With 2018 squarely behind us, the ESMA challenge in Europe has settled in, squeezing retail brokers. But how much did the changes affect the prime of prime brokerage sector, one might wonder. We sat down with the CEO of one of the emerging players in this space, Stater Global Markets, to find out more.
The most pressing question about the firm’s raw financial performance was skipped by Ramy Soliman. Stater Global Markets was only launched in 2016, and the company considers its position in the market as that of a start-up player. According to the company’s CEO, the relative performance of the company is healthy, as the firm is acquiring clients and volume from a lower base than its peers.
For 2017 the firm posted revenues of around £900,000, and throughout last year Soliman says that it managed to increase its market share.
The company’s focus for 2018 was to also continue its infrastructure build-out, adding technology and liquidity improvements to its offering. “We are proud of our achievements since launching Stater in October 2016. Our plan for the first three years of the business prioritized client acquisition, brand recognition and the completion of our infrastructure,” Soliman explained.
The ESMA Challenge
Since the regulatory changes in Europe took place, the company has been diversifying its focus with a presence in other geographic areas. The ESMA’s measures have certainly trickled up the value chain and impacted prime of primes too, but Soliman outlined that the company started to see some of the effects of the changes at the end of last year and certainly more in 2019.
“Last year, it was less prevalent as most retail firms post-ESMA were restructuring their businesses and offerings in order to survive and thrive. It’s no secret that last year was a tough one for the retail broker space, and a natural consequence of that is that Prime of Prime’s saw less volume last year than previous years,” Soliman elaborated.
The CEO of Stater Global Markets thinks that the consolidation in the market will continue as an after effect from the ESMA changes to the industry. Soliman is certain that there will be fewer retail broker participants over the coming years, but the remaining firms would be better run from a risk management perspective and would be capitalized strongly.
As to the evolution of the market, Stater is diversifying geographically, just like the rest of the industry.
“There is a global regulatory arbitrage (there always has been), but at the moment, Australia and its retail broker community stand to benefit from 2018’s regulatory happenings in Europe. The firms in Australia are well capitalized, are in the right time zone to service Asia and are in a well-respected regulatory regime that until now has not been explicit on leverage caps.” Soliman explained.
Asia outside of China is also interesting for Stater and for the industry. The rise of the Asian tigers is playing to the advantage of retail brokers who are now focusing a lot of offers onto Indonesia, Malaysia, Cambodia, and Thailand.
Soliman also finds Africa as a continent interesting for the industry. “Apart from the established areas like South Africa, moves by Western firms to get regulated in places like Kenya show that this is of growing importance for new client growth,” the CEO of Stater outlined.
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The Real Prime of Primes
The intensification of competition in the prime of prime space of the trading industry is shifting the perception of the market about what a true prime of prime provider is. The number of companies that claim to be prime liquidity providers has increased dramatically, and the risk-management standards of the industry continue to vary widely.
The shifting composition of retail broker offerings on the market, especially in Europe, however, is impacting the market materially. One big trend has been the rise of true STP offerings after ESMA.
“The Prime of Prime sector provides an increasingly important role in the FX micro-structure, and the top-down offboarding of customers from Bank Prime Brokers and the bottom up themes of more STP by retail brokers as a result of regulatory pressures mean that the market for true neutral Prime of Primes can only grow in the near term,” Soliman thinks.
According to the CEO of Stater, the barriers of entry into the prime of prime sector remain significant, as capital requirements and the current appetite for Prime Brokers to onboard new smaller names continues.
“In terms of whether the existing number of firms is sustainable, I think there’s a growing understanding by the institutional community of what constitutes a real Prime of Prime – and not all firms claiming to be Prime of Primes tick this box. In my view, there are just a handful of genuine Prime of Primes, including Stater, which deliver. For us, the market is sustainable and healthy,” elaborated Soliman.
Asked about the criteria that a broker has to meet in order to be considered a true prime of prime, there is little doubt as to what those are in the mind of Ramy: “Firms claiming to be a Prime of Prime who do not have direct relationships with a Tier 1 bank/LPs will struggle to grow under the Prime of Prime banner.”
Soliman believes that a couple of years ago, the word Prime was almost a stigma as Prime was branded as a marketing tool by some retail brokers while there was nothing Prime about the offering. “I think those days are numbered,” the CEO of Stater said.
Low FX Volatility
With the first quarter of 2019 behind us, the market volatility conundrum facing the industry is a central theme of discussion for brokers. Aside from the occasional Brexit headline that moves the market, FX volatility has been at multi-decade lows.
Soliman clearly outlined that just as any other company in the industry, trading volumes are the key driver for Stater Global Markets and those are contingent on a healthy level of volatility.
With the company committed to an STP model of execution, lower client activity from brokers is caused by the decline in trading appetite on part of traders. Some brokers internalize more flow to compensate for their revenue decline too.
For Soliman’s company, its resilience is contingent on the fact that it is well diversified from a flow perspective.
“Our business is versatile in that it can serve many different institutional segments, so we are not reliant on just brokers. The fund space and high-net-worth professional traders have different trading characteristics to the retail brokers and having a diversified portfolio of customers (both by client type and geography) helps to mitigate macro themes that can adversely affect some client segments more than others,” Soliman concluded.