Prop trading, according to experts gathered at the Finance Magnates London Summit 2023 (FMLS:23), offers technology solutions that allow brokers to gain a competitive edge in retail trading. For one of the discussion participants, prop trading is like Uber, but in the world of finance.

Moderated by Aeby Samuel, the CEO & Founder of FYNXT, the FMLS:23 panel covered topics ranging from risk management to AI ethics to choosing the right trading platforms.

Where's The Alpha? Technology and Products in Retail Trading

Kicking off the discussion, Samuel posed a question: how can brokers use technology to improve their risk management and operational efficiency?

As Wassim Khateeb, the Chief Commercial Officer at FXCUBIC, explained: "Technology allows to calculate very large amount of data to analyze very large amount of data in a short amount of time and reduce the possibility of human errors."

He gave the example of algorithms that can analyze trades and route them to different execution venues based on customized rule sets defined by the broker to manage risk accordingly.

Christoforos Theodoulou, the Head of Global Business & Sales at MetaQuotes, expanded on this point and added that "brokers need to use automated trading systems to manage their risk." MetaTrader 5, for example, enables brokers to set up customized routing rules to handle trades from different types of traders and strategies, keeping risky trades in-house or sending them to an external party.

The Uberization of Retail Trading

Vitaly Kudinov, the SVP of Sales and Business Development at Devexperts, drew an intriguing comparison between prop trading and Uber's ubiquitous ride-sharing service. Just as Uber allows individuals to provide rideshare services by using someone else's vehicle, prop trading allows traders to trade financial markets with a firm's capital rather than their own.

“Prop trading, this is like a topic to me. It's like Uber, but in retail trading,” Kudinov commented.

In both cases, there is an intermediary providing the necessary resources to enable the service, vehicles for Uber and trading capital for prop firms. And, in exchange for providing these resources, the intermediaries take a cut of the profits.

There's also a parallel in the rating and performance systems. With Uber, drivers are rated by riders and have to maintain good ratings to continue driving. Similarly, prop firms rate traders based on their profitability and risk metrics.

“There is a rating system, so the best performance gets the highest rating and that's the popularity growth. We have many, more than 10 prop trading firms, and I feel like more brokers would like to have this service in addition to their classic brokerage services,” Kudinov added.

The growth of prop trading firms offering these services to attract retail traders is comparable to Uber's rapid expansion by onboarding drivers. And like Uber, prop trading opens up opportunities by lowering barriers to entry. Small-scale traders gain access to institutional-grade platforms and funding with just a subscription fee.

“It feels like a subscription model also works here as well. People are ready to pay a fixed fee just to participate in that very interesting experience,” the SVP of Sales and Business Development at Devexperts concluded.

Artificial Intelligence and Machine Learning in Retail Trading

The panel also discussed the ethical implications of AI and machine learning in retail trading. As Kudinov explained: “While AI tools like ChatGPT can improve efficiency, they need an extra layer to ensure security. To do that, Devexperts, has built a separate AI layer on top of ChatGPT focused on industry-specific questions so that client data never gets exposed."

On how technology can enhance the trading experience, John Murillo, the Chief Dealing Officer at B2Broker highlighted the importance of workflow optimization and automation. As he put it, "the more automation you get to achieve, the more clients you can serve on a timely manner."

Theodoulou added that an intuitive, multi-device platform with features like auto account opening, tutorials, custom programs and communication channels (including AI-powered chatbots) significantly improves usability.

Discussing how brokers can leverage AI for competitive advantage, Kudinov explained how Devexperts allows AI to dynamically group traders based on criteria beyond just performance, profitability etc. This gives brokers more granular, custom insights into their risk exposure.

Technology Differentiates, Not Only Enables

In choosing trading platforms, Christoforos Theodoulou and Dinos Michaelides, the Director at DGM Tech Solutions, highlighted factors like reliability, multi-asset capabilities, total cost of ownership and meeting current & future needs of target markets.

“One important aspect is that the technology being used is tried and tested, ensuring it's reliable. Reliability is a very big factor,” Michaelides commented. “You need to make sure that the technology you introduce is not going to fail at some critical point, ensuring you're not just a guinea pig.”

When asked about their biggest technology investments, the experts highlighted continuity, continuously evolving products based on client feedback and market trends. Areas of focus included scalability, open API architecture, usability, AI and automation.

In closing, Samuel reiterated that technology is now a differentiator in the quest for alpha, not just an enabler, a commitment to pushing the boundaries of excellence.