Technology provision to retail FX firms has become a competitive and somewhat diverse area in recent times. With an entire host of different requirements from brokers, and the market share carved out by MetaTrader 4 facing an onslaught from a number of new trading platforms, many of the industry’s technology providers have sought methods of branching out to encompass social trading, mobile and platform-neutral integration methodology.
One particularly well known company is Leverate, which has continued to offer an integrated system to FX firms, and this year made some enhancements, such as last month’s completion of the rebuild of its low-latency algorithmic data feed, as a result of increasing execution speed requirements.
At this year’s iFXEXPO in Cyprus, Leverate launched its new version of Sirix Web Trader, including HTML5 charting technology from ChartIQ.
In this week’s Forex Magnates Executive Interview, Leverate’s CEO, Ran Strauss elaborates on his business model for ensuring that the company continues its path of progression.
Please detail your professional background, and what led you to your senior position at Leverate, and the ethos behind the establishment of the company.
Before Leverate was even founded, we started out as four friends working on systems to exploit arbitrage opportunities. After we had a working “money machine” we realized that we couldn’t sustain this type of business model and used our technological expertise and knowledge of financial systems to develop technology to protect Forex brokerages against this exact behavior.
Today, in addition to our original data feed to protect from arbitrage hunters, spikes and scalpers, we have developed a full suite of products for Forex brokerages, provide brokers with top tier liquidity via Leverate Financial Services, and we strive daily to push the Forex technology envelope even further. From our small group of four friends, we have quickly burgeoned to a global company with more than 150 employees across five offices worldwide and growing.
Upon assuming your post as CEO, what did you initially seek to achieve, and how did you set about achieving it?
As the company grew from our small group of four friends, we each naturally progressed into our positions. One of our other founders, Doron Cohen and I assumed the positions of Co-CEO.
Leverate has concentrated considerable effort on social trading provisioning. Do you think that the world’s regulatory authorities will start to deem this as financial advice, and therefore require all signal providers who traders can copy to register as financial advisers, and if so, how this will affect the copy trading sector? Will there be a downturn in demand whilst existing lead traders cease their usage, and registered financial advisers are sourced?
First of all, it depends on the model of copy trading. It’s very different when a broker tells its traders that he has to copy from one master trader, versus when a broker offers its clients a shared open community in which any trader can pick any other trader to copy. It is the difference between a democracy and a dictatorship.
There could be a downturn in demand in the post-regulation aftermath, but this would ultimately result in better masters with more educated traders.
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?
Today every platform should have both STP & Market Making abilities. We see a trend that new brokers tend to take MT4 in order to answer a demand and embrace it because it is most marketable. Brokers that do take MT4, however, also tend to add more platforms to their mix as they mature. As long as bridge providers continue to provide a better product than built-in bridges, there will be a demand for them.
We provide our clients with a complete risk management solution including automatic B-Book and A-Book management with a built-in bridge that can connect to our own liquidity solution or to any liquidity provider that the broker prefers
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?
In a world where MetaTrader 4 is most popular, we know that most brokers currently are not differentiating themselves enough. Brokers are gauged by service, branding and spreads because many of their platforms are the same. If a broker has the resources to do so and can afford to do so, then he can go for full customization, if not, it is better for a new broker to take an off-the-shelf solution. There are systems like Sirix, that let brokers take a customizable off-the-shelf solution which is branded and can be easily customized by brokers if they want to do so.
Talk us through the broker on-boarding process in order to 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 his business model wrong. Does each broker have to lodge funds with Leverate as collateral?
The on-boarding process involves legal, structure, brokerage design, branding, a brokerage website and training. In addition, there is an initial risk management configuration or the definition of a risk management policy of the company, and the designing of the offering of the brokerage.
Regarding capital requirements, we have seen a whole host of different brokers, both large and small. It depends on the type of business model. A broker whose business will depend entirely on online marketing will usually need large sums of money for his business. A smaller IB, that all he wants to do is provide an environment for his existing clients to trade with, will need almost no money in a marketing budget, and will only have to invest in his environment.
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It also depends on regulation and if and where the broker is regulated, as this can greatly affect capital requirements. In other words, if you’re a broker starting a brokerage business and you take an off-the-shelf solution, your biggest budget concerns are marketing and sales. Regarding recouping costs, we invest in every broker much more in the first few months of activity than what he pays for setting up the brokerage. Due to our high level of investment in our clients, it does happen that we don’t have a return on investment with some brokers. We don’t require collateral from our clients and brokers are not required to deposit money with Leverate.
What is your view on the increasing cold shoulder which MetaQuotes is giving to third-party software providers? Do you think MetaQuotes will become very strong in offering their own internal versions of solutions provided by third-party developers, or do you think FX firms will move away from MetaTrader 4 in favor of open, customizable platforms?
Leverate is one of the largest clients of MetaQuotes, and we have received and continue to receive excellent service from them. MetaQuotes provides service and support for its own clients, and it is the entities that are third-party providers, but not the clients who have received a cold shoulder.
I believe that MetaTrader is here to stay, but I also believe in a “financial supermarket” where traders can pick and choose the products that they wish to use. Brokers should be offering a diverse product offering to their clients. Most brokers still offer just one platform, but when there is a diverse platform offering, a broker gains a custom angle and already differentiates himself from the competition.
Subsequent to the issuance of a warning to four copy trading providers earlier this year, how do you consider the social trading sector will evolve, and how will the increasing platform neutrality and co-operation with institutional firms as distribution channels affect Leverate, and how are these positioned compared to the Sirix social trading platform?
In general, I believe in an open environment. I think that what will happen is that there will be closed and open communities that will be operated both by brokers and also by independent non-broker companies. Certain social communities will be cross-platform in nature and other will be closed. Sirix social is unique in that it is a multi-broker, cross-platform social trading network.
What is creating the drive among large established FX firms to source liquidity and solution provision from London-centric institutional firms, and how can Leverate seek to gain market share among such long established firms?
Due to London being an established financial hub, we have built two data centers at Equinix and Telecity to ensure ultra-low latency with high availability, and the highest service and support.
Is there a good business case for attracting new brokers from emerging market countries with the risk/reward policy that it may be a low-cost start up, with potentially large market, or do such companies have a very short life, therefore costing more to on-board than they return?
We have solutions for every type of Forex broker, both big and small. Leverate has solutions that are specifically designed for brokers of every size and capability. We don’t want to give up on any client. If a client comes to us and may not have enough funding but says that he wants to succeed, then we want to give him our technology. It does mean that there are clients that we lose money on during on-boarding, but the flip side is that we have a large client base.
There is a delicate balance between what you want to require from a client in terms of start-up fees, and what is possible in terms of their initial investment.
What has led to the increasing number of start-ups which do not complete one year in business, and how can this be addressed by brokers?
Our figures point to a different trend. Like I said before, our analysis points to about 80% of new brokers becoming profitable and succeeding with sustainable businesses. Regarding the other 20%, we have been seeing lower barriers to entry or almost no barriers to entry at all for start-up brokers.
This has brought us to a point where almost everyone can start a brokerage, but of course not everyone can succeed. To succeed, brokers will have to focus greatly on marketing, have a unique product offering and achieve market differentiation: they need to find a niche market and be different.
Let’s talk about China, in line with Leverate’s expansion into the Far East. 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, as well as avoid government rulings against what could be seen as a joint venture with a Western company?
Although we do act as though we are entering a partnership with all of our clients, at the end of the day, a broker taking technology from Leverate is not doing so as a joint venture, but rather as a client. A start-up broker who takes a turnkey solution from a Western provider is a completely independent business—not a joint venture.
In the past years we have seen an explosion of wealth in the East, in particular in China and India. So obviously the potential is quite large and already does exist. We only need the regulation to meet the demands of the market, so that it can continue to grow and thrive. We have established offices in Hong Kong and in Tokyo to localize our business for those markets.
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 IBs/sub IBs have to be paid?
The spread we offer all of our clients is the same. Our spreads don’t change from country to country. Problems that we may experience do depend on the Chinese brokers, as there is a lack of quality infrastructure with many of the brokers. We do ask to upgrade servers and have minimal operating requirements. We highly recommend our hosting solutions for the Chinese clients in order to ensure that the hardware technology is robust and up to date with the most stringent standards. We ensure that all of our manuals are translated into Chinese.
What is Leverate’s plan for the year ahead?
We plan on growing our client base, increasing our focus on social trading, continue providing the best FX technology available today, and infiltrate new markets with new products.