The global forex market has changed quite a bit over the last decade–along with regulatory consolidation, technological innovation has led to a “flippening” of retail and institutional service providers: legacy solutions are increasingly being replaced by solutions that once served the retail market; solutions that are faster, lighter in weight, and lower in expense.
Recently, Finance Magnates spoke to Tom Higgins, chief executive of UK-based trading platform integration and liquidity management solution provider Gold-i, which has been operating in the forex space for over eleven years.
We asked Tom about his perspective on how regulatory changes have impacted forex markets, how tech has evolved in the space, and what Gold-i’s strategy for growth and scalability has been since its establishment in 2008.
In the past, enterprise-grade tools for retail Forex traders were few and far between
Tom explained that when Gold-i was founded, there was a serious need for better tools for retail forex traders: “when we started, there were almost no tools for retail brokers to access–they were very much in the dark,” Tom explained. “There was very high volatility then, so it was really difficult for them to know if they were going to make money or not make money because the risk management tools were very poor.”
Therefore, “our first product was a risk-management integration so that people could see in their back-office what trades they’ve got, and then they could analyze those to look at how their positions were building up and where their risk was concentrated.”
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“We then move onto our second product, which is our bridge product, which allows brokers to cover their trades in the market. Now, where we talk about ‘giving institutional products to retail’ is that these sort of tools have been completely standard in the institutional market…but in the retail market, that just didn’t happen”
Indeed, “you didn’t have these sorts of tools,” Tom said. This provided an opportunity for Gold-i to offer something unique: Tom said the company became one of the first to offer institutional-grade forex tools to retail brokers.
“With our tools, we enabled a whole load of retail brokers to grow much faster than they could’ve done [otherwise], and survive in choppy times because they knew the risks that they were carrying; they knew what positions they’ve got, they could take on clients that were professional–they didn’t want to take the other side, they didn’t want to B-book, because they got covered in the market.”
“Using tools such as our Visual Edge product, [brokers could see] which clients they should B-book and which clients they should A-book, as well as a whole bunch of other things.”
Institutional forex providers should be wary of the “Apple & Blackberry Effect”
Tom said that in the years since these products were originally released, Tom explained that there has been a number of “copycat” firms: “I think copying is flattery–we’ve been copied a number of times with tools like that, but I think we’ve still got the best ones in the [risk management] area.”
In fact, “we’re still expanding [those tools],” Tom continued. “What’s quite interesting in that side is that the institutional world has been going for much, much, much longer, so the tools are there, but they don’t really change very much. It’s very difficult for banks to change these big tools because it’s just too dangerous to change anything in a bank”
And so, what we’re seeing is almost like the ‘Apple & Blackberry Effect’–Apple was almost all retail products, and Blackberry was used by business, and Blackberry said, ‘no Apple product will ever compete with ours, because that’s just for retail people.’”
"90% of brokers wouldn't meet FX global code of conduct standards. Many of them don't want to. I think they should, it's positive steps and creates a fairer market." Tom Higgins, CEO at Gold-i @gold_itech #londonsummit19 pic.twitter.com/4rxrCQybV1
— Finance Magnates (@financemagnates) November 13, 2019
Eventually, however, “Apple crept up and crept up–and we’ve seen what’s happened to Blackberry, it’s almost completely disappeared now.”
Tom said that a similar thing is happening with tools for retail traders, including the ones that Gold-i produces: “[retail products] are challenging institutional products because they are significantly cheaper and significantly faster, because they don’t have that sort of ‘legacy’ behind them.”
“There’s going to be quite an interesting change over the next couple of years–I think the traditional institutional providers are going to have to [either] stop charging very large amounts of money or re-invent their products, because they’re getting a bit ‘dinosaur-y.’”
Strategy & scaling
As such, Gold-i has begun moving further into the institutional space, a factor that has allowed the company to continue to grow and scale since was founded over a decade ago.
Beyond this, we asked Tom what the company’s strategy has been for growth and adapting to changing markets over the last twelve years.
“The first five years were probably very easy, actually–it was a massively growing market; you really just stood there and orders arrived. There wasn’t a great deal of competition–[there were] so many brokers wanting to get into the market. We were probably getting four or five requests a week for new brokers setting up, which is absolutely extraordinary.”
But, alas, nothing gold can stay — ”eventually, [forex] regulators stepped in and went, ‘hang on a minute–this isn’t good for end-people and investors are losing money at an alarming rate; it’s poor quality with quite a lot of brokers, so we need to step in.’ That changed the market quite substantially.”
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Looking ahead: “we’re not scared to go down avenues that might be the wrong road.”
When regulatory action began to quell the influx of new brokers, the company had to find new ways to continue to grow: “one thing we’ve always done is that we’ve always spent at least 50 percent of our development–sometimes more, depending on what we’ve been doing–on research and development. So, we’ve always been building the next level of products rather than simply carrying on with what we’re doing today–we’re always looking ahead.”
This forward-thinking strategy has ledGold-i to expand into new areas, including building products for the crypto space: “we stuck our neck out on the crypto stuff,” Tom said, adding that at the time, “nobody else did.”
“It hasn’t paid off quite yet, but it’s developed into another area; we’re now much more advanced with our digital asset work… than our competitors can be, because they didn’t go into that space at all.”
A new 'Gold-i Demos' video is now live! 🎬
— Gold-i (@gold_itech) January 22, 2020
Indeed, ”we’re not scared to go down avenues that might be the wrong road, because if you never do anything…you’ll never advance.”
Meanwhile, Tom says that Gold-i’s competitors “have stayed fairly standard in what they’re doing, [which] means they’re more exposed if retail markets reduce. In Europe, the retail FX market is pretty stagnant, as far as growth goes. Asia is different–I don’t know if the Coronavirus is going to change that, but we’re certainly seeing substantial growth in Asia. That’s where it’s all happening.”
“With crypto–it’s not going to replace FX, as people sort of thought it was,” Tom said. “It’s an additional asset class that could be interesting to trade for speculators.”
When a company is in the race for the long haul, flexibility is key
Tom also noted that having a flexible business model is essential to “rolling with the punches” and succeeding in the longer term.
One of the things that Gold-i has had to adapt to is the fact that “certainly, for the last few years, there seem to have been a whole bunch of ‘black swans’ gearing up, waiting to buy [into the forex] market,” Tom said.
“It sort of started with the Swiss National Bank (SNB), which had quite a delayed effect–so, when the Swiss decoupled their currency, it took probably a couple of years for the full effects of that to come through.”
This caused a number of banks, “[including] Citibank, for example, to exit the market at that point–probably a year or so later, because all of their compliance people had believed that this was a risk-free product…but what they hadn’t really looked at was that there were different leverages offered from the brokers to their clients, and from them into the bank.”
“And so, it really wasn’t risk-free–because if there’s a big move, the end-client is much more protected than the professional-to-professional market…so, then you’ve got a period when you’ve got a load of alternative liquidity providers coming in, and some of them were good quality, and some of which were not,” Tom said.
“So, there was a whole ton of work which vendors like us had to do in integrating all of these new liquidity providers, half of which never went anywhere–so that was a bit of a waste of time.”
Then, “you started see some consolidation [among private forex companies]…and you started seeing the banks become less involved, and non-bank market-makers (Citadel Securities, XTX, and other market makers) getting much more prevalent in the market, and actually doing a better pricing job than the banks could probably do because of the fewer restrictions they’ve had.”
”Regulators never used to talk to each other–which was quite nice”; however, times have changed
Gold-i has also had to adapt to changing regulatory conditions in the global forex space.
Tom explained that when the company was established, “regulators never used to talk to each other–which was quite nice.” Therefore, as a broker, “you could move around if you wanted a more preferential regulatory regime.”
In the past, a company could move to, say, Cyprus, “if they wanted a nice, easy ride, but they still wanted to be in the EU passport. Then, Cyprus sort of went, ‘hang on a minute, we don’t want to be the dumping ground for people, so we’re going to tighten up and become a really strong regulator.”
For a while, the cycle would continue: “[forex companies] would move to Malta, who did the same sort of thing, and then they moved to Australia, who is now doing the same thing.”
However, this is becoming less and less possible: “regulators now speak to each other; they operate in unison, they sort of take each other’s advice–this, I think, started with the [changes by the] European Securities and Markets Authority (ESMA.)”
“It had an enormous effect on the market,” Tom said. “People didn’t realize quite how much it would.”
Tom explained that in the short-term, “a side effect of this is that it does push brokers offshore–but if all of the regulators are doing this, end-clients should be wary of trading with too many off-shore businesses, because they’re not protected in any way at all.”