Now is the time to take heed of the brokers that are doing things the right way in Australia. Here is a full and open discussion with a company that is leading the way.
Ever since the European Securities and Markets Authority (ESMA) completed its very comprehensive directive in the form of MiFID II which extended huge and detailed trading infrastructure regulations to all electronic trading entities ranging from ETFs to margin brokers, Australia’s financial markets regulator the Australian Securities and Investments Commission (ASIC) has been demonstrating signs that it may emulate the European rulings.
This has not happened, and ASIC is unlikely to emulate the European regulations in their entirety for two reasons, those being that ASIC is a regulatory authority that genuinely understands the FX and CFD industry properly, a facet that cannot be said of many other regulatory authorities worldwide, and perhaps more importantly, that ASIC has begun what can only really be described as a ‘clampdown’ in a completely different manner to that exercised by ESMA two years ago.
During interaction with Australian FX industry leaders over the past two years and certainly since the implementation of MiFID II in Europe, FinanceFeeds has been able to glean from opinion among senior executives that ASIC may potentially follow suit in terms of restructuring the means by which OTC trades are executed, reported and sold to retail customers, many of whom considered that leverage restrictions would be part of that remit.
Indeed, the speculation was correct and by August 2019, ASIC had revealed its very detailed proposal in which the regulator demonstrated its clear intention to restrict the methods by which OTC CFDs are sold.
Now, in a country which has a very long established and important position within the global FX and OTC derivatives sector, the regulators have instigated measures which have polarized corporate opinion. Some of the larger companies have begun to weather the storm, however many have continued with their original business model of high leverage and have kept their Australian ASIC financial services licenses, yet opened offices in offshore jurisdictions in order to onboard clients via those offshore entities and subvert the restrictions imposed by ASIC.
FinanceFeeds therefore deduces that although ASIC’s position is very much a counterproductive one, in that it does not serve to protect clients from adversity, but instead forces them into the hands of unregulated entities masquerading as Australian brokers, meaning that the need to maintain a position in Australia and be sustainable is vital.
It has been our perspective for a number of years that brokerages in the OTC derivatives sector have an increasing need to expand their remit, get away from the affiliate marketing orientated spot FX business via off the shelf, indistinguishable platforms and become genuine multi asset providers.
It is all very well rambling on ad infinitum about this, however it is most important to establish the ethos from within, therefore FinanceFeeds has spoken today to a high quality electronic trading company in Australia which has taken exactly these steps, in order to provide the point of view from within the industry on how to sustain a high quality business from within Australia, and onboard good quality clients who will invest, rather than speculative, short term ‘punters’, which are the bête noire of the regulator and are not revenue earners for brokers.
CTIN Financial Services Pty Ltd, an Australian firm licensed and regulated by ASIC, and which majors on developing financial technology to connect and network traders, investors and partners to Global Stocks, Foreign Exchange, CFDs, Options, Futures and more asset classes from one single account, is a case in point.
Today, CTIN Financial Services’ Director Ian McEwan explained to FinanceFeeds “I agree with your point that brokers need to expand their horizons and look at the multi-asset sector as vitally important for business growth, stability and sustainability.”
“The owners of this business are from China, and China has been a region in which exchange traded global asset classes has expanded tremendously” said Mr McEwan.
How the decision to structure the company was made and why you should pay attention
Mr McEwan explained how CTIN Financial Services looked at the way things have been going in Australia. “Originally, the founders of CTIN came to Australia three years ago with the idea of obtaining an ASIC AFS license, however, they were unable to get one.” – Ian McEwan, Director, CTIN Financial Services Pty Ltd
FinanceFeeds has pointed out in the past that ASIC has been reducing the number of AFS licenses that are issued to OTC margin FX brokers and its extremely one-sided view of the spot FX and CFD brokerage sector.
“We deduced that this was at a time when many Chinese businesses were making efforts to get money out of China and bring it to Australia. Our view at the time was that there was a pervasive collective thought, with which we agreed, that from a physical FX point of view, those persons improperly using physical FX to protect their capital from the Chinese government were not welcome” explained Mr McEwan.
“We found the same as many new entries, in that we could not get a license if we were to set up solely as a spot FX firm. Initially, the firm wanted to use an MT4/5 platform. I said this is what is happening in the world – all of the governments in areas where there are well developed FX businesses are trying to reduce leverage on FX and CFDs, so all the Tier 1 countries are trying to get rid of all b books and high leverage” – Ian McEwan, Director, CTIN Financial Services Pty Ltd
“The question is, do you want to set up a company that runs a b book, and do you want to set up a company in Australia and then onboard clients offshore in Vanuatu or St Vincent, or other regions that allow high leverage and have no recourse for customers? That is not what our model is about. We wanted clients to trade all asset classes via a straight through processing ‘agency’ model and hopefully clients make money and it is sustainable in Australia” said Mr McEwan.
“Some existing firms in Australia about which we are aware now have offshore jurisdictions with less regulation, which in our view is counter to what the regulators are trying to achieve. The regulatory approach does not encourage anyone to look after the clients, it is just making the bad business go elsewhere. This is our conclusion, and our owners agreed with our philosophy” explained Mr McEwan.
“One thing we saw is how Robinhood was approaching the market by offering commission free trading – we looked at that model, too. For us, the idea was to be different to an MT4/5 provider and to have people investing properly and looking for long term investment opportunities rather than trying to attract short term speculative traders” he said.
“Our model is to clip the tickets from an execution point of view, like a traditional stock trading firm, and not go against clients. We could have either white labeled a product offered by another firm, or resolved to control our own destiny, and the latter is what we decided to do. We therefore partnered with TraderEvolution Global, which is a multi asset trading systems development company. TraderEvolution Global gave us a full solution to allow us to trade the multi asset classes, turn on any market we wanted to, and have the counterparties we want to deal with – rather than have it forced upon us by inflexible off-the-shelf spot platforms” said Mr McEwan.
“With TraderEvolution Global, we get the full brokerage solution including front, middle and back office, and we do not have to worry about multi APIs connecting all systems – we have that all in one system. We liked the user interface and how easy it is to execute trades across global equities, and stocks” said Mr McEwan.
“We believe that we are also far more credible in the eyes of ASIC with this method, and it is possible that this contributed toward them granting our financial services license, as they realize the sustainability of this type of business model compared to risky spot FX margin brokers.
“From a retail client point of view, platforms such as those offered by Interactive Brokers are the closest offering a multi-asset product, however we strive to be more user friendly. Platforms should be broker agnostic, therefore taking the Interactive Brokers TWS system wasn’t for us” said Mr McEwan.
“We wanted to assess how we could have a new user interface that clients can use easily, is clean and can operate well. With TraderEvolution Global’s solution we can add different asset classes. Not everyone wants to trade FX, or futures specifically, so we can turn on what each client wants” – Ian McEwan, CTIN Financial Services, Director
“Another important function that we gain by using the TraderEvolution Global solution is the ability to change operational aspects to be unique to our business. For example, with the large number of international exchanges we use, we need to be able to automate the function of turning on and off data feeds for clients, a service that we will be releasing in the next month or two. Clients will be able to add specific feeds such as, for one example, ASX stocks, and they can go straight to those exchanges through our platform for live data” said Mr McEwan.
“We built all of this with TraderEvolution Global to suit our specific needs. We aimed to automate all those features. We are reliant on the technology to do the work for us, rather than having a huge back office team” said Mr McEwan.
“We believe that a proper brokerage platform should not be generic. We can provide tailored APIs for various client requirements. For instance, if someone wants a different front end, and just wanted the APIs, we can connect them to those. If a client wants to run their algos for day trading, they can run their algos through the system. We are about to launch a managed account solution for equities for dividends and custodian services” – Ian McEwan, Director, CTIN Financial Services
Mr McEwan explained that there are currently no true global equity platforms that are available in the West other than those provided by Saxo Bank and Interactive Brokers, and then there is a big gap. There are derivatives firms such as IG Group and FXCM which have proprietary platforms, but they don’t offer a real equities multi asset solution.
“We can roll out a Robinhood style platform for equities trading, but at the moment we don’t want to go down this route. For instance, if a client wants to tap into API and trade global equities and we want to do it commission free. We can give that to someone tomorrow via our solution with TraderEvolution Global and off they go. They can immediately trade in 34 equity markets around the world” said Mr McEwan.
“One thing to bear in mind is that with global equities and futures, the data cost and distribution fees are huge, and this keeps a lot of people out of this space because of the connectivity and fees. People in the OTC derivatives space don’t often understand this sector. The redistribution cost of data is important, and many don’t consider this. The cost of entry is not cheap but MT4 is turn it on and go, so many firms get stuck in that rut. It is very limiting” he said.
“Being able to offer a multi asset trading environment, make it next to real time and get data from one side of the world to another is a consideration. We are about to turn on OPRA US options, this is dependent on huge amounts of data, so large resources are required to make it happen, and these resources cannot be obtained from OTC derivatives platforms such as MetaTrader” said Mr McEwan.
“We have over 30,000 instruments, including options and futures with different ones on each future dates. It is not easy to map it all together so we have done all that, put the infrastructure in place and the team at TraderEvolution Global helps support those important parts of the business. We know that TraderEvolution Global can help do all of this. We get lots of retail business from China, but are focused on B2B business in other important markets” said Mr McEwan.
Taiwan Futures Exchange (TAIFEX) announced last week that it achieved a new record volume of 341,393,346 contracts in 2020, a 30.9% increase compared to 2019. Average daily volume (ADV) for the full-year also reached an all-time record at 1,393,442 contracts.
This result is yet another indicator that the retail trading sector, especially in South East Asia which is an epicenter of high volume market activity conducted largely by individual traders as a part time endeavor and via introducing brokers and money managers, is very much operating on a multi-asset basis, with exchange traded futures and equities at the very heart of the trading world.
Thus, it is clear that going down the multi-asset route is a long overdue natural progression for retail OTC derivatives brokerages if they want to onboard a new and large client base which has a longer lifetime value and requires a diversified product range.
TAIEX Options (TXO), the world’s sixth most traded equity index option ranked by the Futures Industry Association, increased 18.7% to 201,733,160 contracts in annual volume, setting a historical high. TAIFEX’s two other flagships saw even greater growth with Mini-TAIEX Futures (MTX) and TAIEX Futures (TX) increasing 101.9% to 60,051,670 contracts and 35.3% to 46,324,077 contracts, respectively. Strong market demand pushed MTX up to a record annual volume, averaging 245,109 contracts on a daily basis.
TAIFEX may well be a listed derivatives venue in a far flung region, and not part of the OTC FX industry, however it certainly should be, and can easily be.
This type of massive market is exactly what most FX brokerages have bent over backwards to attempt to onboard over recent years. Some managed to develop an under-the-radar Chinese introducing broker network, however most have returned westward with a bloody nose, their efforts to bring Chinese business and its enormous volumes to Western brokers largely having been in vain, as the challenges of navigating a closed market controlled by the Communist government has proven impossible for most.
It is quite simple. The Asia Pacific region remains the most important in the world, however OTC derivatives companies from outside the region are considered prestigious, yet the entry barriers are in many cases insurmountable.
Looking at these figures, and how sustainable they are once again highlights the importance for OTC firms of going down the multi-asset route.
TAIFEX had its record year since the exchange was established many years ago in terms of exchange listed futures contracts. There has been a constant interest in exchange traded currency futures which started in Asia. DGCX is a relatively new exchange which has a massive turnover in Indian rupee futures contracts, but now the whole Asia Pacific region is doing massive retail exchange traded futures volumes.
Surely the right move here is for OTC FX brokerages to connect to these exchanges and offer their clients in Asia a full range of listed derivatives?
Where better to approach this from than Australia, with an appropriate ASIC license?