Cracking China’s FX Market – What it Takes for Brokers to Succeed

It is difficult to break into and succeed in China. So what is driving brokers to enter the market?
Photo: Bloomberg

China is becoming an integral centre for foreign exchange (FX) brokers, as many companies are looking to grow and maintain a global presence – this makes the Chinese market an ideal locale for these goals. According to the State Administration of Foreign Exchange, China’s FX market posted a turnover of $16.7 trillion dollars in 2015 alone, and it is growing.

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There are certain expectations that FX brokers can have when trying to crack China, particularly regarding results. Unfortunately, the Chinese market is quite challenging to succeed in, a feat that has managed to elude many prospective brokers in the region. A level of arrogance and a lack of preparation can lead to disappointment, as breaking into and succeeding in the Chinese market is far from simple and has unique challenges.

Hosting in China

FX needs to be fast so customers can take advantage of quickly changing exchange rates, but there’s also another potential problem – arbitrage. A delay in updating exchange rates could be ruinous if a customer takes advantage of this difference in exchange rates of competing platforms to make a profit.

The Great Firewall and The Golden Shield that monitors content accessed from China means a delay for any data travelling through it. Exactly how much of a delay can be unpredictable, but tests have shown that data from Dongguan, situated within the firewall, can take twice as long to reach its destination as data from Hong Kong, which is close to Dongguan but outside the Great Firewall.

Complications

Usually, distance and the number of exchanges between the origin server is what affects performance the most. So a solution to this might be to host the website within China, and bypass the need to go through the firewall.

Unfortunately, this does not solve every problem. Data may be faster to well-connected urban centres, but millions of potential customers reside in tier 2 and tier 3 markets. The internet infrastructure in China has limited peering points (where data flows between service providers) and poor connectivity.

Unlike in countries with better infrastructure, setting up data centres in major cities is not enough – many people will still suffer long loading times and data received will not be as accurate as needed.

Licensing can also cause complications. All websites in China need an ICP Bei’An license and any company that makes money directly through the website needs an ICP license. The two, while having very similar names, are not the same, and both are mandatory in order to operate legally. Obtaining a license, especially an ICP license, can be more complicated than expected, delaying entry into the market.

Hosting outside China

So if hosting inside China doesn’t solve the problems of reaching customers in rural areas and ensuring the website meets regulations, what can forex providers do to reach this market? The answer may be to host outside China, and accelerate content into the country.

Using a content delivery network is a common solution for making sure websites load quickly and availability isn’t affected by either too many users trying to access the site or a malicious attack. The way this works is that content is cached across the network, and those accessing the site receive the website from a server close to them, or another server if traffic is making accessibility difficult.

This is great for websites that rarely change, but a cached version of data that is forever changing – like forex data – is useless. But it is possible for some content delivery networks to accelerate dynamic data from the origin server to the user – speeding up the ‘middle mile’ and making sure data can go from origin to destination in a time that makes forex trading viable.

Hosting outside of China also helps cut through the ICP licensing requirements, and some content delivery networks will help you with your ICP Bei’an license while working around the issue of poor connectivity in country. Many of the issues that in-country hosting would normally help solve are actually solved by hosting outside and accelerating into China.

Do a few seconds really matter?

It’s tempting to think: do a few seconds really make such a big difference? The answer is undoubtedly yes. Research has found that if website takes more than five seconds to load, then users will simply give up. The same research also found that European websites on average take over half a minute to load in China.

So these sorts of loading times and delays are undoubtedly going to be frustrating for anyone using a trading platform. The risk of arbitrage is also very real.

Seconds matter when dealing with arbitrage because automation is key for any trader looking to take advantage of it. Software is used to scan for opportunities to buy and sell and make trades automatically. A delay of a just a few seconds could be enough for a trader to make a huge profit – and for a forex broker to make a huge loss.

FX brokers are right to see China as a promising market. But even if they get local marketing right, hire the right people, adapt their offer for China, and adapt their website for local tastes, getting web performance wrong could make the venture completely unviable. Without considering it fully, FX brokers will not even make a dent in China, let alone crack it.

This article was written by Alex Nam, Managing Director, CDNetworks – EMEA

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