FX BROkERagE OpERatiOns
Top class technology lowering risk and easing the FX brokers path towards increased sales and client acquisition The phenomenally massive industry that is electronic foreign exchange trading demands nothing but the best software, hardware and trading infrastructure. This is particularly true for both Retail and Institutional FX brokerages where top class technology can lower risk and ease a broker’s path towards increased sales and client acquisition. However, as Heather McLean discovers, finding and choosing the most appropriate technology is no simple feat.
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Increasing numbers of FX brokers are being forced to re-evaluate their core trading infrastructures and operational procedures. Andrew Ralich, CEO at oneZero, believes there are two primary reasons for this. He explains: “As global markets mature, so do the regulations that govern how a broker must operate their business. A trend towards transparency in execution for clients and strict regulatory reporting on trades lends itself to a more developed infrastructure in terms of STP processing, back office reporting
FX BROkERagE OpERatiOns
and risk management. Third party providers who have developed such solutions for markets such as the US (NFA), UK (FSA) and Japan (j-FSA) are therefore already positioned to provide such facilities into new markets where the regulation is demanding more from brokers. “ “The other factor that influences brokers’ moves towards outsourced infrastructure and operations is sophistication, which has two sides: client sophistication and broker sophistication,” says Ralich. “As clients grow in sophistication, the complexity of a brokers risk management procedure and tendency towards A-Book (agency) execution also increase.”
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Risk management “It’s harder to manage the FX book without the ability to internalise the flow across a large client base, like the largest dealers do.”
social or the next big thing, creates pressure on in-house development and IT staff to stay ahead. However, to develop these solutions in-house is expensive, risky and not very scalable. We believe that more and more brokers are ready to outsource IT and development efforts and convert these investments to revenue-based costs instead, which is a less risky approach. Our customers have outsourced their IT infrastructure to us so they can concentrate on what they do best, and have a knowledgeable and reliable partner to support their IT requirements.” Nick Solinger
Ralich continues: “In addition to addressing regulatory requirements, there are many technology providers who have already developed solutions for managing complex relationships between automated trading activity, brokers internal risk management and outsourced liquidity. Secondly, as brokers themselves grow and progress, the desire to normalise profit and revenue models, which can be done via agency, consistent risk management and operational reconciliation procedures, becomes paramount as a way to answer to shareholders. This normalisation of income and procedure facilitate IPOs and allow brokers to capitalise on more aspects of their business than simply market making,” Ralich notes. Karl Alfredsson, chief marketing officer at Fair Trading Technology, agrees, adding that: “The onslaught of regulatory requirements, together with increased client demand for new and improved trading platforms and top-of-the-line trading environments including mobile,
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Nick Solinger, chief marketing officer at Traiana, comments that there are different drivers depending on the position of the broker in the marketplace. He says for retail brokers, the lower volatility in FX markets has put pressure on brokers who operate as principle: “It’s harder to manage the FX book without the ability to internalise the flow across a large client base, like the largest dealers do. Accordingly, the agency model has been on the rise, as the larger FX banks with their more diverse client base are better sources of liquidity, and a feefor-execution model offers greater predictability for the retail broker.” “For small to mid sized institutional brokers, we’ve seen opportunity continue to increase globally as more participants enter the FX markets,” notes Solinger. “There’s been phenomenal growth in the Middle East, Asia and Eastern Europe, requiring brokers to expand globally and this brings operational demands. In large FX banks and FX prime brokers, managing risk, regulatory change and cost continue to be drivers of the technology and systems strategy.”
With this need to re-evaluate core trading infrastructures and operational procedures there is also a new drive towards improving risk management systems. Tom Higgins, CEO at Gold-i, comments: “A return of decent volatility to the FX market has increased the requirements for better risk management systems and procedures. Brokers need to know their net position, running P&L and exposure, in real time, all the time. Vendors like Gold-i work with medium and large brokers to really open up the data in their trading systems so that they have a holistic view of risk.” Stanislav Stolyar, vice president of FX products at DevExperts, agrees: “For big brokers, the major drivers in technology are the increasing volumes that are processed via the core order management system, and the need to optimise exposure/risk management by employing the most efficient systems and algorithms. The industry is experiencing consolidation via M&A’s and this is leaving CTOs in a situation where the technology zoo has to be brought under control. As opposed to the zoo metaphor, where the more kinds of animals you have, the better, in the trading industry the variety of trading platforms is not always a 100% obvious advantage; cost of ownership grows so it becomes a target for optimisation. The balance between variety and efficiency is important,” he warns. However, Alfredsson also notes that: “There is a fine balance between managing risk efficiently, keeping underlying STP liquidity providers engaged, and ensuring the broker’s clients are seeing consistent pricing. Brokers are now able to access tools and risk management applications that previously only the institutional banks had available. These tools are enabling brokers to manage everything from spreading to A/B book positioning to dynamic routing
FX BROkERagE OpERatiOns
rules based on currency pair or client in realtime.”
Cost optimisation
One of the major drivers for cost optimisation that surfaced last year was low volatility, which resulted in low profits or even operational losses for some brokers, notes Stolyar. “Cost optimisation programmes were put in place and they caused a revaluation of trading, risk management and operational procedures. Those brokers that are only making their first steps in the industry face an important choice of technology that will bring them their first clients. There are several interesting platforms currently available for them to evaluate and start the business with. Start ups are usually focused only on marketing and traffic, and the problem they face is the variety of platforms that are available now.” However, Juan Jutgla, director of institutional business, X Financial
“Innovation is picking up, right? The key is to stay nimble and responsive. The next killer app can show up at any time.”
Solutions, states: “Due to a recent lack of growth and volume in the retail FX sector, we are seeing more and more brokers launching or further developing their institutional business as another means of revenue. This shift from retail to institutional has resulted in a need to review the technical capabilities of their current technology offering for white labels and introducing brokers. This also leads to a popular industry topic at the moment surrounding platform and technology development restrictions.” Jutgla explains: “The time of a ‘one stop shop’ solution is no longer conducive to providing a premium service to twenty first century clients both at the retail and institutional level. X Financial Solutions is of the opinion that the future of broker/ vendor relationships are those of an open environment. Not only must a broker’s trading technology meet increasing client demands, but from an operational point of view it is imperative for the technology to seamlessly integrate with external accounting systems, CRM technology, reporting interfaces and the like, not only for regulation purposes but also to maximise business efficiency.”
Fine tuning and automation
Stanislav Stolyar
Continuously studying and analysing the market, competitors, and industry peers, is an essential
“For big brokers, the major drivers in technology are the increasing volumes that are processed via the core order management system, and the need to optimise exposure/risk management by employing the most efficient systems and algorithms.”
Karl Alfredsson
route to business efficiency. But what Jutgla believes is critical, is the continuous analysis of internal processes, reviewing business intelligence and streamlining a brokers’ existing technology and third party integration to ensure ease of use for not only their clients, but also staff. On what steps brokers can take to identify fine tuning and automation requirements, Alfredsson says brokers should look at how they are managing risk, and how their current core trading infrastructure looks today. “Are they getting an ‘at-the-glance’ view of their exposure across all traders on all trading platforms at the same time? If not, their best case outcome is that they are running an inefficient operation. The worst case is that they are taking on unnecessary risk, with the added possibility of sustaining unnecessary and unpredictable trading losses,” he remarks. Ralich also notes that: “Brokers who succeed in developing a brand and
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marketing strategy often struggle to keep up with the demands of client flow, specifically when automated trading activity leads to constantly shifting risk and client profiles.” “Many times, the push towards automation comes as a necessity to scale,” continues Ralich. “Just as traders have automated their own processes to determine when to enter a position, so must brokers when handling the market making, agency and liquidity sides of their risk profiles. Identifying opportunities to outsource these activities, utilising proven systems for trade risk management and STP, brokers can find ways to profit on any type of client flow through a combination of sophisticated internal risk management and reliable means of outsourcing trade risk. This approach brings a far more consistent and reliable ROI for all trading activity that comes as a result of the brokers approach to brand and marketing.”
Looking FoR signiFiCant Roi
As to how brokers can work out where fine tuning and further automation of their existing trade workflows may bring significant ROI, Solinger says that the first step is to look for anything manual. “The best brokers today are 100% automated for trade workflows, risk management and are able to be very efficient with their resources; with the right infrastructure in place, it should be ‘just add water’ to grow volumes. Beyond that, look for opportunities to aggregate volumes to reduce cost of settlement,” he recommends. “Client netting and retail netting can reduce costs, increase capacity and allow you to grow the business without incurring significant additional costs. It also brings greater predictability to revenues and profitability for the retail broker, which allows them to confidently invest in growth and acquiring flow.”
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Solinger continues: “Lastly, watch for the risks. In the pursuit of lower costs and increased revenues, you need to look at the risk profile of the client base and the pace at which your risk controls can stay on top of the trading activity. For retail brokers, or institutional brokers taking automated or algorithmic/ high frequency clients, specific controls are needed to ensure that technical or operational issues don’t give rise to market risk.” Stolyar mentions the first step to identify where tuning efforts have to be applied is to figure out what type of clients the company caters for. For established companies the obvious route to expand their business seems to be in adding new asset classes, he says. “Starting with just spot FX, they add CFDs, spread bets, after that some start looking at exchange traded instruments like futures, others move to a more speculative market like binaries. This is the moment when the technology universe becomes complex enough and brokers start thinking about consolidation and automation
of various operations under one technology umbrella.” “They get lucky if the platform they have started their business with a few years ago is flexible enough and technology vendor is ready to custom tailor the platform for a broker who is mature enough now to afford deep customisation,” adds Stolyar. “In terms of ROI, risk management and order routing engines which take cost of transaction into consideration when the routing decision is made are usually a right choice because they let brokers save on manual labour on the trading desk, and provide for more accurate and consistent profits by utilising the best liquidity providers.”
Liquidity management
Specialist FX technology vendors are also assisting retail brokers to optimise their liquidity management operations. Higgins notes that vendors such as Gold-i, with advanced liquidity management built-in, provide an array of tools to the broker to allow them to
FX BROkERagE OpERatiOns
Top class technology
implement the risk policy that they have chosen, and to be able to tune that policy on-demand. He adds: “Very few brokers just run simple A/B book models anymore, with most either operating 100% A book or building a hybrid solution using client profiling to decide how to cover the business.” Liquidity management is one of the key ingredients of the successful brokers’ operations, notes Stolyar. However, retail brokers who primarily work in B-book mode with infrequent exposure management orders sent for external execution are primarily concerned with the reliability of the liquidity provider, he remarks. “Those brokers do not need sophisticated liquidity management solutions, therefore a couple of connections to liquidity sources for redundancy purposes should be enough for them.” “A-bookers and STP providers dealing with large traders or providing copy trade capabilities for clients may face quite complex situations that may be difficult
“Very few brokers just run simple A/B book models anymore, with most either operating 100% A book or building a hybrid solution using client profiling to decide how to cover the business.” to deal with without proper technology,” continues Stolyar. “For example, copy-trades may result in large volumes of client orders in a short period of time that have to be executed. Smart order routing solution has to be able to deal with those orders by sending them to the liquidity providers in a fast and efficient way. In this case one or two connections are not enough and brokers refer to the technology providers, liquidity aggregators.” As we have noted in this magazine over the last few issues, pressure on brokers’ trading infrastructures continues to increase. Commenting on this Ralich states: “The landscape of FX technology vendors has grown significantly as the demands from retail FX brokers have increased over the past few years. The number of tickets that trading systems must handle, plus the numerous liquidity relationships needed to run a multi-asset and competitive spread environment, creates significant demands for the technology infrastructure behind every brokerage.” “Technology providers, such as oneZero, have worked very closely with top tier firms to determine the most scalable means of managing internal and external books, and to be able to provide these facilities in a reliable, 24/5 fashion. The key for brokers is understanding how their highly complex systems, ranging across multiple platforms, liquidity sources and client types, are all
Juan Jutgla
“The time has come for forex technology vendors to become open and unrestrictive for their partners.”
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Tom Higgins
reconciled into a centralised system which they can reliably use to evaluate risk and develop strategies to increase ROI and profitability. Though some brokers attempt to develop such systems internally, there is a significant cost in terms of time and resources to do so, whereas the proven solutions that exist on the market today offer a wide range of flexibility without the up front risk and development time,” Ralich says.
White LabeL soLutions
Retail FX brokers can also leverage white label solutions to their advantage. On this point Alfredsson remarks that: “Innovation is picking up, right? The key is to stay nimble and responsive. The next killer app can show up at any time. The broker client is the kingmaker, really. By choosing a technology provider that is scalable, neutral and can facilitate smooth client transitioning between existing and new platforms, brokers can get an edge over less nimble operations. At the same time, they
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Top class technology
can also retain, and reactivate inactive customers with ease when the new killer app is crowned.” Higgins says: “Brokers who use white label solutions need to differentiate their offering in the market, which can be achieved in a variety of ways, depending on the trading platform chosen. Some platforms allow the broker to customise the offering and others empower the trader to add whatever features they want.” Retail FX brokers can use a new generation of bespoke white label solutions to capture new business opportunities and achieve faster time to market, believes Ralich. He says: “Just as outsourcing risk
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management solutions and back end infrastructure has been a common theme throughout the past few years, brokers are also choosing to leverage further economies of scale through relying on end to end solutions from technology providers.”
the demand of a differentiated, but consistently stable option for brokers to promote their brand through a variety of venues and asset classes, with the stability and consistency needed to operate in a space where success depends on competitive liquidity and 100% reliability.”
“The latest generation of platforms, including hosted solutions for popular systems such as MetaTrader4, but also binary options and other systems, can be deployed in a way that involves very little IT overhead but still garners the flexibility, branding and execution controls that a traditional in-house system would offer,” continues Ralich. “These solutions, like the industry itself, are evolving to meet
Jutgla states: “What is most important to us as a provider of technology is to give our partners the power in all aspects of the products we offer, not only through the open API structure of our technology but also for their growing white label business. For example, we are near completion of a new automated white label creation system, which has not yet been seen in the industry. This
FX BROkERagE OpERatiOns
industry, smartphones have become popular due to the thousands of great applications that developers have created for them. Modern smartphones are used by all types of people with different interests, habits and needs. Ability to deliver reliable and well documented technology, build a developer network, and to provide favourable commercials for developers, will result in trading solutions that will create enormous opportunities for brokers adopting those platforms.” “In electronic trading, industry open platforms will transfer a portion of costs from the broker or technology provider to the end user trader, who is ready to pay for customisation of his own workplace. It is a totally new experience of freedom of choice and efficiency that brings more clients to those brokers that utilise open platforms,” observes Stolyar.
CusTom mT4 and mT5 exTensions
will give partners of X Financial Solutions the power to set up and configure new white label partners automatically and efficiently. We look forward to the anticipated launch this summer.”
Taking advanTage of open plaTforms
The open platform concept is a growing trend in FX, however, without support from app developers it’s going to have problems gaining traction, states Stolyar: “The open platform concept that has recently been introduced into the trading industry is yet to prove its sustainability. This new trend has all the signs of becoming a major driver for the next few years. Using an analogy from the mobile
On what new customised and innovative MT4 and MT5 extensions brokers can deploy to help them reduce risk, lower costs and improve their customers trading experience, Higgins comments: “There are a huge number of MT4 and MT5 add-ins available on the market, but the quality and reliability of these is hugely variable. When a broker chooses a vendor’s products it is vital to test not only the functionality, but also the performance and reliability. Some interesting areas of work that Gold-i has developed are related to running multiple MT4 and MT5 servers and allowing the broker to have a single, holistic, view of their data across all of their servers.” Ralich observes that: “STP solutions for MT4 and MT5 have come a long way since the deployment of the first Bridges, which have become an essential aspect of a broker’s e-trading topology. As the established STP firms have
evolved, their responsibilities have grown from 1:1 liquidity bridging to handling multiple liquidity providers for failover, aggregation, multiplatform and multi-asset solutions. These components also now hook into multiple platforms and provide a flexible but solid backbone to the broker’s risk management infrastructure.” “In choosing reliable, established technology solutions, brokers are able to improve their quality of service for clients by offering consistent trading environments across multiple venues (platforms, mobile, etc) with consistent experience and uptime for their traders,” states Ralich. “These toolkits, which range from risk management to full end to end agency and reconciliation systems, allow brokers to tweak their appetite for risk depending on individual client metrics while also utilising the same infrastructure developed internally at top tier firms over a much longer period of time and much higher expense. Start up and maturing brokers in today’s space benefit significantly from the third party toolkits available right out of the box.” While Jutgla claims that it is now no longer really possible as an external party to create and customise extensions, plug-ins or toolkits for the MT4 or MT5 technology. He says: “The natural way of improving your client offering in this way is to introduce an open trading environment to run in parallel to the MetaQuotes platforms. The time has come for forex technology vendors to become open and unrestrictive for their partners.”
ChoiCe of TeChnology vendor
Alfredsson says there are various factors that should influence a firms’ choice of technology vendor to partner with. He explains: “The battle will be fought on three well
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known fields: marketing, technology and innovation. Increasingly we can see these fields merging as data points are captured and crunched from the whole value chain. Which campaigns are putting the most pressure on servers? Is the campaign generating enough additional ROI to compensate for additional costs incurred? Maybe the industry is not quite ready yet, but brokers should look for technology vendors who are asking these kind of questions and building innovative technologies to support it.” Solinger states: “It’s important for brokers to realise that we aren’t in a commoditised market; the end retail broker is very sensitive to the capabilities of the trading platform, and the robustness of the post-trade and risk management infrastructure are critical, especially for the broker using an agency approach.” Additionally, Higgins notes: “In this very niche and complex market, buying based on the lowest price only will usually lead to disaster. Choose a vendor with an excellent reputation, not only in the product functionality, but also in customer support and service management. Gold-i passionately believes in delivery a fantastic customer experience and works incredibly hard to delivering this across the whole product and service line.” Choosing a technology vendor to partner to help meet the increasingly complex challenges of the ultra-competitive retail FX brokerage market is no easy task. Jutgla states: “Brokers, banks and financial institutions offering a retail FX product to the market have the need to cater for ever changing client demands whilst maintaining the ability to differentiate themselves and promote their own brand identity.” Continuing, Jutgla says there are many questions a brokerage would
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“The technology firms who have grown with the industry over the past decade have already learned the lessons necessary to provide consistent, reliable technology for a very demanding client base.”
need to ask: “Is their technology open for future development as the market changes?; Can they connect to more than one liquidity provider and offer their clients the deepest liquidity?; Can any existing technology, such as CRM and accounting systems seamlessly connect to the new trading environment and back office system?; How would the new technology support their institutional/white label business?; Is ongoing support and training given after implementation of the technology? Our X3 Open Hub environment has been designed to answer all of these questions with our clients and their end users in mind.” Ralich believes brokers should avoid ‘flavour of the week’ technology solutions and make their decision to outsource technology based on which providers have established themselves as leaders within the space of outsourced risk and liquidity management. “In the ultra competitive retail FX space, stability and quality of execution are paramount,” he warns. “The technology firms who have grown with the industry over the past decade have already learned the lessons necessary to provide consistent, reliable technology for a very demanding client base. It’s important for brokers to look to a provider who not only has strong marketing and brand presence, but also a solid reputation for delivery.” Continuing, Ralich states: “Though many new options become available as the space continues to gain traction and attention from software providers, private equity firms and new platforms, the solutions that truly deliver on their promises
Andrew Ralich
are easy to find based on their established reputation and success with top tier firms. Determining if a technology provider is able to deliver on their vision is easily determined by asking questions such as ‘who else are you working with?’, or ‘how long has this solution been in production for?’”
ConClusion
In conclusion, Stolyar says that technology is one of the key drivers of the industry and therefore the vendor’s choice is very important. He recommends the following: “The major factors that should influence the firms choice should be the answers to the following questions: how am I going to be different from many other similar firms?; what am I going to do when my successful business grows and I get more requests from clients to add new asset classes?; how does it scale?; how is it managed on the operations side?; is the vendor ready to customise my solution when I can afford it?”