today, here in Limassol, Cyprus, the world’s largest ever FX industry conference is set to open its doors to over…
Today, here in Limassol, Cyprus, the world’s largest ever FX industry conference is set to open its doors to over 2,000 executives from every sector of the FX industry.
During the course of the day, FinanceFeeds will provide live coverage, including interviews with industry leaders, detailed synopses of discussions and debates covering the current matters that are of great importance, and essentially who is talking about what, as well as news and launches.
As a precursor, FinanceFeeds has spent the last two days with a number of executives here in Cyprus, culminating in the welcome party which preceded today’s iFXEXPO hosted by ConversionPros.
The welcome party, which took place at La Isla Beach Bar in Limassol, and was hosted in conjunction with binary options platform and software development company O-SYSTEMS following the launch of the company’s intuitive O-SYSPRO fully automated binary options brokerage solution, welcomed over 1,500 guests from across brokerages, technology vendors, introducing brokers, prime brokerages, liquidity specialists, charting and analytics companies, education firms and digital marketing experts.
Prime brokerage and bank relationships is a very hot topic
Perhaps as expected, the way that brokerages engage with prime of prime service providers and liquidity aggregators is one of the most critical topics that is on the minds of many executives that we spoke to yesterday, ranging from operational directors in some of London’s largest spread betting and CFD firms, to institutional FX experts within vendors and service providers from North America right the way to platform integration experts right here in Cyprus.
During the course of 2016, the entire business model by which liquidity is distributed to electronic trading companies has become a matter for consideration, for many reasons, one being that the average owner of a retail brokerage has a far greater understanding of how liquidity provision works from a structural and technical perspective, and another being that the Tier 1 banks have taken a very conservative approach toward their relationships with prime of prime brokerages, resulting in Citigroup actually producing a research piece recently denoting a potential 56% potential default rate by liquidity providers which provide services to retail brokerages.
As a result of these factors, three dynamics are emerging:
- Brokerages are no longer prepared to connect their system to another, larger retail broker which acts as a liquidity provider yet processes the order flow via the same dealing desk as it does its own direct retail customers. This model is now being regarded as one that disempowers brokerages and places them on the same level as retail customers, and does not provide any indirect relationship with bank liquidity.
- The double edged sword is that whilst the demand for direct connectivity to genuine prime brokerages is at an all time high due to the first point here, banks are restricting liquidity due to the counterparty credit risk that they consider to be high. As a result, innovative solutions are being developed by very experienced integration and trading environment technology firms such as oneZero and PrimeXM in order to foster greater prime of prime relationships and provide better access to liquidity for retail brokerages, with reduced cost per million.
- A select number of large, well capitalized brokerages, mainly those based in the institutional FX heartlands of London, are beginning to develop their very own genuine prime of prime service, with direct relationships with banks. Firms with very strong capital bases are able to lodge collateral and have executives who are highly experienced in institutional relationships to be able to carry this out.
Indeed, in London, ADS Securities recently launched its own dedicated Prime of Prime service, with direct relationships with Tier 1 banks, meaning that medium sized brokerages can take on such a service and gain access to Tier 1 liquidity, within separate, dedicated units rather than have their order flow placed with the retail dealing desks offered by many firms in the past.
In explaining how he views the current topography, Marco Baggioli, COO at ADS Securities explained to FinanceFeeds recently “To me , when I look at the retail space, I divide the world into 3 major groups of providers.”
“One group is made up of global players like ADSS, FXCM and Saxo Bank. Those, whether they were hit or not by the Swiss National Bank event in January 2015 tend to have less problems with regard to cost base or PB credit lines” he explained.
“Global brokerages have less problems with their cost base because even if these brokers have retail clients on small tickets, their prime broker allows for very cost effective aggregation of trades. These global players have the ability to keep prime brokerage costs low by not suffering small ticket charges. They do this by putting together the flow of a very large number of clients and give them to their prime brokerage once aggregated usually via Netlink” – Marco Baggioli, COO, ADS Securities LLC
“The second group is made up of purely local retail brokers which are specialists in their own niche market or region, whether it is because of regulations that mean that they cannot go abroad, or it is because everything is in the local language of their market, for example” explained Mr. Baggioli.
Mr Baggioli explained “for smaller regional brokerages, “I would recommend not to go the prime brokerage way, not even the PoP one. It is better for that type of retail brokers to go to a global provider like ADS Securities and take our liquidity in aggregated form instead. We have access to about 80 feeds from bank and non-bank providers as well as from ECNs in one package with no PB costs at all; our retail broker client can chose what LPs the want to add to the pool and we can save them 100% of the prime brokerage costs, whilst providing the same level of best execution they are getting today.”
On this subject, Natallia Hunik, Global Head of Sales at Advanced Markets will today present to the attendees of the iFXEXPO on what exactly constitutes a prime of prime, and how YOU can actually become one.
Coming up soon: We know of two large firms which are setting up prime of prime services, headed by very well regarded industry professionals and will report in detail on that very shortly.
How to keep your introducing brokers happy, and automate services
Remarkably, the focus for many brokerages in terms of keeping their client acquisition and retention costs down is beginning to move away from the traditional media buying model in which firms attempt to optimize banner advertisements to attract customers and then charge a sales team with the responsibility of calling leads generated by such banners, before retention account managers then call to increase the lifetime value of retail customers.
The difficulty in sourcing effective retention staff was highlighted last week in the advent to this conference during a meeting with Sivan Peled, CEO of PELED HR in Tel Aviv, who highlighted the importance of finding the right staff and the associated challenges.
Companies which provide services to retail brokerages are now looking at two methods – one being the provision of automated systems which attract clients automatically and then use data and electronic calls to action to retain the clients, therefore reducing the cost of operating a brokerage significantly.
Haim Lagziel, CEO of O-SYSTEMS spoke with FinanceFeeds yesterday about the importance of going down that route, the company’s O-SYSPRO solution being an example of how the binary options call center model may well be obsolete.
Much of the regulatory pressure being applied by the general public across many jurisdictions – France and Israel being main ones – concerns the method by which binary options are sold, and the high pressure sales tactics which are being applied in some cases, not the actual product itself or the trading environment.
Aside from automation, the integration firms are now looking at methods of enabling brokerages to reduce the cost-per-million that they have to pay to capitalize their liquidity flow and platform. This is now a major item on the agenda of many firms.
Introducing brokers still play a significant part, and ingenious methods of negotiating good remuneration packages whilst maintaining a good relationship with international brokerages has come about.
One particular introducing broker who had arrived yesterday from North America explained how he had bought his account manager at a London brokerage some new hair extensions as a good barter agreement!
Diversification of services – The age of the multi-asset firm
Multi-asset brokerage is still a path that many firms wish to follow, some via the expansion into CFD products, others by connecting their platforms to providers of stocks and equities.
The drive toward offering CFDs outside of the UK which existed a year ago has receded, with far less companies looking to counter potential exposure to negative client balances as a result of high volatility by offering what is effectively an OTC futures contract.
Last year, FXCM CEO Drew Niv explained the challenges associated with providing CFDs during a meeting a the firm’s head office, one of which being the difficulties associated with clearing CFDs and how to price them.
GAIN Capital’s purchase of British speadbetting company City Index was partially driven by the will to take CFDs to a global audience. Over one year on, this has not featured as part of a model that other brokerages have followed, with recent mergers and acquisitions having been centered on acquiring client bases or specialist technology that can increase the prowess of trading systems.
At 3.30pm today, Alex Kachur, Project Manager at PFSOFT will speak to the iFXEXPO attendees on what constitutes a true multi-asset solution and how to obtain multi asset technology, as well as what a multi-asset solution requires in order to operate.
These are just a few of the important topics that are being discussed at the moment, and during the course of today, FinanceFeeds will continue to report in detail from the largest FX industry conference in history.#ifxexpo, #ifxexpo 2016, #O-SYSPRO, #o-systems