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Retail FX has now overtaken hedge funds & pension funds placing it second only to banks themselves as far as trading volumes are concerned. Tom Higgins*, CEO of Gold-i, asks how this trend is developing and how should retail brokers keep up with the evolving market?

Outsourcing

The retail FX landscape is changing – with global consolidation of brokers and an increasing number of brokers moving to London from the US due to regulatory changes. As the market evolves, so does the technology, which is at the heart of e-FX businesses. Technology can fuel growth and help brokers to differentiate themselves and broaden their offering in an increasingly competitive market.

One of the major trends we are seeing is the move away from brokerages using in-house developers. Across the globe, more and more brokers of all sizes are seeking to outsource their technology. This coincides with banks and brokers reducing the number of IT staff.

The trend for outsourcing makes perfect sense. I have always believed that brokers should look to outsource as much as possible – otherwise they will spend their internal resources on developing something which can be bought in. This applies to office management systems like email and web pages all the way through to trading, back office and CRM systems. Modern, successful brokers are lean, with most functions taken care of externally and the core business taken care of in-house.

Broking technology is highly complex and is, therefore, an ideal function to outsource. For example, you cannot simply plug a liquidity provider into a trading system because neither end will be compatible with the other. Specialist vendors have a vast array of experience in liquidity provider connectivity and the associated latency reduction. The integration requires detailed customisation and extensive testing as well as ongoing management to keep the integrations up to date as liquidity providers change their systems regularly.

A barrier to outsourcing has previously been the idea that it is harder to differentiate your service offering. However, it is increasingly possible to buy in products and services which can be customised, helping brokers to retain a competitive edge whilst also offering cutting edge technology to their clients.

Liquidity provision

Over the last year there has been a significant rise in the number of institutional FX organisations offering liquidity to the retail market – a trend that I expect will continue in 2014.

As institutional volumes have been reduced, institutional FX players are looking for more flow from other sources and seek to increase their volumes by offering liquidity to retail brokers. In terms of liquidity, it’s important for liquidity providers to offer liquidity on a regional basis, with regional distribution hubs – not just from New York, for example.

Whilst many retail brokers connect to just one or two liquidity providers, brokers are increasingly looking for choice – so having more liquidity providers to choose from enhances the market. It’s important that brokers select their liquidity providers carefully. Having tight spreads and deep pools of liquidity helps them to lower trading costs and improve their competitiveness.

Multi-asset offering

The e-FX industry is now about much more than FX. One of the biggest growth areas for brokers is extending their offering to cover all asset classes. Whilst FX is still the primary focus in the retail market, an increasing number of brokers are being asked by their clients to also trade CFDs, equities, futures and commodities.

Since we launched the technology to transform the highly popular retail platform, MetaTrader into a multi-asset trading platform, brokers across the globe have benefited from expanding their offering to clients and have attracted new clients because of the breadth of their service. This trend looks set to continue and brokers are certainly missing a huge growth opportunity if they limit their offering to only cover FX.

Mobile trading

A significant amount of investment has been made by key industry players to enhance mobile trading platforms. Whilst the majority of trading is still done on PCs and laptops, we will continue to see more and more traders seeking to use tablets and smart phones to implement their trades. Brokers need to be able to have a comprehensive offering and plan for their clients’ current and future needs – a mobile trading offering should be very much part of their strategy.

Platforms

Open platforms are also gaining traction – but it’s still early days as far as these are concerned. When open platforms first emerge, in any market, there are very few applications that can work with them. This is usually followed by a surge of rather low-quality applications before, eventually, a lesser number of higher quality applications take hold. Open platforms and app stores, however, are a very positive evolution as they give the end user far more choice. In 2013, the first open platforms had started to evolve. 2014 will be a key year in driving uptake.

When it comes to platforms, smart brokers will continue to offer a choice to clients. The difficult aspect for brokers can be the management of multiple platforms. We will be driving the market forward in 2014 with our new, customisable Matrix product, which will enable a broker to connect to multiple platforms, combine multiple liquidity feeds, offer A / B book management, and integrate with Back Office, Risk Management and CRM solutions.

The technology is out there to help both start-up and established brokers to run profitable businesses and manage their risk more effectively. It’s important for brokers to test products and discuss ideas for customisation. If they have a clearly defined offering, fast and reliable technology and also provide excellent service, they can be very successful in a market which is thriving.

©BestExecution 2014

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