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Providing prime brokerage solutions to retail FX firms has become a competitive business, with large companies aiming their products at a myriad of retail brokers, all of whom are vying for market share.
Cyprus, being a veritable hub for FX firms, is home to over 140 retail brokers but is less well represented by liquidity providers or prime brokers, as most are based in Britain, Israel or North America. One prime brokerage firm which has the Cyprus FX brokers on its doorstep is TopFX, which has expanded its operations recently with the appointment of Vice President of Business Development Paul Orford earlier this year.
Mr. Orford is an industry expert, with a career in FX spanning across several years, most recently culminating in two years at Blackwell Global before joining TopFX as a senior executive.
In today’s interview, Mr. Orford details to LeapRate the current matters which surround prime brokerage.
To provide an insight into your professional background, it would be of interest to detail your background within the FX industry.
I have been in the involved in the Financial services industry for about 10 years, ranging from options & stock trading, Institutional and retail FX. When I started off in the FX industry people were still writing out trade tickets by hand, so I feel like a bit of an old timer!
It is remarkable how the internet has really transformed something that was a very niche industry, to something that you can do from your telephone.
As we are reaching the in the middle of summer, it is often a good time to evaluate how well the year is going. How could you sum up TopFX year so far?
It has been a very strong start to the year as we have had a lot of positive responses from our clients, so we have a generated a huge amount of referral business. Moreover, with the FCA maybe looking to change things regarding A and B book, it has never been a better time for TopFX.
We do not really have a marketing budget as we believe that our business should live or die by the service that we offer. There is no point in spending hundreds of thousands on marketing a PB service if you do not have a service to complement it. As a result we just try and keep the spreads and commissions as tight as possible to pass on to our clients.
Supplying Prime Brokerage solutions to partners has become a very cost-sensitive business. What is your opinion on how to ensure that 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?
It need not be cost sensitive if you have not kept control of your overheads at the brokerage end. I see many brokerages that have a lot of fat in them. They have become like working for the government! You have people with all weird and wonderful job titles that actually do not generate anything for the company.
They forgot how they became successful was by being lean and everyone pulling their weight.
We offer a solid selection of spreads and the agency model, so our clients know what they are going to get from the outset. From this they can factor this in. We have a number of clients who are small to medium sized banks, so it does not really affect them as they are not having to add the cost for IB’s etc.
With the brokerages when they factor in what they are going to offer to their IB’s etc using our spread, there is often more than enough left over for them so make a healthy return from the A book clients.
I think IB’s are sensible enough to see that if they are being offered a huge rebate somebody is going to have to pay, and that is often to the detriment of the end user. So they will not get a loyal client base as they will be burnt out. If they also look to offer a value added service then they will make more in the long term.
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?
We have prided ourselves upon running a transparent operation based upon the agency model. We know that when we leave on Friday evening, we will have a business to come back to on Monday.
I am not being critical of the B book side of the business as many clients are still looking for a market making brokerage, and that is fantastic.
However, as long as you are transparent with your clients then it should not be a problem. If they are misleading the clients, then that is another matter completely that the regulator and maybe the advertising standards authorities should become involved in, as it is unethical.
I also think that the trader has to play a part as well as it is easy to blame the brokerage sometimes.
I was reading about a case in Israel recently, but it looked like the client did not really read about what he was getting into. Most traders are aware that a spread widens when news happens, as long as it is fair on both parties then it is all good.
Being a Prime Brokerage based in Cyprus provides access to a very populous local client base. How does TopFX differentiate itself from its competitors in order to maintain loyalty among Cyprus-based retail FX firms?
We have a very strong local client base as it is easy to always drop into their offices and see how things are going. We are very lucky with our location in that respect as it offers a real local service. This is something that gives us a big advantage compared to our competitors as they are always welcome to come and visit our office.
Further to this, we are getting more enquiries from Middle Eastern and Asian brokerages. I believe that this is purely down to word of mouth. This is such a small industry that you can heavily stack the odds in your favour if you are offering a great service.
Look at it like this, if I am offering you some of the tightest spreads on the market, along with being one of the most flexible Prime Brokerage solutions, that operates within an EU regulated environment. Most people are at least intrigued to see what we have to offer.
Once they see what we have to offer it is very rare that they will replace us with another LP.
What is TopFX’s plan for end of 2014?
Just keep pushing for a strong end to the year as we have built up a lot of momentum from the referral business. Also maintaining the existing priority of improving the service to both existing and new clients alike.
If the FCA are going to become more forceful in a & b book business, then this will put us in an incredibly strong position due to our reputation and service.
Further to this, hopefully we be adding new products and solutions, which will open up vast new markets for TopFX.