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Welcome back to another issue of the C-Suite, a once a month interview where we speak to senior executives from the retail trading industry.
This time we’re talking to Illimar Mattus. Illimar is the Co-Founder of brokerage group Tickmill and prop firm The Trading Pit. We covered a lot of ground in this one, looking at Illimar’s background, Tickmill’s future plans, how The Trading Pit operates, regulations in the prop space, and even Gordon Gekko.
Listen to this via the buttons or watch it on YouTube. Alternatively you can read an edited version of our conversation below.
DK: You control several companies today, but Tickmill was the one that you first set up is my understanding. Can you talk a bit about how you ended up setting up the company?
IM: My journey actually started more than 25 years ago when I was still in high school. I saw the movie Wall Street, I was like 15 years old, and seeing Gordon Gekko in this big room and with all this flashy, like ticker tape and the phone ringing and so on. So I was 15 and I knew that I wanted to be part of that world because it was just so different to the place where I’m from.
So I’m originally from a small village in Estonia, which has about 3,000 inhabitants, one small shop and is surrounded by like potato fields. So that impacted me quite a lot. And so in high school, my friends were out having fun, and I was reading economics books, financial analysis books.
I was a subscriber to a local daily, a business newspaper. And there were only two subscribers in our village, so one was myself through my mother and then the other was the owner of the local shop.
So I ended up going to university and afterwards going to work for a private equity firm. But when I actually finished high school, I was also trading stocks. Throughout these six or seven years, even as I was working in private equity, I was also trading together with my brother Ingmar. Eventually in 2010, we came to the conclusion, you know, why not switch to the other side? We’d been clients of the bigger firms, Interactive Brokers, MF Global when it still existed. So that’s how Tickmill started.
DK: I don’t know if you have any thoughts on this but if you look at Estonia, you have a lot of tech companies that originate from there, so Bolt, Skype, Wise come to mind. Why do you think the country punches so above its weight?
IM: There is some historical background to this which I think others can talk about but if you go back to the 1990s, after the Soviet Union collapsed, we had these ties to Sweden and Finland.
So our neighbours actually helped us to kickstart the economy. What that meant was that, for example, when the banks were born in in the early nineties, they were built from scratch, with the latest technologies.
In practice what that meant was everything had to be thrown out. You know, government operations, medical services, financial services, banking. It all had to be started from scratch and with the latest technology, with this backing from Sweden and Finland.
And because of that the younger generation got access to this technology and were maybe more used to it than other parts of the world.
Even in the brokerage space, it’s not well known, but Interactive Brokers have had their core technology development center in Estonia for almost 20 years now. So the core infrastructure and the platform development of Interactive Brokers is done primarily in Estonia.
DK: Ok so taking a slightly different turn, I have been doing TradeInformer for a couple of years now and it seems like a lot of the time I’ll be looking at a company and you are some way involved with them. So is that primarily through Pinorena Capital and what is Pinorena?
IM: Pinorena is effectively my family office, where I invest the money that I have primarily made from Tickmill, but also trading activity and other investments.
We invest in financial services businesses, so now have banks, brokers, and lots of interesting companies in there. It’s been a bit like going back to my work in private equity.
DK: So is this like VC-style investing? What sorts of companies are you looking for?
IM: It has changed a bit over time. Originally I set up this firm with an aim to invest in companies that complement what Tickmill does. So from the early stage of being a trader to asset management and even to institutional asset management.
We do early stage companies, so the smallest allocation we’ve had is a quarter million. But the largest we’ve done is up to $15m. So it varies but in general that is our approach.
DK: Is it difficult to manage all of this? I can barely manage 1.5 jobs. I cannot imagine running two and then also keeping track of these other businesses you invest in…
IM: If I go back to the early days of Tickmill, then you might be surprised, but when we started in 2010, we were answering the phones and doing the live chat.
So for the first few years it was very hands on. I mean, to the point I knew what coffee bean brand we had in the kitchen. But as the business grew, we started delegating a lot of stuff.
My approach is to find, let’s say ‘core’ individuals, that have the capability to run teams and companies and projects, and to delegate to them as much as possible and also to trust their judgement.
Oftentimes decisions are not the perfect ones, but it’s important to make decisions. So I always try to delegate as much stuff as possible. But even saying that, I am still working those long hours, and my focus now is on Tickmill and the Trading Pit.
Pinorena is more passive because we make investments but these companies already have the teams in place to handle things.
DK: Is it difficult to make that kind of change? I would imagine that if you are very involved, particularly with a company that you have set up, that it would be difficult to be more hands off?
It can feel difficult because you kind of lose touch with the business. So for example, when we started, I literally had my laptop by my bed answering live chat at night. And if it wasn’t me then it was my brother or our other co-founder.
So it’s been difficult because the moment you start giving away decisions, you somewhat lose control and a lot of information as well. But I kind of adjusted myself mentally, in that sense that I tried to understand just the high level, so how things are working and, and what are the key decisions that we need to make, what are the core KPIs I need to focus on.
And then I know, ok this company is at this point, and so on. So I have to divide my day between TickMill and the Trading Pit and prioritize certain things. Prioritization is one of the biggest tasks that I have every day. So it is difficult.
DK: Ok so moving on to the Trading Pit. My audience seems to be split, although that’s probably changing, where some people are not aware of this industry but others are either paying attention or looking into it. So what is the Trading Pit?
IM: The idea originally came from the fact that there are literally hundreds of thousands of good traders out there globally, if you take the global level in all different asset classes. And a lot of these guys, if not all of these guys, have this aspiration that if they trade well, they perform well, they have the profitability, the consistency, et cetera, then eventually they would like to get access to more capital because this way they actually increase their income at the end of the day as well.
And they are really struggling because let’s say if there’s a guy from, let’s say from my village with 3, 000 people, there’s one guy who’s a super good trader. If he wants to attract capital today to his strategy, it’s almost impossible because nobody knows him. He also doesn’t know how to go about finding people to invest.
Even if he gets through to somebody, the chances are that nobody will actually listen to him because he’s from Estonia, from a small village – who cares? And so the Trading Pit is like the ‘gateway’ for these people to access investors.
And how we do it is that we evaluate the effectiveness of their strategy by pushing them through the evaluation process. So they buy various challenges and the objective of these challenges is primarily for us to be able to determine if this specific trader is a good trader.
And if they are a good trader then obviously we start investing money into these traders by picking signals from these traders and making profits from it. And the difficulty is that because we are capturing tens of thousands of traders every month, the risk management is super, super difficult.
DK: Is there a ‘standard’ person that comes to you? I mean if I think of someone trading at a hedge fund or similar, the type of strategy they’d be able to trade using futures or CFDs is probably something like a CTA?
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IM: So there are various levels of trading talent and experience. The challenges that we have are primarily meant to anybody from the street who comes in, who is interested in the trading world. So they may have taken a course or something and they want to try.
So let’s say like 90 percent of the client base is like this, you know, ordinary guys, from Kuala Lumpur to Sao Paulo, who just want to try and get access to more capital.
Then there is the other 10% of guys that already have, let’s say one to five years of experience in trading. They’ve had some successes already.
But we need to mould them a bit – because oftentimes these guys are far from proper risk managers – by pushing them through the challenges. We help them to change their mindset in terms of how to manage the risk and refine how they manage risk.
And so from this group, we hope to nurture the rock stars of trading from whom eventually we would be able to create portfolios under regulated fund structures to be able to sell to external investors.
Then there’s a third group that are already semi-professional, if not professional, or even small hedge funds. In those instances, we will not get them to take a challenge but just analyse their existing track record and see if it’s worth investing in or not.
So we have invested directly into some of these strategies via Pinorena. So there are various levels and we hope to capture the whole universe, and all of the traders, segmenting them properly and giving them the right product as well.
DK: Can you explain how you are manage the flows that these traders create? It seems similar to running a broker but also isn’t quite the same.
Our clients, whenever they’re trading, they’re always on the demo account. So they never have an account where we have real live money. They always trade on the demo account.
And then what our risk team does is that they start picking the trades from the top guys selectively. So for example, one guy might be overall a good trader, but his best trades are in dollar-yen. And we picked a dollar yen trade from this portfolio. Another guy is trading major crosses, but he also trades gold and he’s actually most successful in gold.
So we pick these trades and then copy them at our discretion. But we can even send10 times the size to the market. So that’s what’s happening on our side. And it’s super, super difficult, which is also the reason why I’ve said that you need to come from the brokerage industry to properly build this business because a lot of the prop firms that are out there, you know, they have been set up by some marketing guys from Dubai or wherever, that have no real understanding of risk. And that’s the most difficult part of this business.
DK: So is the challenge part to really filter out people who will just blow up? Is there any risk that, just by dint of the numbers involved, someone lucks out who shouldn’t be given capital?
IM: So the challenge part does a lot of that work automatically. We see already which guys have no potential at all, and which guys have at least some potential. And then when they go through the challenge and we actually put them on a scaling plan, then in the scaling plan as well, they can scale up to a larger risk base over time. So they are not able to finish the challenge and then jump immediately to having exposure of up to five million.
The interesting thing is that oftentimes it happens that, those who actually pass the challenges, from the pure fact that they have passed the challenge, they develop this perception that they are already the best traders in the world.
And what happens is that when they actually go to the first level of the scaling plan, they become reckless. Because they think that they know more than others and they think they are better than the markets, which means that a lot of people fall out on the first level of the scaling plan because something in the psychology has changed, you know?
And then, uh, when they pass the first level of scaling plan to the second level, then we have already more confidence – okay, this guy has something, you know? And so the higher they go on the scaling plan, the higher is our confidence to copy the signals and maybe even to expand the exposure when we copy the signals.
DK: In any investment strategy you are, at some point, size constrained. But this seems to happen much more quickly when trading OTC instruments. So is that a problem? That these people may be good but actually their strategy simply doesn’t work if a small amount of capital is allocated to it? I notice that Darwinex caps some of its strategies…
IM: I think you just highlighted a very good point. That’s exactly one of the core problems with FX, CFDs, and in general OTC products. So you mentioned Darwinex and they have put limits on some strategies and, even though these are good strategies, there are people that have reached this limit. So some of these strategies on the Trading Pit, you can try moving to futures, but let’s say you are doing exotic FX, you can’t scale it. In no way can you scale it.
This is actually the reason why we don’t allow copy trading. You know I spoke to this guy that runs a trading academy in South America, and he asked me, ‘hey Illimar, can I bring you thousands of guys from my academy and give them all the same EA to trade?’
So I said to him, ‘ok, imagine all of these 1,000 guys, they have $100,000 in their account. You have $100m in underlying equity and you leverage it to say $3bn maximum exposure. So with one click you have $3bn entering the market. It’s not going to work!”
By the way, I use this also to explain to the guys why we are not allowing copy trading, because we are looking for real solid traders that we can invest real capital with, put under fund umbrellas and so on.
So if a guy comes in, you know, with some signal that he copies from his neighbour, then actually the talent doesn’t belong to this guy, the talent is with his neighbour.
DK: One of the things you alluded to is the fact you offer futures. Is that a more popular product than CFDs?
IM: It depends on geography. So we started at the Trading Pit, primarily from Europe, so the German speaking regions, Italy and Spain. And in this geographic space, there are a lot of like future traders. So if you ask me right now, more than 50% of clients are trading futures.
So FX/CFDs is less, I think last month we had less than 45% was in FX/CFDs. But at the same time, if you go towards Asia, let’s say you take Malaysia, uh, Indonesia, Vietnam, they don’t have this historic connection to futures, so they are more trading FX/CFDs.
So as we are growing globally, and as we are expanding more outside of Europe, then I think the FX/CFD share will probably rise up to a certain moment.
And then when we launch real stocks, I think then we’ll have an avalanche and that will actually become the biggest asset class for our community over the next two years.
But surprisingly, yes, today futures is more than 50 percent of the total business that we have.
DK: It’s been a very crazy start to the year for this industry. So do you have any thoughts on where things are headed? Are companies going to keep pulling back from the US? Are you seeing more competition? Do you think there will be regulation? I appreciate it’s a lot of questions!
IM: We offer real futures in North America and actually over the next month, we are going to partner with one of the largest futures brokers in North America using also their platform. So that will bring a lot credibility to this and, as you said, we are one of the few companies offering futures trading. We are not staying away from the US in the futures segment, because we partner with solid companies there.
But if I look at the industry in general, I think regulation will come within the next, two or three years. And the primary reason why the regulators will come into this space is because you have people starting these companies who don’t have the faintest idea what they are doing.
They just heard from their neighbour or somewhere that this is good business to make money in. So there will be regulation, there will probably be, over the next five years, huge consolidation. I think there will be 15 – 20 firms globally who will pick up 90% – 95% of this business. And we already know who they are.
So most of them are already there but how we stand out today is with those real futures. We also have this huge brokerage and risk management background that puts us in the forefront in the sense that any clients should feel safe dealing with us. You know, our CEO Daniela Egli has almost 20 years managing regulated brokerage firms.
If I look myself, then I am actually sitting on the boards of pretty much all of the Tickmill regulated entities. So we have a huge reputation that we need to protect here. And that means we also have to manage our business in a way that cannot damage Tickmill in any other way.
So anybody who joins us, they understand who we are, what our background is, and they feel safe dealing with us. And it’s not only the clients. It’s our partners, our affiliates, anybody on that side too. They see who we are, what we have done before, and they kind of feel that they have a higher probability of success with us.
DK: Ok to finish off, we have not really discussed Tickmill but actually, I think that’s what most readers are going to be interested in. What is happening there? Any interesting plans on the horizon? I know you are one of the few companies here, at least at the moment, that has options trading.
IM: So we are going full multi-asset, that’s our strategy for the next one to two years. We’re going to launch our own platform. That’s going to be launched any day now.
We’re also going to be expanding our licensing footprint as well. So we are looking at some places in South America and a bit in North America, although I think that’s a few years away.
Tickmill has around 300 people now so it’s a solid organisation. And if I ask clients why they trade with us its consistency. I was at an event in Dubai not long ago and met a few clients that have been with us for a long time. And that was the thing they all said, using different language, that Tickmill stands out because of its consistency.