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A couple of weeks ago, I was speaking to someone at a broker who made the point that the standard offering for firms today is to have three products – a retail-facing broker, a prop product, and a prime or B2B offering.
I wouldn’t say this is 100% true but it is certainly not far from the truth. If you were setting up a firm a decade or so ago, the odds are you would go to Cyprus, get a CySEC license and begin hitting the UK, Europe, and maybe Asia.
Today that is much harder to do. Regulatory restrictions and competition mean it is more difficult, more expensive, and more annoying to get a CySEC license and do business in Europe than it was ‘back in the day’.
In fact, at least three different brokers I spoke to when I was in Cyprus earlier this month said that they are not going to get a CySEC license. One of them even said that having the license made it more difficult to do business in Europe than having one, which fits with what I said a couple of weeks ago when we looked at IC Markets.
And this leads on to the interesting question of, if you were starting a new firm today, how would you go about doing it?
In April of this year we looked at getting a license and setting up in the UK, coming to the conclusion that the cost would probably be a minimum of £7.5m to set up and stay in business for one year. And that was probably optimistic.
Most people may not have that money or don’t want to risk it all on a market that is heavily saturated and over regulated.
So what do?
Step one is getting an offshore license.
You could still go to SVG or St Lucia if you really wanted to cheap out but I don’t think it’s worth it. Plus if you want to get a MetaQuotes license then it’s much better to set up in a jurisdiction that offers a regulatory license.
An interesting discussion is on what the ‘best’ license is in this regard. From what I understand, Mauritius is number one, primarily because of banking.
However, and this is probably a subject for a different article, something I wonder about Mauritius and the Seychelles is if they will start to feel ‘pressure’ from other jurisdictions at some point. If that happens then they may make life difficult for firms.
Vanuatu is probably better in this regard as there are fewer levers to put that ‘pressure’ on the country but there is no escaping the fact that banking is a big problem there.
Whatever the case, I think you then have the option to (1) start spamming emerging markets and/or (2) to pick up European clients. Obviously this is not allowed in theory but where there is a will, there is a way. And for many firms in this industry, the will is often powerful.
However, in practice, I would say the best option would be to pick a few EMs, ideally ones you know and are familiar with, and then go all in on those. I see some offshore brokers targeting Europe but it’s not easy to do and the market doesn’t seem to have recognised offshore firms as being a ‘thing’ in the same way Japan has (yet).
Prop onshore
Next step would be to set up a prop offering, which could be done easily ‘on shore’. I understand that banks are putting some pressure on this but it’s early days and at a level that is not comparable to the brokerage space.
Anyone saying that prop is somehow ‘not ok’ is ignoring the fact that basically every player in the broker industry is looking at it and wondering if they can do it. If you think otherwise or are hearing someone moralise about it, then keep these immortal words of Res One in mind. They will help you go through tough times.
Then think about this from your point of view as a company founder. You can (1) spend a huge amount of time and money setting up a broker, with the risk it won’t work or (2) you can set up in about a week and begin targeting clients across Europe. The downside / upside risk is just much lower if you do the latter.
In terms of specific markets, Spain is probably now a much more attractive proposition, given the regulator there has now put every restriction possible on CFDs, except banning them outright. There is thus likely to be less competition, making it easier to do client acquisition. I notice at least one offshore firm seems to be doing this as well.
The other point I’d make here is that even though prop is ‘easy’ to set up, it is not easy to run. Firstly, on an operational level, it seems like no one has fully cracked a standard model on how to run the business. Secondly, it is hyper competitive – in large part because it is so easy to set one up.
Who is doing it?
If you look around the market today there are now a few firms that have already set up with this model.
For example, the prop FXIFY is part of a wider group that encompasses retail broker FXPIG and liquidity provider Alchemy Prime. Hantec Markets is in a similar position, as they are primarily focusing on EMs with their broker offering, then have a prop offering, and recently launched a B2B product. There are a couple of others that seem to be setting up to do something similar.
Maybe it’s the way to go?
