LR: What are the biggest trends you have been seeing?
Jeff: First of all, it’s clear that in many cases, the money that brokers make from their B-book is actually just a small proportion of their overall revenue but it comes with a very high proportion of risk, which means that their P&L is extremely volatile. Brokers often don’t realise how small the risk revenue component causing the massive variability in their monthly P&L is at any given time.
Their risk-free revenues on the other hand are much more linear with their clients’ trading volumes. And by deconstructing each transaction, we are able to show brokers how much revenue they could be locking in risk-free.
LR: Are you suggesting that a B-book model shouldn’t be used by FX brokers?
Jeff: With the B-book model, in any typical year in there is likely to be six fairly average months, three very poor months and three very good months. So is it worth the stress, the aggravation and most of all the risk that these high-percentage swings in revenue cause? Is it worth sacrificing the ability to grow a consistent, sustainable business for the hope that clients have a “large drop”?
Only the brokers themselves can answer those questions. But a brokerage is a business. And any investor looking to inject money into that business will want to see consistent revenue streams rather than highly variable month-on-month P&L that devalues the business.
LR: How can ISRA help?
Jeff: We can help by providing and implementing models that give brokers full visibility into their revenue, P&L and risk on a transactional, day-to-day, week-to-week and month-to-month basis. The net result is that they can take a more informed approach to risk, adapt their business models accordingly and monetise their flow on a more consistent basis.
There are clearly identifiable revenue components and ISRA can help brokers recognise them, to help facilitate more sustainable business models.
