Establishment of new retail FX brokers in the United States is quite a conundrum these days, and contrary to the general trend of what could be viewed as an American FX exodus.
Flying in the face of this adverse trend, NFA regulated introducing broker Back Bay FX has launched its new white label today, under the M2 Forex brand, positioning itself as a ‘mid-level institutional’ offering by Back Bay FX (BBFX), an NFA registered introducing broker based in Boston, Massachusetts.
Forex Magnates speaks to BBFX CEO Paul Towne to gain his perspective on M2 Forex’s position in this fiercely competitive market segment.
What market does M2 Forex compete in? Please elaborate on which market segment is represented by Mid-level Institutional, and where will the client base come from?
M2 Forex was designed in order to give what we consider “mid-level” institutional clients access to a tighter more competitive pricing model. The definition of Institutional pricing varies significantly across the industry, but the way we define “Mid-Level” is anyone who cannot access top tier bank liquidity through their broker because they do not meet the volume or deposit requirements.
Our goal is to provide prime pricing access to the serious retail trader who understands that low spreads directly impact their bottom line. This model although 100% open to the NON – US market was created to specifically fill the void in the US market where consolidation is forcing traders to open where they might not feel comfortable and may not get the best pricing due to lack of options.
The last 12 months has seen a substantial exodus from the United States of FX brokerages as the costs of maintaining offices and regulatory adherence for retail brokerages and smaller institutional brokerages has rendered it not viable. What is your view on this, and how can companies in the United States adapt their model to suit the changes that the domestic market has undergone?
We believe that the regulators in the US are looking for a consolidation of the current brokers which will inevitably weed out smaller fringe FX brokers and allow for larger more established firms operating in other financial markets (Futures, Equities, Banking, etc…) to gain access.
With M2 Forex we provide a boutique style offering with the backing of a larger financial institution allowing our clients access to better pricing and liquidity. Additionally we are providing brokers new business and flexibility without having to adjust their current business model.
The approach we are taking with M2 may be one of the only access points left for firms that want to position themselves in the United States, but do not have 20 million in Net capital or the time necessary to devote to the regulatory procedures currently in place.
There have been a number of NON-US based firms recently either starting to develop offerings or inquiring about using established firms as the financial and regulatory backer and in my opinion will only continue to grow in the coming years. With M2 we are looking to build on our already established presence in the US market and we understand what needs to be done to differentiate ourselves from the rest of the industry.
Additionally we are providing brokers new business and flexibility without having to adjust their current business model. The approach we are taking with M2 may be one of the only access points left for firms that want to position themselves in the United States, but do not have 20 million in Net capital or the time necessary to devote to the regulatory procedures currently in place.
There have been a number of NON-US based firms recently either starting to develop offerings or inquiring about using established firms as the financial and regulatory backer and in my opinion will only continue to grow in the coming years. With M2 Forex we are looking to build on our already established presence in the US market and we understand what needs to be done to differentiate ourselves from the rest of the industry.
As a white label and IB, how is risk management conducted? Are you able to A or B-book clients yourself, or do you have to accept the order flow provided by the dealing desk/STP of the host broker?
All IBs and White labels operating under a true white label status (not omnibus clearing) are subject to the clearing methods of the broker they work with. Only Omnibus accounts are able to “A – B Book” clients at will. Most IB’s and white labels do not have any risk profiling ability let alone the ability to toggle and differentiate different flow based on profitability. As we are structured now M2 Forex clients flow is passed directly to the broker for clearing, we do not partake in the P/L of clients.
Who provides the actual trading environment for M2 Forex’s MT4 platform? Please elaborate on the provider and structure of the white label provider.
The MT4 environment is a complete white label of our liquidity provider, without having to use a third party bridge M2 Forex can concentrate on keeping transaction costs low, equating to lower, more competitive spreads for our clients. Bypassing a bridge also significantly cuts down on execution time for our clients.
Our liquidity provider services a fairly large number of retail Forex clients, thus we have secured something that other MT4 white label brokerages often overlook, securing a separate, dedicated server. In the case of M2 Forex our server is located in the Equinix NY-5 datacenter alongside our liquidity provider. We believe our white label instance is “a cut above” other white label brokerages operating in the US and abroad.
Do you think there is more merit in operating as an IB and spending the client acquisition budget on recruiting strategic partners and paying commission to sub-IBs who will develop a network of clients and bring business rather than spend on web advertising to drive traffic to the website?
This is an easy one for me to sum up. With our current offers (BBFX / Back Bay Futures), we have served as true Introducing Brokers providing sales and customer service to our partners for years in exchange for a commission. Therefore we firmly believe in the ability of outsourced support, sales and marketing firms as a solid value add to their partners.
By building a strong partner network you are able to expand your industry reach and access new clients. It is true, IB’s and affiliates are the brokers largest fixed cost, yet when properly managed and developed they can also be their largest asset.
What is your opinion on white label products, in terms of the best means of establishing a white label? Do you think there is any merit in going to an existing broker, paying $5000 for a white label MT4 license, then around $15,000 to $20,000 for integration of the CRM/back office system/website/payment solution plus the cost of regulation, or do you think it is better to have your own MT4 license and then take a prime broker solution from a company such as Boston Prime or LMAX?
I think the answer to this question differs depending on where you are regulated. M2 Forex for instance is in the USA, and is an NFA member firm clearing through another NFA regulated FCM/RFED. In the case of a USA based white label the $5K white label fee and money spent on back office integration are much more palatable expenses compared to the $20 million needed to operate and run an FCM/RFED.
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M2 Forex structured its relationship with our partner broker as per NFA regulations so we can offer US and NON US clients alike a competitive FX atmosphere based on pricing and commissions at a time when we feel it is in demand. For NON US white labels it depends on how well capitalized you are and what type of entity you are looking to build.
If you can afford it, a long term sustainable approach is to outright purchase an MT4 license. For shorter “quicker to the market” solutions there are other options not previously mentioned though like using a 3rd party bridge solution to access MT4 clients while still sourcing your own liquidity and clearing arrangements.
Regarding the recent institutionalization attempts by MetaQuotes regarding trading signal companies and third party software companies, do you think this is likely to diminish the value of using MT4?
We don’t see MT4 going anywhere fast, much to the chagrin of a number of vocal brokers, savvy traders, and most recently to the signals and third-party developer community. While the latest actions taken by MetaQuotes may only hasten MetaTrader’s demise, the platform still commands a substantial market share amongst retail forex traders and their brokers.
In our opinion; It’s ironic that MetaQuotes would begin cracking down on the external developer community, (i.e. signal providers, copy trading services, tech firms providing popular MT4 add-ons, and trade tracking companies), it is those same firms are who brought MT4 to the forefront of forex trading platforms to begin with. Retail Forex traders espoused the “expert advisor” abilities back when MT4 was first released in 2005 and even more so in the preceding years.
Though the language these “expert advisors” are coded in is deliberately MetaQuotes’, the indicators and expert advisors developed using the MQL language have largely been contributed by third-party developers. Without the “expert advisor” and custom indicator community MetaTrader4 would likely never have reached the success it has reached today.
No trading platform is perfect; however the recent anticompetitive actions taken by MetaQuotes to shut down external signal providers in light of releasing their own signals marketplace has prompted the same developers to bring to light some of the inherent flaws in the platform.
To name a few, developers have berated the MQL language for its inconsistency, its inability to handle anything but trade-related functions without having to code a separate DLL file, and inadequate debugger. Developers have also pointed out the inability MT4 has when backtesting – namely there is no consistent historical data, and while the platform is backtesting it is unable to keep track of changes in the spread.
Alternative platforms are gaining traction in the market, albeit, slowly. Broker-specific platforms such as FXCM’s Trading Station, MahiFX’s proprietary platform with the same name, and Tradestation’s platform are just a few platforms that have arose as viable alternatives to MT4. Web-based platform such as OANDA’S fxTrade, Leverate’s Sirix WebTrader, and eToro’s Webtrader have all attained some measure of success. Lastly, stand-alone platforms such as cTrader, PF Soft’s ProTrader, and NinjaTrader all represent possible substitutes for MT4.
M2 Forex has been actively searching for the right combination of signal based services to offer our clients but has been relegated to the sidelines as we are forced to watch what unfolds with the MetaQuotes vs. Provider power struggle. We plan to announce partnerships to clients shortly.
Do you look internationally or domestically for strategic partnerships with IBs and local representatives? If M2 Forex looks internationally, how is customer support conducted? Is this in-house, or conducted by strategic partners and local representatives?
As a USA based company, we are unfortunately not allowed to source any clients from 3rd party IB’s, marketers, or affiliates working in the USA or with US clients unless they are an NFA member. Internationally we are looking to build a number of NON-US referring partners who are looking for good pricing for their clients with the regulatory and financial security of working with an NFA Member. We feel that M2 Forex has a lot to offer our partners and their individual clients. Additionally we are aiming to have our NON-US entity available to NON-US traders by 9/1/13. We are currently sourcing liquidity and going through the process of interviewing staff to provide 24 hour support in a worldwide market.
There has been a lot of discussion in regulatory circles about client fund safety recently. How are client deposits handled? Do clients deposit directly to the host broker, or to M2 Forex’s omnibus account? If to an omnibus account, will it be subject to the new inspections by regulators on the transactions which take place on omnibus accounts?
As I previously mentioned when discussing handling risk in the USA “All IB’s and White labels operating under a true white label status (not omnibus clearing) are subject to the clearing methods of the broker they work with.”
This goes for holding funds as well. In order to operate out of the USA and hold client funds you must be registered as an RFED with the NFA and have $20 Million in net capital.
Therefore you cannot serve as an omnibus clearing broker in the USA like other entities can in other parts of the world. This is a good thing in my opinion for clients. There is additional layer or two of protection of funds when dealing with larger, highly regulated, and more capitalized firms.
What is your stance on the CFTC’s ruling that rolling spot transactions could be deemed to be swaps?
The final rule as to the implications on the Forex industry hasn’t been finalized yet, including what reporting requirements would be placed upon FDMs if any. It is difficult to garner an educated response without knowing the final verdict, and also knowing how slow the process has been going inside of the CFTC.
Assuming worst case scenario and it did take place, it would be similar to parts of the deliverable FX world. This would mean that there would be daily reporting requirements that would not only require additional account, back office, and legal support but more importantly additional fees. Any client holding longer than 24 hours would be subject to enhanced reporting, fees, and regulatory scrutiny. This would truly change the retail FX industry.
What is the future plan for M2 Forex, and how will you achieve that in the initial stages of its market presence?
We are initially looking to supply the US market with a new and viable FX based solution to the consolidating market. We believe our products, pricing, and commission structure will separate us from our competition and give retail clients new opportunity in the space.
By the 3rd quarter, M2 Forex intends to offer a fully-regulated non-US product opening the doors for non-US traders to have access to flexible leverage, true hedging, and CFD trading while still receiving all of the benefits M2 Forex USA offers including tight spreads, competitive commissions, loyalty points, and the same top-notch customer service.
M2 Forex also looks to bring exclusive signal providers and technology partners to enhance our clients’ satisfaction. In that same pursuit M2 Forex anticipates expanding our loyalty points program, bringing access to additional markets to our clients, and offering mobile trading to all clients to name a few of our plans.