Following its successful registration as an entity regulated by the Financial Conduct Authority (FCA), to carry out business in the largest financial center of foreign exchange trading (London) earlier this year, FXOpen UK, a trading name of the online forex broker FXOpen Ltd, has launched its UK website just yesterday, as the region becomes continually sought out by forex companies.

In an exclusive interview with Forex Magnates today, FXOpen UK principals spoke with us about the new website launch and some of the drivers behind the company’s growth plans and in choosing the UK as it builds out its competitively priced offering, through its new headquarters in London for its UK entity. This follows having achieved regulatory status with the Australian Securities and Investment Commission (ASIC), as previously covered by Forex Magnates, for its FXOpen AU entity.

Join the iFX EXPO Asia and discover your gateway to the Asian Markets

A fairly large broker in Forex Magnates’ opinion (under the overall brand name), the company’s offering is concentrated at the moment on the MetaTrader4 (MT4)  platform solely, and states it was the first to offer an ECN model for the MT4 platform in 2009. Through its New Zealand regulated entity, FXOpen NZ Limited, the company is duly registered with the Financial Service Provider Registry in New Zealand and a member of the Financial Dispute Resolution Scheme, as well as the Financial Commission.

UK Site Just Launched

The new UK website, under the name fxopen.co.uk, will have almost all of the same core products offered under the brands other sites, except for the PAMM account manager offering, due to prohibitive FCA regulations concerning PAMMs.

An example of the ECN functionality added to MT4 can be seen in a screenshot taken from their corporate website, posted here to the right.

As spreads and margins continue to decrease for brokerages, the advent of what is referred to as ‘institutional pricing available to retail clients’, is increasingly evident in offerings such as those by FXOpen UK.

Forex Magnates’ Scoop

In looking at the structure of its ECN platform, it’s clear that firms willing to make less on spreads in order to pass savings to clients, and thus compete for their business is a trend that has gained considerable traction, even though spreads alone are not indicative of execution quality or customer satisfaction of platform user experience. Concurrently, there are many brokers offering solid execution and competitive spreads and/or commission fee structures, with such platform models.

Today Forex Magnates spoke with Gary Thomson, Operations Director of FXOpen UK, regarding the new website launch and direction for the region, he said to us, “We are delighted to announce the launch of FXOpen Ltd (trading under the name FXOpen UK), an FCA regulated company here in the UK. FXOpen UK has been set up to bring the core values of the FXOpen group, the first company to offer ECN trading via MetaTrader 4 back in 2009, to the UK market. Founded by traders, we are committed to providing excellent trading conditions, fairness, transparency and technical innovations to enable and empower our clients.”

A screen shot of the MT4 platform that is posted on the FXOpen UK website, can be seen to display a very small difference between the bid/ask spreads in the order entry window that shows the tick-by-tick rate data history as can be seen in the example below.

Institutional Prices for Retail Traders

FXOpen positions itself as a brand that was literally started by traders and which therefore understand the needs and common impediments that traders are challenged with. Having originally started as an education center for technical analysis, the company commenced offering brokerage services in 2005, and has continually optimized its business since.

Because of the ECN structure of its offering and its overall philosophy, its interests appear to be aligned with that of its clients, as the firm says it doesn’t take risk on its clients’ trades, and instead acts solely as an agency facilitating the execution of customer’s orders through the third-party liquidity providers which it aggregates in its ECN offering.

The cost of lowering spreads and offering clients more savings, creates the juxtaposition where a broker will make less revenue per trade (or as commonly measured in USD per million units traded) when compared to higher spreads, in the hopes of attracting more clients whose effect on total volumes would positively offset any decrease in revenues per million as spreads come down.

Margins Squeezed as Spreads Narrow

This often inverted relationship of brokerage fees to trading volumes, is not always a proportional ratio (could be disproportional) and thus requires meticulous forecasting models with flexible assumptions when making critical business decisions that can affect long-term revenues.

Jeff Ward, Global head of ICAP’s new EBS Direct offering which was just launched, had been quoted as having said during a video interview that was published on the internet, that such margins will continue to decrease even as spreads have already come down considerably, and that spreads would also become even narrower across the industry.

The challenge that this puts on technology-driven brokerages is that a firm with lower spreads could have substantial trading volume, yet only make less revenue on that flow relative to its overall size (of the flow), and therefore requires a lean and efficient business model with less company overhead and staff or overall operating expenses to compensate.

Otherwise, unless considerable volumes can be achieved, revenue might not suffice to sustain the operation, paradoxically, a lean operation could be sustained even on smaller revenues (and even smaller volumes for that matter).

Aligning Broker’s Interests with Traders

As the traditional dealing-desk model has been under increased scrutiny following several waves of regulations, and expected best-practices aimed at providing customers with fair and best-execution of their orders by brokers, there remain various business models along the lines of dealing-desk operations that take risk by becoming principal to customer’s trades rather than just as their agent.

Smart-order routing, price discovery, execution policies and processes all come into play when designing a dealing desk such as those used by banks and liquidity providers or even retail online trading companies.  These aspects may be the subject of new regulations proposed to bring a standardized approach, as there still exists a degree of ambiguity regarding how certain firms manage to provide fair execution and best prices to their customers, as opposed to asymmetrical slippage or such cases of unfair dealing, or as a result of the latest probe by regulators into major institutional foreign exchange providers.

While the agency model sounds better from a perspective of risk, as noted before, there is still always two sides to a trade and whether bank, LP, broker or even another trader, details surrounding how trades are executed are paramount in understanding the value offered through such services.

No Dealing Desk (NDD) ECN Platforms

The subject of a No Dealing Desk ECN model has drawn controversy of opinion with regards to the actual definition that the acronym strives to describe. As is common in financial services technology, the terms used at one company may have a totally different dialect meaning when used by a different company to describe something similar. For example, this could be something as general as the term “back-office”, to a more specific term such as “market-order”.

For this reason, it’s important to understand the specific definitions of such colloquially used terms, as they sometimes do vary considerably from company to company, as each firm has unique processes and semantic interpretations of how to label its procedures and define them .

In a business model like that of FXOpen, the benefits are that some of the risks normally associated with the traditional or modernized dealing-desk model are mitigated to the 3rd parties that provide the liquidity, even though the counter-party stays the same (just like almost all agency models).

The Goal of a Transparently Open Business Model

This helps remove any potential-conflict of interest between the customer and the broker, and instead mitigate it to the LP who is expected to provide valid executable prices. Having multiple LPs certainly help to buffer any bad prices and diversify the available liquidity pool.

A diagram of the FXOpen Aggregator can be seen below, where four liquidity providers are shown in the example. As someone with considerable experience in FX, having held senior positions at prominent UK brokerages, Mr. Thomson explained to Forex Magnates during the interview today how this is only a portion of their LPs and how the firm is continually looking at expanding its access to available providers.

Mr. Thomson, added in his comments to us during the interview, “Our ECN service with level 2 pricing means clients have direct access to the market with no dealing desk intervention, no requotes and spreads as low as zero giving them an institutional experience whilst still receiving constant support from us.”

As a relatively new entrant into the UK market under FCA regulation (and yesterday’s website launch), FXOpen UK may be poised to replicate its success already achieved through its brand elsewhere, if trading volumes and market share can be acquired as the need for lower spreads and best execution in Forex is continually sought.