Another year has passed, and another industry event is behind us. Last week, the iFX Expo in Cyprus marked the eighth consecutive round in Limassol, consistently attracting the leading fintech industry executives to the island.
After three days of vibrant panel discussions, a slew of business meetings and a couple of big and eventful parties, another widely-successful event is now over. This year will be marked by a record attendance of over 4000 people, a development which few could anticipate a year ago, just before the ESMA’s regulatory challenge was looming over the industry.
Challenges for the brokerage industry have remained rampant over the past months, but the record attendance confirms the resilience of the space to regulatory changes. Every industry eventually reaches a consolidation point, and we are probably yet to see the full extent of the changes to the retail brokerage space.
That said, the continuing pivot of brokers to offshore zones is definitely buying some time. The world is entering the 10th consecutive year of expansion, and the economic cycle is supporting the growth of retail brokers across the globe. All that said, challenges for the industry remain and will continue to be present for a long time.
Payments Discussions Dominating
Payments undoubtedly are a key area of interest over the past year. The services of payment providers are in high demand as brokers pivoted to offshore jurisdictions over the past several months.
IFX Expo exhibitors, as well as attendees, have been actively discussing the challenges associated with processing card payments for subsidiaries located in remote jurisdictions. While some brokers who also hold regulated subsidiaries are having an easier time, those who are solely relying on offshore operations are paying a steep price last year’s VISA and Mastercard crackdown.
With the sheer number of exhibitors focusing on this challenge, the next most prevalent issue for the industry seems to be bank accounts. Speaking to several attendees, we found out that there are about ten banks which are currently servicing the industry as a whole, but for brokers which are operating from remote jurisdictions, challenges are very steep.
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B-Booking Back in Fashion
As FX market volatility continues to remain subdued, brokers have been keen to make the most of their books. As a consequence, we found out that more and more brokers are internalizing flow in the current challenging environment.
While the number of companies that claim to be sending their order flow via Straight Through Processing (STP) systems has rapidly increased over the past several years, those that really do it remain few.
Declining revenues over the past months as a consequence of lower trading volumes stemming from new leverage restrictions were exacerbated by the decline in FX volatility. While some brokers have outlined that the regulatory changes are eventually going to shift the whole industry to an STP model and high leverage trading will be gone, the resurgence in market-making suggests that others briskly disagree.
Offshore Industry to Determine its Faith
Changes to EU regulations dictated the offshore pivot on the part of many brokers. While consumer trust in the operations of brokerages which have a heavily regulated subsidiary in Europe or Australia is higher, brokers which are offshore-centric are managing to attract enough clients to operate profitably.
With the bulk of the industry focusing on jurisdictions outside of the EU to avoid scrutiny, the brokers are finding ways to stay relevant. Their main edge, for the time being, is high leverage, but the risks are stemming as usual from players that might approach the lax rules in some offshore regulatory jurisdictions as a green light to engage in unethical behavior.
About ten years ago, the first steps of the binary options industry in the market created a toxic atmosphere which eventually led to the ESMA’s drastic steps in the retail brokerage space. Long-time iFX Expo attendees remember the time when the presence of binary options operators was ample, by 2019, such operators are extinct.
While brokers offering their services from remote jurisdictions remain upbeat, the risk is that enough of them may be tempted to abuse their position, therefore leading to another ramp up in legal efforts to squeeze pressure from banks and card providers. For the time being, we don’t know how that will turn out, but the industry will do well if it learns from its past mistakes.