Why retail brokers are launching prime services

Rick Steves

Insights are provided by leading industry experts, including Elina Pedersen, Co-CEO & CRO of Your Bourse; Andrew Saks, Chief Product Officer at TraderEvolution; Natalia Zakharova, Head of Business Development at FXOpen; Alexandros A. Patsalides, Head of Deriv Prime; and Jay Mawji, CEO of Infinox.

Retail FX and CFD brokers, traditionally catering to individual investors, are increasingly expanding into the B2B domain in a noticeable evolution in the brokerage industry, driven by several key factors, including technological advancements, regulatory changes, and market dynamics.

Recognizing the benefits of serving a broader client base, particularly one that buys in bulk and is not subject to the same regulatory protections as self-directed traders, retail brokers have been launching their institutional arms. This B2B expansion allows retail brokers to tap into larger trading volumes, secure more stable income sources, and enhance their market presence.

The trend of retail brokers launching prime services marks a significant evolution within the brokerage industry, motivated by challenges in accessing institutional liquidity and stringent regulatory pressures. Since 2015, the industry has faced hurdles such as high deposit requirements, strict Know Your Customer (KYC) processes and the adverse perception of retail FX trading conditions. These factors have driven brokers to seek new opportunities in the B2B arena, offering liquidity and specialized services to smaller firms.

This strategic pivot aims to open new revenue streams and alleviate regulatory burdens. However, it requires a deep understanding of risk management differences between consumer and business clients, sophisticated technological solutions, and a strategic approach to product offerings and partnerships. The transition to B2B is seen as a way to diversify and scale operations, yet it comes with its own set of challenges, including the need for a fundamental rethink of business models to thrive in a competitive landscape.

This feature article delves into the reasons behind this shift, the methodologies employed by brokers to navigate these new waters, and the future outlook of this burgeoning trend. Insights are provided by leading industry experts, including Elina Pedersen, Co-CEO & CRO of Your Bourse; Andrew Saks, Chief Product Officer at TraderEvolution; Natalia Zakharova, Head of Business Development at FXOpen; Alexandros A. Patsalides, Head of Deriv Prime; and Jay Mawji, CEO of Infinox.

Why and how retail brokers are launching prime services

Elina Pedersen, Co-CEO and CRO of Your Bourse, takes us through why retail brokers are venturing into the B2B world. “I believe moving into “B2B” has been trending ever since 2015 when real institutional liquidity (especially Tier 1 and even Tier 2) became less and less accessible for smaller brokers and asset managers. There are actually many reasons for the trend: large deposits needed, low leverage, low NOP limits, and of course the KYC itself including the credit committees that just don’t accept the retail business, which is probably the most difficult part to get in order to be able to work with the institutional providers.

“Tier 1 and Tier 2 liquidity providers simply don’t see any value in retail FX and at times they even deem the industry toxic due to the retail tendency of offering artificial trading conditions (0 spreads, swap-free, etc). Of course, we shouldn’t forget that the retail industry is dominated by b-book, therefore the flow that is sent to the liquidity providers might be in fact toxic by its nature e.g. swap, latency arbitrage, etc that the b-book broker just can’t digest.

“Therefore, retail brokers saw a gap in the market and started offering their own liquidity which is ultimately recycled Tier 3 at its best and Tier 4-7 at its worst to the smaller retail firms. Very often, however, those B2B brokers do not understand the difference in risk management between B2C and B2B and they completely disregard the negative mathematical probability they are facing by offering retail conditions to their B2B clients. That’s one of the reasons we’ve seen many brokers struggling to retain the profit margins at the end of 2022 and throughout 2023.

“In reality, institutional liquidity and especially market making requires the tools and the knowledge to get the equation right, it’s not impossible with the retail trade conditions offering, but it’s definitely not just a few markups and delays here and there. It’s a lot more statistical with the need to understand the exposure limits, delayed hedging, and many more. Luckily, at Your Bourse, we offer the tools as a part of the standard product and we see many mid-size brokers successfully moving into the B2B space.”

Regulatory pressure pushing retail brokers into B2B

Natalia Zakharova from FXOpen views the B2B move as a strategic evolution. Facing tighter regulations and looking for fresh revenue streams, retail brokers are putting their market wisdom to work in the B2B arena. “One of the primary catalysts for this shift is the escalating regulatory scrutiny faced by retail brokers, particularly concerning the onboarding and solicitation of retail clients. Compliance with stringent regulations can be resource-intensive and challenging, making it increasingly attractive for brokers to explore the potentially more lucrative B2B market. By targeting businesses rather than individual investors, brokers can alleviate some of the regulatory burdens while tapping into new revenue streams.

“Furthermore, the offerings that retail brokers bring to the B2B table are highly valuable. Beyond simply providing liquidity, they can offer tailored risk management services, streamlined onboarding processes, and sophisticated proprietary software solutions. These capabilities are in high demand among businesses seeking to optimize their operations and mitigate financial risks. Moreover, forging partnerships with B2B clients can lead to mutually beneficial relationships, fostering long-term growth and stability for both parties involved. By collaborating with businesses across various industries, retail brokers can expand their reach and diversify their revenue sources, reducing dependence on any single market segment.”

The next ‘golden egg’  risks being a very expensive lesson

Jay Mawji, CEO of Infinox, which launched IXO Prime, gives us a candid take on the leap from retail to B2B. It’s not just about chasing the next big thing; it requires a complete rethink of product offerings, technology use, and risk management. The B2B space, while lucrative, is just as competitive as retail, if not more. Mawji’s advice? Tread carefully. The shift might seem appealing, but it’s filled with pitfalls for the unwary. There’s still plenty to explore in the retail realm, suggesting a focus on value and client relationships might be a safer bet for many.

“The B2B space (Prime) is significantly different to the Retail space that many brokers have established themselves in. No doubt, with an incredibly competitive Retail space, brokers are looking to what appears to be the next ‘golden egg’, which some might assume comes in the form of a B2B offering.

“Through our experience of establishing our well-regarded IXOPrime product; we have seen that the B2B space requires a committed product offering and fundamentally different approach to the use of technology & risk management that is adopted in the Retail market. This can be quite challenging and firms moving into this space risk ‘upsetting’ their B2B business or leaving them exposed to what could be a very expensive lesson! And of course, the B2B (Prime) space is equally, if not more competitive than the Retail market.

“There is much more that can be done in the Retail Space, with a focus on a value offering and client lifetime cycles that the leap to B2B might not be the best option for many firms.”

FinanceFeeds also spoke with Deriv Group, which recently launched its institutional arm. Alexandros A. Patsalides, Head of Deriv Prime, said: “Established retail brokers are moving into the prime market so they can offer services typically reserved for big institutional clients to a growing customer segment in the market: increasingly sophisticated traders and asset managers and small-to-medium institutional clients.

“In our case, our Deriv Prime partners are coming to us because they want more flexible ways to fund their margin accounts and we can offer more choice of liquidity connection options. We can also do this without being just transactional either. Our model means we can offer our Liquidity Provision with the appropriate level of support each partner needs so it becomes a collaborative offering and one based on Deriv’s wider pillars of trust, accessibility, and partnership.

“Advances in technology have also made it easier for brokers to start-up a brokerage business because of lower costs and the ability to scale services faster. It’s an obvious way for retail brokers to diversify their revenue streams beyond traditional high commission-based models and can be a great differentiator in an increasingly crowded market.”

Increase revenue and credibility via product diversification

Andrew Saks

Andrew Saks of TraderEvolution breaks down the shift towards B2B as a smart move for brokers looking to scale up and diversify. “It is clear that a natural progression toward building a scalable B2B offering is now in the frame for many brokerage firms that have become established within the retail electronic trading industry. Currently, there are specific categories which companies that have gained market share by providing B2B services fit into, those being the provision of either their own or external liquidity, via prime of prime brokerage services via FIX API, another example being via white label solutions which make up a valuable activity of companies with their own infrastructure such as Saxo Bank, Interactive Brokers or Exante, and then there are companies which provide services via a Client API such as DriveWealth or Alpaca Securities.

“Being able to offer genuine B2B solutions along these lines ensures the ability to increase revenue and credibility via product diversification without limitations or the inevitable conflicts of interest inherent in simply offering the same environment to a B2B client as used by existing retail clients. This means that brokers must have full control over their core technology so that they can dynamically provide comprehensive services via white label solutions or via API business rather than simply offer a retail trading environment to B2B partners.”

The shift of retail FX and CFD brokers towards the B2B sector marks a significant evolution in the brokerage industry, as articulated by industry leaders, is not without its challenges and risks. It demands a strategic approach, deep market understanding, and the adoption of sophisticated technological and risk management solutions.

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