America. Land of the free, home of high operating costs for retail FX companies. Over the last three years, the retail FX sector in the United States has moved in ever decreasing circles, with forty brokers in 2009 decreasing to only nine today.
Procedures on how to operate in the United States are highly detailed, and since the implementation of the Dodd-Frank Act, and several moves by the National Futures Association aimed at protecting customers against every possible eventuality, resulting in unviable operating costs for most firms. America has become synonymous as the world’s center for technological advancements for retail FX, whilst the executing venues and large-scale financial transactions within the institutional sector continue to dominate.
The State of Massachusetts is notable for its technological institutions and contributions to academia, therefore, it is fitting that there are some solution providers based in Boston, such as Boston Technologies and its prime brokerage division, Boston Prime, as well as BMFN Ltd, which concentrates on offering turnkey brokerage solutions to overseas firms.
The latter was founded by Paul Belogour, an entrepreneur with a career spanning two decades in retail FX in Boston. In this week’s Forex Magnates Executive Interview, Mr. Belogour lifts the lid on specific parameters to bear in mind, when providing solutions to firms in new markets.
Please detail your professional background, and what led you to establish BMFN Ltd.
Fascination with the currency markets led me straight out of college to join Bank of Boston and its foreign exchange department. While working with institutional clients I started to come across retail foreign exchange. In 2001, in collaboration with Commerce Bank and Trust, I established my first forex firm. CBFX was the first FDIC insured banking entity offering retail FX to customers worldwide.
The business model proved to be a success, and a couple of years later was acquired by IFX Markets and then again by City Index. Perhaps, the best experience came while working with City Index management and its people. City’s global growth vision, creating foreign sales offices and developing new web and mobile technologies was revolutionary and promising. Learning from the best, I wanted to advance some of those visions by running my own business.
BMFN was created with a simple business model, embracing a traditional sales approach, establishing global sales offices in strategic places and building and servicing a network of Introducing Brokers. Understanding the value and power of IBs, their abilities to penetrate local markets that cannot be penetrated by online advertising were the reasons why BMFN was created. BMFN’s primary business is B to B, where we are servicing an extensive network of IBs from over 100 countries.
Upon assuming your post as CEO, what did you initially seek to achieve and how did you set about achieving it?
Proper licensing to service BMFN’s global network of IBs and strategic position of the sales offices were our main tasks. Having presence in all major markets, Europe, the Middle East, Russia, Latin America and Asia was key. In over two years we managed to secure all needed licenses, but most importantly open ten different sales offices to help managing our IBs in real time, speaking their languages and understanding their needs.
With MetaTrader 4 still dominating the retail FX industry, despite a significant number of new platforms coming about which do not require a bridge and are designed for the STP model, do you think there will be a point at which retail brokers will have to embrace new platforms in order to keep the cost-per-million down due to not having to capitalize a bridge, or will the bridge manufacturers find other ways of charging for the bridge to keep those familiar with MetaTrader 4 producing volume?
MT4 is the greatest product of which the Forex industry could have dreamed. Not only did it help many Forex companies build their businesses, but more importantly it helped to deliver our industry to millions of customers, who otherwise may not have been aware of the industry’s existence.
I think when it comes to new platforms, it is all about choices and diversification. MT4 with the bridge or without the bridge is a must platform for any broker, start up or seasoned, who is serious to expand their business. I believe the MT4 STP model, and the use of different bridge providers will continue to evolve.
For many start up brokers, this is perhaps the most known model that is surrounded with a great level of expertise and support. What is unique about MT4 and its relationship with the bridge manufacturers is that they supplement each other, delivering help, support, free consultation and easy solutions for businesses who may be intimidated by the complexity of the business during the early stages. When embracing new platforms to keep the costs down, one has to be able to give customers a choice, no matter on what platform the business will ultimately reside.
How does BMF UniTrader differ from other proprietary platforms?
UniTrader in some ways is just like any other platform that is out there and in many ways it is not. While on the surface to the end user it looks perhaps just like anything else, but it is not an ordinary software. UniTrader was built for market makers whose primary business is comprised of servicing IBs who in return deliver customers. UniTrader was built with IBs’ business in mind, helping market makers to manage thousands of IBs and their customized settings.
From the free white labels that can be set up by IBs in less than five minutes, to real time payment reporting and building in CRMs for demo and live customers, to customization of spreads and products setting down to a single customer, UniTrader offers it all in a fully automated fashion.
The software comes with four interconnected and fully automated consoles, the back office, risk management, client interface and IB center, making the operation of UniTrader possible by a single person. From the online application to storing of the photo IDs and client forms such as power of attorney, or signed agreements, UniTrader offers a truly fully enclosed business solution to a market maker. Perhaps, the best beneficiaries of UniTrader are start up market makers who want a very low cost business solution that can be operated by a limited staff.
UniTrader encompasses 17 years of my personal FX experience, translating in the most logical and easy to use software for market makers, IBs and clients.
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What is your view on the provision of fully customizable solutions to brokers who are new to the market? Do you think the ability to customize a solution to suit a specific niche gives new brokers a means of providing a USP that their competitors may not have, or do you think it is better for a new broker to take an off-the-shelf solution and keep their costs down and therefore, outsource all support to the solution provider, yet be an also-ran in terms of product positioning?
I think a start up broker should be taking an off-the-shelf solution to begin with and concentrate on sales, marketing and business growth. Tying up resources and time in customizable solutions and technology that is not well understood to begin with, has a costly opportunity cost. The off-the-shelf solutions such as MT4, ACTForex and UniTrader, to name a few, offer a wealth of support making a start up experience less costly and smooth. Later on, as the business grows there is always a chance to experiment with a customizable solution and perhaps discover that specific niche business.
Do you think there is a way of remaining competitive as a retail broker in the US, if a different more efficient business model is adopted, therefore mitigating the cost of regulation and ensuring that enough clients are kept on board? If so, please detail how best to go about this, or do you think that it is over for retail FX in North America?
Well, there is not much competition to begin with, for the handful of FDMs left in the US, and for whoever has resources and expertise to deal with the NFA and CFTC, the market is wide open. The US market represents the best market in the world. I am sure the FDMs will continue to adapt to the regulations, finding new ways to deliver retail FX products and services and expanding its client base. For as long as the US government regulatory bodies will allow retail FX in the US, the business is far from over, if anything, it is probably the most promising business opportunity out there.
Let’s talk about China. Retail traders in China generally do not trade with Chinese companies, instead preferring overseas firms, if they are able to transfer their funds abroad successfully to make a deposit. What is the size of the existing and potential market for providing start-up brokerages within mainland China with a turnkey solution, and how can this be capitalized, and avoid government rulings against what could be seen as a joint venture with a Western company?
I wish that was the case; Chinese underground local market makers promulgate in great numbers, offering the greatest competition to overseas regulated brokers. In fact, it would not be a stretch to say that retail traders in China barely know with whom they trade to begin with, relying heavily on information supplied to them by Introducing Brokers. There is also the question whether an ease of bank wire transfers from China to FX brokers overseas would result in a greater willingness of clients to convert RMB and send them to not well known destinations, entities, market makers in London, Sydney or New York.
Overall, the Chinese business is poised to continue to grow significantly. The preference of Chinese customers to send local RMB wires and heavy influence of local IBs and local market makers is the challenge for foreign brokers. I believe anyone who is offering technology and turnkey solutions in China to either local start up market makers or IBs, is the winner in the long run. I am not sure that joint venture with the Western or not Western company helps to overcome the gray area of the Forex industry in China. The local authorities — whether they are local city police or are the elite Economic Investigation Unit with the department of each major city– are free to access each local presence of Western Forex brokers at will.
They understand that Forex is a gray area in China and tolerate the foreign brokers’ presence for as long as customers do not inundate the local authorities with massive complaints.
Do you have volume statistics for Chinese companies using BMFN Ltd’s solution?
BMFN’s primary business is B to B. In China alone, we have over 2,000 Introducing Brokers covering every major province and city. BMFN services its Chinese customers from three locations: Shanghai, Wenzhou and Zheng Zhou. The Chinese business and its volume represent close to 50% of BMFN’s overall business. With the introduction of UniTrader at the beginning of the year, offering free instant White Labels and IB centers we expect our business to grow by at least 50% in 2013.
How do the requirements of a Chinese broker differ from that of a Western broker? Do the Chinese brokers expect very low spread/very high volume and then negotiate on IB/rep office revenue share? If so, how can this be competitive if the spread is very low and several layers of IB/sub IB have to be paid?
Well, this is an interesting question. Since, most of the business in China is done through an IB, a client rarely has a full understanding of a product or familiarity with the market maker he/she will open an account with. The IBs are using that for their advantage, negotiating deals on both sides. They ultimately attempt to negotiate the best possible deal with the market maker, in terms of spreads, rebates and, in some cases revenue sharing. But, what is even more amazing, they will push the envelope on the client side as well, asking to be allowed to charge high commissions and in some cases to widen spreads to astronomical levels– all basically resulting in setting up clients’ accounts for potential churning. The ability to negotiate the best deals on both side is perhaps the biggest difference between Chinese IBs and others, not only Western.
BMFN would know better than anyone since we have close to 4,000 of IBs worldwide; so, we can compare them based on counties or regions. The Chinese IB, sub IB relationship and how one pays to another is part of the overall package. The main IBs have to negotiate the best deal and make enough money to be able to pay out part of their earnings to so called sub IBs. BMFN spends considerable amount of time dealing with the Chinese IBs, educating them about longevity of the business, fair treatment of customers and prevention of churning.
Talk us through how a ‘broker in a box’ solution can start up a firm, and what capital requirements they need, plus how you insure yourself against a new broker not performing and recouping the cost of providing solutions if no business is conducted, or if the broker gets its business model wrong. Does each broker have to lodge funds with BMFN Ltd as collateral?
We refer to a “Broker in a Box” more like a “Broker in a Link”. What a broker in a link is, is a simple White Label solution, comprised of a single downloadable fully branded platform link for an IB to start his/her business and receive all needed tools in less than five minutes, pending of course, that all proper documentation or licenses are submitted and they pass the compliance. Yes, it is a costless solution for them; their investment in this business is only their time. If they get it wrong, their cost is just an opportunity cost, making UniTrader IB solution, perhaps the cheapest business trial. BMFN and UniTrader also offer an omnibus solution where an IB can link his/her IB center to another market maker who offers an API. Alternatively, anyone can license its own UniTrader and either STP everything using an API or make markets.
Who do you view as competitors in the United States and internationally?
As an industry we are still in our infancy. In many ways we help each other and we are growing together. Whoever spends money on advertising in Europe or China or elsewhere in the world, creates an IB or educates a customer about Forex, helps my company, and I do the same for the others. Clients and brokers continuously move from one broker to another or add additional relationships. There is a tremendous amount of retail FX business out there for the existing brokers and many more to come. As we continue to grow an overall client base worldwide, educate governmental bodies regarding Forex, we in some way work together.
I tell you what, when I used to row competitively and won a world championship, six teams were separated by only split seconds, but I could have easily told you who I thought were our competitors. However, in the world of retail FX, we are separated by oceans, by the countries where we operate and by the knowledge of the local markets. At this time, while we all continue to grow our industry, this competition looks more like collaboration.
What are your plans for the remainder of the year?
We will continue to offer UniTrader to all of our IBs as a tool to grow the overall business on three of our other platforms MT, ACT and Currenex. Our IT has been working on offering one UniTrader back office to our IBs with the choice of four different platforms. Perhaps, this could be easily compared to building a single garage for our IBs and partners, where their clients can drive any of four different cars they like. We would like to give our IBs’ clients’ choices, different trading platforms but with the ease of operating their business, one reporting and one on boarding system, translated into 17 different languages. And of course, as always to grow the sales force and bring more customers.