Britain is often considered home to many of the world’s institutional FX companies, most of which maintain a London-centric focus in terms of liquidity and relationships with banks within the world’s largest financial center.
The retail side of the business in Britain does, however, employ somewhat different business principles to those of overseas companies. In some respects, it reflects the same line of thinking as the institutional sector insofar as it is very London-centric, and that a vast proportion of technological development and platform design is conducted in house, rather than utilizing white labels or off the shelf MetaTrader 4 based solutions.
Today Britain, Tomorrow The World
The British retail FX market differs from that of many other countries in that traders and investors on the island nation have a propensity toward CFDs, therefore requiring certain specialist functionality. In addition, due to taxation laws in the United Kingdom, forex trading can be conducted via British retail brokers under the legal terminology of spread betting, which renders the profits gained from ‘betting’ on currency values tax free in the same vein as profits gained from gambling, whereas trading financial instruments for profit is subject to income and capital gains tax.
British firms such as ETX Capital and AFX Capital Markets offer their own, in-house platforms to a British audience, however as time goes on and competition around the world increases along with the cost of remaining in business, the attraction of gaining a share of the overseas market becomes ever more appealing.
Earlier this month, AFX Capital Markets COO Rachel Clark demonstrated to Forex Magnates that large markets of expansion for the company are Dubai, Italy, and Russia, showing the need to provide a good solution which suits differing regional audiences.
The company also has embarked on establishing different business units, as it diversifies into the institutional sector, and becomes a technology provider, alluding to the provision of its solutions to white label partners overseas.
“We have been working very hard on this differentiation over the last year splitting the business into 3 different areas: STO for the pure retail clients, Market Technologies for the Institutional and Quantic for the portfolio management. We are also working on USPs in each area for example on the retail side more CFDs on the MT4, other platform choices, Sostituto d’Imposta (for Italian clients) etc. This way we can give each client the tailored product he requires” explained Ms. Clark.
Just recently, compatriot British firm ETX Capital partnered with Gold-i in order to be able to offer its clients the MetaTrader 4 on an STP basis alongside its in-house platform, and IG Markets also began to offer MetaTrader 4 alongside its bespoke platform.
Of course this results in two sets of costs, as the MetaTrader 4 has to be capitalized, and the development team has to be paid to support and upgrade the existing platform as time goes on.
ETX Capital implemented Gold-i’s low latency Bridge, and added a wide range of Gold-i Bolt-On products, including the Gold-i MultiMAM, Gold-i Position Keeper and Gold-i RiskDBSnapshot.
The integration wasn’t a simple off the shelf offering, and Gold-i had to create a bespoke product to suit ETX Capital’s specific requirements. One of the major advancements was to enhance the audio and visual alerts on the Gold-i Position Keeper for aggregated risk across all symbols.
In order to ascertain the rationale behind this, Forex Magnates spoke to Ishaq Siddiqi, ETX Capital’s Market Strategist today, in order for him to elaborate on the business model.
Mr. Siddiqi began by explaining the type of traders which ETX Capital wishes to attract by adding MetaTrader 4 as a platform option for its clients. “Our clients tend to trade a range of markets, but this year, our business has seen a marked pick up in indices and forex” he explained.
“Equities and commodities are in demand, the latter more so. Traders are mostly retail clients, a diverse age group from young clients looking to develop a career in trading to middle-aged clients who trade as a hobbie to gain a second income.”
“Forex is extremely popular, with high levels of demand seen for MetaTrader 4, and as such, clients are showing an increasing preference to trading forex due to its highly volatile and fast-moving nature which can be used to book profits quickly and shed losses instantly too” stated Mr. Siddiqi.
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“Indices are a similar tale to forex, particularly due to the increased volatility we have seen in the global market space. Equities and commodities have fell a little out of favour as investors anticipate reduction of stimulus by the Fed, forcing clients during Q2 to move to the sidelines and cut positions. So in summary, we continue to expect a diverse range of clients which will use the MetaTrader 4 platform from all spectra of the market”.
Volume Projection vs Previous Performance
Mr. Siddiqi detailed to Forex Magnates that the projection of year on year volumes is not an easy task, but that the company had a strong start to the year. “Quarter 1 volumes were healthy but we saw weakness in Q2 across most markets” he explained.
“Quarter 3 already looks better quarter on quarter and we expect a resurge in volumes through to the end of 2013.”
“In summary, we experienced a sharp increase in forex volumes, number of trades and number of clients to new record highs over a two-year period between 2011 and 2013.”
“Daily average FX volumes of currencies grew by 91% in the period, a new record high for ETX Capital. During the same period, daily average trades registered a new record high of 52%. ETX Capital also saw a new record in daily average FX clients during the period, growing by a total of 77%. Overall, the firm saw total FX revenues grow by 37% between 2011 and 2013” confirmed Mr. Siddiqi.
Exporting The Spread Betting Model
Whilst spread betting is popular among British traders, it has had less relevance abroad, even in neighboring European countries. Therefore, serious consideration has to be applied as to how to approach such markets.
Does it require an also-ran pure forex orientated, MetaTrader 4 system, or can the British model be applied elsewhere and garner a new client base which the overseas brokers do not cater for, or is a cost-reducing white label partnership a good means to mitigate risk and slowly expand to different regional markets?
Mr. Siddiqui stated that “Launching into new areas via white labels and affiliates is a sound strategy in our opinion. The spread betting and CFD industry is growing outside of the UK and for us, international expansion is paramount to stay ahead of the curve. WorldSpreads proved to be a very successful acquisition for us, as we have established businesses in Spain, Greece and Denmark on the back of that acquisition.
“What we learnt from this acquisition is how to strategically test the waters in new regions without heavy capital needed to start operations. This is cost effective and allows us to exit an area if business proves to be unsuccessful” said Mr. Siddiqi.
“We also work with partners who have a wealth of experience in the spreadbetting and CFD market in regions we have explored and this provides us with a huge level of comfort”
Growth Model and Future Direction
With regard to expanding the company whilst gaining experience of the results from doing so, Mr. Siddiqi considers this model for growth to be not only cost effective, but also to offer the company much greater flexibility. “ We don’t have to part with too much cash in order to enter new regions” he said.
“Our risk exposure therefore is relatively low, and since the acquisition of WorldSpreads, we have launched in Italy and Romania and are soon to launch in China. We already have successful and established business in Germany and France and South Africa”.
“Total international revenues rose over 400% year on year from 2011 to 2012, with Germany prominently continuing to drive over 400% revenue in its second full year since launching in 2011” concluded Mr. Siddiqi.
Britain’s financial sector has a long tradition of trustworthiness, is highly established and overseen by one of the world’s most respected financial regulators. The point of interest here will be as to how overseas clients will take to the British method of trading, whether they will see it as the next step in their retail trading career, or whether the compromise of offering similar systems via the ubiquitous and familiar MetaTrader 4 platform to overseas clients, with a set of mildly differing features may transpire.
Certainly, the British market is established, but catering for the overseas trading community is becoming an increasing necessity.