This article was written by Søren Beissenherz Lanng who is the founder and CEO of TickCOM.
Much has happened since LMAX was introduced in 2010. The introduction of the bridge aggregation started a series of dramatic changes in the financial FX retail sector. We recall that MetaQuotes mid-last decade introduced the broker package with a back-office solution combined with a front end. No doubt MetaQuotes has had a significant influence on the sector, and still has.
The global success of the MT4 package
The global success of the MT4 package has led to a situation today where most brokers use the same product in the perspective of the end user – the MT4 front end.
Combined with the move towards STP and low spreads, many brokers and providers have over the past few years experienced increasing competition with a shorter distribution channel, lower spreads and commissions, and thereby a lower margin.
Status in 2016 – the lack of differentiation
In 2016 we have a market situation of high and increasing competition, and low entrance barriers to becoming a broker or even an LP provider. More than 95% of the brokers are using the same front end, the MT4. We shall here notice that the front end is the product in the perspective of the end user, and the end user is the client of the broker.
I cannot recall any major retail sector having an almost 0% percent differentiation in the product offered to the end users – except perhaps for gasoline, sucker, ice cubes and similar off the shelf products. The retail FX sector is in many ways still an off the shelf business, where all sell the same sugar.
The impact, two lines crossing
This has led to the cost of an account opening almost exceeding the revenue generated by the client, since the only way to compete is to boost the marketing budget. For many brokers these two lines have crossed, for others they are still to cross.
The instruments used so far have been to acquire client accounts, and thereby fix the numbers of these two crossing curves – and perhaps even to change the manner in which the curves are calculated.
With the increasing noise from the ever-increasing number of brokers, participants seek new ways to avoid the noise, or rise above it. Since IronFX showed the affiliate path, more and more focus on using affiliates which are typically paid $500 for an account opening, compared with the average sector metric cost per account opening of a now estimated $1.000 – $1.500.
The observant will conclude that this is, as with acquiring client accounts, postponing the problem, since the core problem was not solved – the lack of differentiation.
Lately some brokers are changing their cost structure, cutting off affiliates, as there is every year less margin to pay the affiliates. But the use of affiliates is more a symptom than a solution, and not sustainable in the future if spreads are cut further and more brokers enter the segment.
There is only one solution – to differentiate
The market has come to a point where there is only one sales parameter left – the front end. The financial FX retail segment has never been a traditional market, where the classic methods of R&D, sales and marketing were the base of the business. Primarily because of the off the shelf MT4 package, brokers did not need to perform R&D. There has in fact been no real R&D in the sector since mid last decade with front ends, except perhaps attempts to clone the MT4, which is not a differentiation.
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The FX retail sector is no different from other industries, the same rules of how the markets behave are equally valid and in force – meaning there is only one solution, to differentiate.
Many brokers in the segment have started a tech race to try to differentiate themselves. This process of differentiation is different from broker to broker; some start to develop their own product to lower costs instead of differentiating, some develop a custom website where clients can log in to their account stats, some develop a proprietary front end, typically in HTML, to differentiate at the end users perspective. But very few develop their own back office, which is an important requirement in order to differentiate. Larger brokers take the full step in order to differentiate and switch to an entirely new back office and front end solution.
In terms of spreads, we have yet to see market players entering with a business model similar to consumer electronics, where the strategy of entry is to offer low pricing no matter the cost.