RIP B-book:Â 1997-2014.
Perhaps a number of my peers in the liquidity provision market maybe inclined to agree with me, insofar as that we are in the fortunate position of being able to watch the ever changing landscape of the retail FX industry.
Over the past 10 years we have seen a huge amount of developments from a very basic form of electronic trading for the retail client, the huge growth of social trading (surely a misnomer for such an activity!), to the dominance of Metaquotes which is now being increasingly challenged by the exciting new products from fast growing companies like Spotware(cTrader, cAlgo.) et al.
By the time we are a celebrating the end of one year and the beginning of another, will we also be witnessing the demise of the B Book? This year can only be described as catastrophic for any brokerage that has the majority of all of their clients under this structure.
In fact it was not until the past 2 weeks that a collective of brokerages in my region have breathed a huge sigh of relief as the volatility has returned, but how long can it last for? To paraphrase Mohamed A El- Erian, former head of Pimco, this distinct lack of volatility may be the ‘new normal’.
Much like the world stock markets over the past 8 years, which many view as being tremendously over valued due to cheap credit, has the FX market become drunk on ‘cheap volatility’. If this is the ‘new normal’, what does this meen for the B Book industry and their clients as a whole?
We all know the basic nature of the argument that if this were to continue there will be a lot less of the ‘established’ brokerages left in this field who have failed to adapt from the now outmoded market maker model.
You may find it incredibly challenging to run with a tremendous amount of overheads and still cover all the expenses. If you list everything from paying out to the client, salaries, utilities, marketing costs, etc. You need to balance the books by having a lot of people lose trades against you.
If you are aiming at the lower end of the market, you have to get more traders to lose due to low deposit value and increased overheads. This inevitably leads to more marketing / sales costs, which you have to cover with more traders losing. It creates a death spiral of costs!
What myself and other people in our industry have seen is a dramatic increase of either brokerages hedging their exposure via ourselves or one of our competitors, along with more new forward looking brokerages operating upon either the hybrid or the 100% ECN STP model.
The real beauty of this is the owners and employees can leave work on Friday knowing that they will have a business to return to on Monday! Moreover and perhaps most importantly you are offering the transparency that a number of brokerages advertise but often do not fulfil.
Like a drunk in a bar demanding a last drink before he leaves, maybe we will seeing the end of the brokerages drunk on cheap volatility and a new much needed transparency will perhaps prevail in the second part of the decade.
As with any walk of life or industry things change, much like the old Nokia and Blackberries we all used to carry, the FX industry will have many new models of operation in the very near future.
This is a guest editorial by Paul Orford, Vice President of Business Development at TopFX