The following article has been contributed by the CEO of Star Financial Systems, Dan Moczulski
I believe in brokers from the industry going multi-asset, and that doesn’t just mean adding gold and NYMEX contracts, but offering thousands and thousands of products. The largest brokers tend to offer the largest range of markets. This long tail helps to push their acquisition costs down, and retain sophisticated volatility-seeking veteran traders. And now the FCA is targeting the high leveraged products such as FX there has never been a better time to broaden your offering. The proposed leverage limit will have far less of an impact on non-FX products, especially equities which are rarely offering with leverage higher than 25:1.
Clearly – the industry is starting to follow the trend. Our own client base is growing at an exponential rate, and binary option software providers seem to be jumping on the band wagon as their own market gets squeezed by regulators. Going genuinely multi-asset is MUCH easier than it used to be, but there are still things you need to consider and plan for.
This used to be easy in the single asset FX world. Typically FX trades off-exchange, which in this context means two things; there is no ‘the price’ that is available everywhere, and no one is claiming to ‘own the price’. So typically you would pass on, or aggregate, your LP’s prices to your clients. Unfortunately, it is not as simple as that with multi-asset offerings.
Non-FX prices tend to be from, or derived from, an exchange somewhere in the world. Each exchange has a different approach to the distribution of its prices. Some allow for their prices to be distributed, some require payment from the broker, some require payment from the liquidity provider (LP), and some require payment from the end consumer. Some require all of the above, while others don’t require any payment.
What to Look for in a Liquidity ProviderGo to article >>
Each approach will have an impact – so expect your LPs to allow you to distribute some prices but not others. For the markets that your LP doesn’t want you to distribute you have a couple of options. You could hook up directly to each exchange, and receive their prices, or you could connect to a price vendor, like Morningstar or Reuters for example who would provide multiple exchange prices. Most exchanges tend to prefer you to do the latter. Remember, as these markets trade on-exchange, prices should be identical.
Even if an exchange doesn’t want you paying for prices, they will want to know who, and how many people, are viewing their prices. Allowing traders to opt in or out of viewing particular exchange prices is beneficial to the brokers as they only need to pay for the clients who view that particular market. It is becoming fairly common for brokers to charge their client base to access certain exchange prices, at least if they fail to hit certain trading frequency hurdles. Secondly, exchanges will want you to classify your clients, and this tends to involve a client declaration as to whether they are a retail or professional investor.
Infuriatingly, this has been one of the major hurdles stopping smaller brokers becoming multi-asset. Where FX liquidity providers fall over themselves to take a broker’s trades, the large multi-asset providers have been slow to offer FIX connectivity to their full range of markets. Thankfully this is changing, and while each has its own foibles, the market is getting more competitive, and solution driven.
Brokers can choose to STP all trades to the liquidity partners, or they can decide to run some sort of hybrid risk book. It’s worth noting that this isn’t as easy a decision as it could be in the FX markets. Market depth and information asymmetry means it can be difficult to cover positions in fast moving markets. That’s not to say there is not opportunity in the larger markets.
The vast majority of platforms available to brokers were built for FX. They are not comfortable with many of the issues that affect different markets, such as dividends or corporate actions on equities. Usually your LP can help with what actions are happening to which positions, but your brokerage and technology will be responsible for applying them to clients’ positions.
And finally – you need to be able to choose a trading platform and technology infrastructure that can handle these issues. The legacy technology solutions that supported 40 currencies pairs are simply not built to offer thousands of different products. Choose a platform, and technology partner, that can grow with your clients, and your brokerage.