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Acclaimed FX risk management aficionado Jeff Wilkins provides a valuable insight into the method of developing an effective and sustainable business model in retail FX
Today’s retail FX firms are faced with many challenges in terms of ensuring that they provide competitive trading terms to clients and give the best possible execution, whilst ensuring that a viable business is maintained, particularly given that retail FX traders are very knowledgeable, perhaps considerably more so than just five years ago, and competition is at its highest in what is a global business with access to all companies from any location.
With so many participants vying for business around the world, it has become necessary to employ intelligent methods of conducting the business internally. Whilst there are companies which have in the past taken the view that it is a case of making hay whilst the sun shines and generating revenue to the detriment of clients, this has widely been marked out as the elephant in the room as far as retail clients are concerned, and a preference for the agency model which connects traders directly to the live market via a liquidity bridge has become the preferred norm.
A sensible and sustainable methodology must be adopted if customer loyalty is to go hand in hand with longevity, which is where highly sophisticated companies such as ThinkLiquidity most certainly prove their mettle.
In order to ascertain important caveats relating to the innate design of a robust business model, LeapRate spoke to ThinkLiquidity’s Managing Director Jeff Wilkins, from ThinkLiquidity’s head office in Grand Rapids, Michigan.
To provide an insight into your professional background, it would be of interest to detail your background within the FX industry.
I started my career as an FX dealer at GFT in 2005, but almost immediately my focus shifted to risk management. At the time “Risk Management” wasn’t really a department at any of the major brokers and I sought to change that at GFT. In a short time, I built the 24 hour risk management team from scratch. The focus of my group was to optimize revenue streams and protect the firm. When GFT made the decision to expand the product base beyond FX, my team took on global responsibilities for risk management in all asset classes. My time at GFT was invaluable and I still have the utmost respect for my former colleagues.
I left GFT in the summer of 2011 and spent a year leading financial planning for a multi-billion dollar corporation. The experience was incredible, but my passion for the markets was still very strong. Almost immediately after my move, I received dozens of requests for meetings and interviews. That was when the idea of ThinkLiquidity clicked. The brokerage landscape is growing exponentially and there is not enough experienced talent to support the growing demand. My next step was to build the most talented risk management team in the industry.
When starting ThinkLiquidity, what did you initially seek to achieve with regard to provision of risk management to FX firms, and what is the best way of going about it?
Risk Management is my passion and I wanted to build a company with risk management as the core focus. All of our technology and services are built to protect brokers and optimize revenue streams. Every single person at ThinkLiquidity has a risk management background and I am very proud of our team.
I can honestly say we have the best team in the industry and our trophy case reflects this fact. Selling Risk Management is not easy because it is a very intimate topic for all brokers. We have been successful because of the experience and reputation of our team. Whether a broker is looking for an MT4 white label, bridging technology, risk management or the full package of products, there will always be an industry leading risk management team standing behind our products. Although what we do is extremely complex, our goal is simple; we provide brokers with the best risk management technology and services in the industry.
What is your experience of the best means of developing relationships between a bridge provider, technology solution provider and FX broker in order to ensure that all interests are aligned long term?
This is a great question. The relationship between a bridge provider and broker needs to be very intimate. I have heard a few times “You know it is a good bridge when the broker never needs to speak to the bridge provider”. I have to say I completely disagree with this fact. A good bridge should operate seamlessly, but the provider needs to have their ear to the ground so they can be sure any future developments are going to provide the best returns for the brokers. The ThinkLiquidiy bridge is just a part of our overall risk management suite. In addition to the brokerage relationship, we also make sure the relationship with the LP is strong.
Our policy is to remain 100% agnostic towards LPs. I am asked every day for LP recommendations and I steer our customers in the direction of who treats my brokerage clients the best. Spread, execution and service are core factors that influence where I direct my clients. I always tell brokers to be careful about LP recommendations, because in many cases, the person or company making the recommendation is receiving a kickback from the LP.
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?
I could literally spend all day discussing this single question. I still do not believe traders fundamentally care about what happens to their flow behind the scene if they are getting high quality execution. The fact remains that a broker can make more money running a hybrid model over an STP model. Take a look around the industry and you will see countless “STP” brokers offering “raw” spreads. If you look at the largest brokers in the world, they are all running some form of a hybrid model. If traders are adamant on pure STP style execution, they should be ready to accept spread blowouts around news announcements. I have built some of the deepest liquidity pools in the market and no matter what, banks are going to protect themselves and widen out at certain volatile times. If a trader wants to be on pure STP execution, they should understand the risks.
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?
MAM offerings are coming under heavy scrutiny around the globe and rightfully so. I have seen too many instances of “MAMs” offering services only to benefit themselves through rebates. Over the years I have seen many legitimate money managers, but they still account for a low portion of the total. I hope the FCA sets a strong precedent with their upcoming regulation on MAMs and copy trading. Now that my MAM rant is out of the way, I have seen some very good algorithmic MAMs. The key to consistency is low leverage, cutting losses and sharing actual audited performance.
How can existing bridge providers which have built their entire business model around the adaptation of MetaTrader 4 to operate as a direct market access platform diversify their offering as new API-based platforms such as cTrader gain popularity. Do you think that brokers are willing to pay the extra cost per million for a bridge in order to offer the universally accepted MetaTrader 4, or do you consider the low cost of API platforms a good tool with which to onboard clients?
To be completely honest, including the ThinkLiquidity bridge and risk management engine, there are only four high quality bridge providers in the market today. Over the years, I have seen smaller players trying to dilute the market with a low cost offering. At ThinkLiquidity, we have many success stories of clients coming from a bargain bridge to our solution. A bridge is a key component to a trading infrastructure and you get what you pay for.
As far as current bridge providers diversifying their offering, this is already happening. Of the four solid bridges (including ours) each provider is diversifying their business in a different way. As far as the MetaQuotes competitors go, a few have been successful with their own connectivity infrastructure. As long as that infrastructure is good, we are happy to provide our risk services around these other platforms. At ThinkLiquidity we have a great relationship with all of the providers.
Will the retail FX market go down the route of the institutional sector, with trade repositories and costly reporting systems having to be set in place? If so, how will brokers be able to justify positioning themselves in the market place as A-book, and then promising raw spread during volatile periods such as news releases by warehousing trades?
Reporting systems are key for a regulator to properly monitor brokers. The regulators with their act together understand that FX is off exchange. At the end of the day, FX is a zero-sum game. There will always be a counter party on the other side of every trade. If the market moves towards a STP only style of execution, there still needs to be counterparty to every trade. I do not believe this will ever happen.
What is ThinkLiquidity plan for 2014?
Expect big things from the ThinkLiquidity team. We have some very exciting releases on the technology side and we are currently planning on opening multiple offices around the globe. I cannot give away many secrets, but plan on us disrupting the market in a few different ways.