Unveiling the Future of Retail Trading Liquidity: Industry Leaders during FMLS:23

The annual Finance Magnates London Summit 2023 included an expert panel discussing the current liquidity landscape for retail trading brokers. The panel covered topics around accessing deeper liquidity pools, innovations in liquidity operations, competition in the prime of prime space, and whether banks are opening up to working with retail trading firms.

Moderated by Hormoz Faryar, the Managing Director of Institutional at ATFX, the panel featured industry experts including Phillip Spurgeon, the UK Branch Director at B2Prime, Andreas Kapsos the CEO of Match-Prime Liquidity, Ben Robson, the Head of Institutional EFX at Swiss Finance Corporation, and Alexei Jiltsov, the Co-Founder at Tradefeedr.

Impact of Geopolitical Events

The panel kicked off with a discussion on the impact of geopolitical events, such as the escalation between Israel and Gaza in October 2023. Phillip Spurgeon noted the defensive pricing by market makers Market Makers Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Market makers or called dealing desk brokers represent a type of broker that internalize flows and are taking the opposite side of a transaction submitted by their clients. The market making broker is only quoting a feed of prices to its clients. These feeds may or may not be the exact same as the prices quoted on the interbank market.Any order a client enters is processed internally and never goes out to the market, except in rare cases where a market making brokerage identifies a client as a v Read this Term and widening spreads, particularly in commodities like gold, during geopolitical tensions.

"What we notice with any geopolitical tensions, they always lead to uncertainty in the markets. As a company, we saw market makers pricing defensively, we noticed spreads widening, particularly on commodities, particularly on gold as well,” Spurgeon said.

This sentiment was echoed by Andreas Kapsos, who highlighted how such events lead to protective liquidity strategies, triggering arbitrage opportunities. "It is very often that we have events like this during the financial year. Obviously this one outshines the rest of it. The specific event happened on Saturday, so that allowed the market a bit of time to react during the opening.”

Internalization with A-book vs B-book Models

A significant part of the discussion revolved around the A-book and B-book models in retail trading. Spurgeon emphasized the importance of a hybrid model, balancing risk management and selecting the right liquidity provider. Kapsos shared his perspective on regional differences, noting the varied success of B-book strategies in different markets.

Alexei Jiltsov pointed out that 2023's lower volatility compared to 2022 implied a more directional market, affecting both A-book and B-book strategies. He stressed the importance of client management in liquidity strategies.

“Firstly, the market might be more directional, with potentially less uncertainty. Secondly, there's a chance that retail traders occasionally make accurate predictions,” Jiltsov stated. “However, this greatly depends on the client profile. In cases where trading is highly directional and concentrated on just one or two assets, there's a higher risk of getting caught out, especially if these assets have strong consensus views.”

In preferring the A-book flow, Ben Robson highlighted the influence of factors like balance sheet strength, client base, and leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term on these models.

“B book does have its advantages, but I agree with Phil that the balance sheet plays a significant role. The location of the brokerage's domicile is also crucial. The client base and the economies of scale and leverage are important factors,” Robson added.

Evolution of Retail Trading Platforms

The discussion then shifted to trading platforms, with a focus on the dominance of MT4/MT5. Andreas Kapsos noted the increasing demand for alternative platforms and technology solutions, particularly in the wake of MetaQuotes’ decision regarding white labels.

The changing dynamics around trading platforms have direct implications on liquidity and broker strategies. Kapsos observed that more startup brokers, now exploring alternatives to MT4/MT5, are considering A-book strategies from the outset. This is a departure from the traditional approach of initially focusing on B-book models.

The panel concluded with a forward-looking perspective on liquidity management, acknowledging the complexity of factors influencing it, from geopolitical events to technological advancements.

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