Following the recent implementation of new rulings by the New Zealand FMA, the gateway to the Asia Pacific region has widened further. Jake Amar, CEO and Co-founder of Mercer FX talks best execution, investment in bespoke solutions, client loyalty and the future of retail FX brokers as bona fide financial institutions
The long and often obstacle-strewn road to sustainability within the highly contested retail FX sector these days has generated a need for ingenuity and diversification.
Market participants around the globe have experienced a narrowing of spread, which in turn adjusts the profit margins to far narrower levels than those which were attainable just two years ago, and retail traders in most regions with a sizable Forex trading population have become considerably more astute as the industry has matured.
Add this to the regulatory developments which have taken Forex as a major subject as far as new consumer protection rulings are concerned, and it is easy to see why constant refinement of business model is key. Regional preferences vary, however with the Asia Pacific firmly at the center of the map for most retail Forex brokerages, with its large, investment-orientated populace and high trading volumes, a drive in that direction is omnipresent currently.
Reinforcing the drive toward evolution, Jake Amar, CEO and Co-founder of Mercer FX, a retail company with a newly-minted New Zealand FMA regulatory license, speaks candidly to LeapRate on the subject of sustainability and ensuring that client order flow is correctly processed.
Mr. Amar understands that the retail industry has to follow the banks and institutional sector, and has modeled the brokerage around this methodology.
To provide an insight into your professional background, it would be of interest to detail your background within the FX industry.
I started working in this industry in 2007 after serving in the Army for 3 years. The potential of retail online trading is massive, and 7 years ago when I joined the industry, I saw this potential.
I was Head of Business Development at one of the key firms of that time, after which, I became the VP at that same firm. I established my first company back in 2010, sold it a year later, and the company is still operating in this field today. I have a vast knowledge of trading, economics, business development, and international business relations.
When establishing Mercer Capital, what did you initially seek to achieve and how did you initially go about it?
I joined a team of investors and key figures in the financial industry to establish Mercer Capital.
Our intention was to create the best conditions possible for our traders to make profits, with the most advanced technology, and the best liquidity available today.
When choosing a jurisdiction in which to be regulated, what contributing factors led to the decision to operate from New Zealand, and does the antipodean region stand the company in good stead to approach a client base in the Asia Pacific region?
I think that the answer to this lies in the questions itself. We are aware of the changes in today’s global economy and we can see that the Asia Pacific region is growing rapidly. I can assure you that Mercer Capital will be a part of this growth as well.
Supplying Prime Brokerage solutions to partners has become a very cost-sensitive business. What is your opinion on how Prime Brokers and liquidity providers can ensure that their broker partners continue to provide good quality client referrals by giving a good commission structure and low spreads, yet retain a profitable cost model for the Prime Brokerage and the broker partners alike?
I think this comes down to the profitability of the client, his trading experience, and the level of support he receives. Yes, today the broker-partner relationship is changing due to unrealistic commission structures and rates, which are moslty based on a B-book business model within most companies. This makes a real STP broker’s business model, more of a long term profit model, versus a short term, quick profit model. Really, though, running a solely A-book brokerage is the only way to sustain a long term business.
As STP brokerage has become de rigeur in today’s market, many retail end users assume that all brokers which profess to have a non-dealing desk model are operating an A-Book only. With the ever-increasing demands from traders for raw spread, and many offers of 0.2 pips on EUR/USD, it is certain that B-booking is taking place. What do you consider to be the best practice in terms of offering A-book only, and ensuring that traders are aware that spreads will widen at certain critical times, as opposed to B-booking the trader to keep spreads at 0.2 pips?
It’s very unfortunate how things have turned for the retail brokerage business model. I can tell you, for a fact, that anyone offering 0.2 pips on EUR/USD on a constant basis is B-booking their traders. The biggest liquidity providers in the market don’t offer 0.2 for 95% of the brokers they work with, so how can the broker offer a price less then they receive? The only way to bring in and retain clients is by being honest, having good support, giving traders multiple platform options, and most importantly, providing first-rate trade execution. Real traders know right away when they are getting slipped.
What is the best way to capitalize the infrastructure of a retail FX firm? Is it best to invest in on-site infrastructure and then take liquidity feeds only from a provider, or do you think it is better to take an entire solution from a technology firm and capitalize it monthly or on volume rather than having the in-house maintenance costs?
That’s a tough question, but since Mercer Capital has been on both sides of this scenario, I believe we are well experienced to answer it. Starting a brokerage and building all the necessary pieces from different providers is very expensive and very time consuming. At the same time, using a turn-key solution can take 2 weeks and be very inexpensive. But, the reality is that the turnkey solution doesn’t work.
The pricing that looks cheap under that model often turns out to cost more. Unfortunately, the white label company will always control most of your business, including the most important aspects of your business, which is your clients’ trading flow. When you use a white label, they are the gatekeepers and determine where the trades actually end up – meaning they can b-book and slip the flow of the associated broker’s clients, with or without the broker’s knowledge. Now that Mercer Capital is a stand-alone STP broker, we have access to every step of the trading process. From when our clients make a trade, to when the bank accepts the trade, and therefore, we know that there is no dealing involved.
Do you see good potential revenue generation in managed account provision, whereby algorithmic traders are the target market, placing their clients’ funds in an automated MAM account? What is the best method of operating this type of service?
If you can find a good money manager, one with proven trading results and a good reputation, I believe this is the future of Retail Forex. Most new traders will have very little chance of making money without real education, which takes a lot of time to gain. In my experience, having your funds traded by a professional in the beginning, while you are really learning how to trade, is the only way to successfully build yourself in this business.
On a cost-per-million basis, how do you envisage the most sustainable solution to reduce the STP and liquidity bridge cost to white label partners and IBs, and do you anticipate that many brokers which operate in the retail FX space will have to reduce the spread that they offer to traders as they will find it hard to b-book clients in future, or do you anticipate that most will continue to run a b-book in order to keep spreads low so that clients do not look elsewhere given that margins are very narrow these days?
I believe both will continue, as they currently are. You will have the B-book, chop shop brokers, who keep slipping and stealing money from clients, disappear and reopen as another brand. But, there will also be the real STP brokers, who build long term business models, making less money in the short term, but will be around in the long run.
What is the best method of ensuring security of client funds when operating a pure A-book model? Should there be an omnibus account between the broker and liquidity provider, or do you think the liquidity provider should have full control of funds, and the broker should concentrate on providing a platform to its traders and on client interaction?
There are different laws for different countries. The Liquidity Providers that we work with, who are FCA regulated, will not accept funds directly from clients. That being said, with all of the new regulations in the banking industry since 2008, I don’t foresee this will change anytime soon, and will probably become even more stringent in the coming years.
What is the most cost-effective and efficient means of onboarding and retaining new clients?
Customer support and on-boarding clients is not the problem, it’s keeping them. Clients must feel that they are important. They must get a high level of support throughout their experience with your company. Only then will a broker retain its clients long term.
How does Mercer view the ideology of many European firms having registered as an FX bank, and do you think becoming a bank has merit in all jurisdictions including Asia Pacific, and should not just be the preserve of traditional banking regions such as Switzerland and Denmark where all FX firms must be licensed as a bank by law?
We believe that this is the future of Retail Forex. Since the 2008 changes in banking regulations, banking and building a financial company has become much more difficult. We are currently in the beginning stages of turning Mercer Capital into a FX bank, with a regulated banking license.
What is Mercer Capital’s plan for the year ahead?
In terms of how we treat our clients, not much will change. We will continue to provide the highest level of support possible and we will continue to offer the best trading conditions around. We are continuing to expand our market with many of our partners and we see 2014 being our biggest year, so far.