Professional services consultancy companies which aim their services at assisting new brokerage firms to enter the market by providing guidance and administrative services to assist with navigating the regulatory and legal bureaucracy have carved out a niche in regions synonymous with retail FX firms recently.
For one particular company which specializes in registering brokerage firms, it is not enough just to provide start-up and administrative consultancy, as Archer Consultants is now expanding its operations to incorporate broker and liquidity provider-neutral software solutions and social trading facilities in order to be able to provide an entire end-to-end solution to new brokerages, in what the company considers to be a unique, independent, liquidity-agnostic package.
White Label Or Genuine Brokerage?
An area of particular interest with regard to this development is that Archer Consultants considers its APIFX solution to be a unique means of a retail FX firm entering the market, and ensuring that its business model is its own, rather than being at the mercy of liquidity providers and technology solutions firms with existing relationships with larger firms and intends to give smaller start-up firms more of a chance to be masters of their own destiny.
Forex Magnates spoke to Lior Shmuely, CEO and Founder of Archer Consultants, about the intended path that APIFX is to take.
Mr. Shmuely stated that, “With the inception of APIFX, Archer Consultants offers a full turnkey solution for technology, based on MetaTrader 4.
Our solution will not step on the toes of existing firms which provide technology, and does not intend to take market share from existing firms like oneZero or Boston Technologies, but we will add another level.”
In his capacity as a management consultant concentrating on FX and binary options brokerage establishment, Mr. Shmuely has noticed many cases whereby an individual who starts a brokerage goes to great lengths to gain all the licensing and complete all the paperwork, but does not have a technology solution. This is, in his opinion, where the difficulties begin.
“If you go to a big broker and ask for a white label, then you have to be accepted and sometimes, even if you take their own MetaTrader 4 solution, they will not always accept the application. If they do, there is a question as to who actually controls the business.”
Mr. Shmuely makes a point of accentuating to newly established brokers who take a white label solution from a large firm that, “The large firm that provides the white label controls the business, not you. When a client signs up, they sign up with FXCM, or Alpari, not with you. When you leave, you do not own anything.”
Another method of putting together the required operational infrastructure, according to Mr. Shmuely, is for a new broker to build their own CRM, website, data center, payment gateway and back-end. He considers this to be a potentially long, drawn-out affair with limited benefit. “A broker can spend years and hundreds of thousands of dollars to get an IT team, then spend 6 figure sums maintaining it on a monthly basis, making this completely out of the question for most companies.”
When challenged as to how this solution differs from existing offerings and where it is likely to fit in, Mr. Shmuely explained that APIFX is a pure technology company, providing only technological solutions for brokers. “Firms often come with their solution but it does not always include vital components, and brokers still need to integrate a third party vendor’s website into the technology solution. This can cause difficulties, expense and the third party which built the website to own the broker.”
“X Open Hub tried to offer technology solutions in this fashion, as did ForexWare which is FXDD, and BMFN is trying to do it. All of these companies state that they are technology providers but they all want the flow of the new broker. The new broker doesn’t have a choice to run an A book or B book,” is Mr. Shmuely’s controversial opinion.
Overcoming Conflict Of Interest
Mr. Shmuely considers the approach taken by binary options firms in which they are provided with a full solution and website, including risk management and brokerage facilities by a provider such as SpotOption. In his opinion, this only works in the binary options industry as the interests of both parties are completely aligned.
He considers technology firms, liquidity providers and prime brokerages involving themselves in the business of retail FX brokers to be the cause of a conflict of interest. “When a technology firm or prime brokerage forces a broker to operate with its own liquidity, this renders the business a white label or IB, not an actual brokerage in its own right..
As an A book broker, you want max volume, whereas if operating as a B book broker, you just want P&L so now the white label partner has a conflict of interest, and the problem is that he controls the execution..
With binary options, it is a different matter, because they are all B Book so there is no conflict of interest. That particular model makes sense in the binary options sector. Binary options provisioning totally works as a technology solution, and on that basis, APIFX bears a lot of similarity to that model insofar as that it is a technology solution in its own right.
All the binary options platform providers operate similarly within their environment as APIFX operates today in FX,” continued Mr. Shmuely.” Brokers do not need to integrate anything to the solution and have full control of not only the back end and website, but order flow too.”
In terms of functionality, brokers are able to operate the solution in-house, without requiring external support teams or intervention by Archer Consultants.
Firstly, the company provides a website to its brokers which is supplied by API FX instead of a third party solution. Integration is then completed in-house, using a third party CMS which is supported and customized by APIFX.
In order to open a client account, a drag and drop facility is utilized, which Mr. Shmuely considers to afford quick registration of new clients.
In terms of back office facilities, the ability to add functionality to the system such as campaign management, dashboards, sales, retention, compliance, and region specific matters such as creating a new language is totally customizable and managed totally by the broker, who can change every setting himself, similarly to TradeSmarter’s Strategix platform for the binary options industry.
Clients can see open trades, closed positions, pending orders, can make a withdrawal, can see broker campaigns from one user interface, and payment services are integrated to 8 systems which a broker can choose from, or alternately request integration into an existing payment provider with whom the broker has a relationship.
The Liquidity Conundrum
In terms of choice of liquidity, Mr. Shmuely considers there to be 3 methods which are commonly used in the industry. The majority of technology providers, according to Mr. Shmuely, state at the outset that they are the liquidity provider. ” This does not offer much choice for the broker, and brokers cannot see what happens after each trade is made.”
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In this circumstance, brokers have got to trust the technology provider. APIFX does not operate in that manner. Instead,brokers can use APIFX as a liquidity provider if they wish, but in doing so they can offer specific accounts. The broker can view the liquidity provider’s information on the GUI, offering 100% transparency, and can see all of the A Book trades and where they went.”
Mr. Shmuely explained the further options that are provided by his firm should a broker not wish to take APIFX liquidity. “If a broker does not want to take liquidity via APIFX, he can instead deposit directly with an FCA-regulated liquidity provider,” which Mr. Shmuely considers a good option.
” I don’t mind taking the responsibility for liquidity, but realistically the brokerage part of the business is not really my concern. I would rather not deal with all those deposits & withdrawals, and instead concentrate on technology provision.”
The downside of taking liquidity from a separate source however, is that it can take longer to open account with an external liquidity provider. An alternative means that a broker can come with its own liquidity provider and MetaTrader 4, use a bridge of the broker’s own choice, and connect it to any of APIFX’s systems, at which time it can be either hosted at APIFX or the broker can host it on site. “What exists in today’s market is a hybrid of number one, which means you deposit with the LP with no transparency,” is Mr. Shmuely’s opinion.
Location, Location, Location
As an integrated service which provides licensing and technology solutions, Archer Consultants considers New Zealand’s registration to be its flagship service. Since the New Zealand regulatory authorities insisted that all New Zealand registered FX firms have physical operations in the jurisdiction, Archer Consultants has established an office there, with 9 employees, which firms establishing a brokerage can utilize by outsourcing compliance, operations and back office activity.
This office currently services 30 companies, with 20 currently undergoing the establishment process.
“New Zealand is a great region as it provides real services,” stated Mr. Shmuely. ” An FX company can be established there, and use our offices, the regulators know Archer Consultants well and are familiar with our operations.”
“I have heard a lot of dialog in the industry stating that this cannot be done, but they say this because they do not have the facilities,” is Mr. Shmuely’s bold claim.
New Zealand’s regulatory authority will not allow firms to operate as they once did, with virtual offices, having passed a ruling a year ago that an FX firm can only exist if it has operations with the correct key staff.
“FX firms can outsource their compliance, customer service, dispute resolution services and administration to us, therefore costing around $30,000 a year, rather than $30,000 a month if done in-house,” he said.
Mr. Shmuely also considers opting for New Zealand or CySec regulation to be more advantageous to retail firms than heading to London and registering with the Financial Conduct Authority, a direction which many firms have taken recently, including some which gained CySec licenses and immediately eschewed them in favor of FCA registration.
“There are wide-ranging difference in the way the FCA handles applications made by brokers,” Mr. Shmuely informed Forex Magnates. “When the FSA became FCA, the documents were handled in a certain way, which has now changed.”
According to Archer Consultants’ information, the FSA used to work within a six month time frame in which to tell a brokerage whether it was to be accepted or declined registration.
Now the FCA has added three levels, which equate to time scales, totaling fifteen months, broken down into a six month initial period, a further six month processing period and a final three month decision period. This fifteen month period does not mean that a firm will be able to commence operations after this, it means that firms often face a fifteen month waiting time between lodging documents and after this period could still face a rejection.
“Companies eschewing Cyprus are making a mistake because they are going to lose out with waiting all that time because they don’t know it may take 15 months to get a rejection. If a broker wants to start an A Book model, or B Book model, all consultants will give you the same criteria. If you go to FCA via a consultant, all the answers will be different,” is another caveat that Mr. Shmuely advises.
“On getting different answers from consultancies which assist firms setting up in London, the question is, who is right? They’re all right. How can you get 7 answers and they are all correct?” is the question firms ask Mr. Shmuely when he explains this potential pitfall.
” The FCA is effectively self regulatory. They ask what a broker needs to get the sort of license that the broker is requesting, then the broker provides the information. Once the broker provides this to the FCA, a license is issued on those terms, and if something goes wrong and the terms that have been agreed are not adhered to, the FCA will file a complaint and seek to prosecute the broker. As a result some brokers there have £730,000 net capital which is the minimum required under MiFID, some have £5 million, the difference being a result of how they applied for their license. With CySec, it is all the same, and there are no anomalies,” warned Mr. Shmuely.
He explained further that in order to make it worthwhile, a consultancy which assists a brokerage in obtaining an FCA license should work out how to produce the application so that a license can be obtained with the minimum requirements.
Completing the end-to-end turnkey nature of APIFX is its newly established subsidiary, Zudura, which is intended to be launched as an independent social trading platform which is broker and platform neutral, in the early stages of 2014.
Mr. Shmuely explained to Forex Magnates that the idea is to reduce the cost of retention of clients, and make the need for a client retention department redundant by automating the process. “The basis of Zudura is that it provides brokers with an automatic retention facility to ensure existing clients have higher lifetime value, without needing to contact them by telephone.
Within Zudura, every user is assigned a guru. A client from one broker can follow from another, and they are nickname-based so that users cannot see which broker each guru and user are trading with,” he explained.
Within Zudura, there are three social trading modes, which are manual, where a signal is provided and a trader must execute the trade himself, then there is semi-automatic whereby Zudura sets up the trade and asks for confirmation of execution, and finally, fully automatic whereby the trades are executed with no user intervention on a copy trading basis.
The system can be integrated into any trading platform, and features pop-ups so that its users can see, independently of their trading platform, that his guru has placed a trade.
Mr. Shmuely signed off by confirming his belief that his solution has a highly practical advantage in that a broker will be dealing with the same member of staff at Archer Consultants for all aspects of the business, from registration, to technology, to liquidity and even social trading.
With New Zealand’s FMA having taken control of overseeing FX firms, perhaps a prudent practice for brokers wishing to register is to ensure that the full regulatory registration has been completed with the FMA, as opposed to the previous structure which allowed FX firms to operate in the region by joining the list of Financial Services Providers which does not constitute regulatory oversight.