Two weeks ago you got the date, last week you got the location – now you have a date, time and location. The CFDs Weekly meet up will be starting at 18:30 at the Counting House (near to Bank) this Thursday. It looks set to be a good time so come down for a drink if you are around.
In other exciting news, CFDs Weekly now has a podcast. You can find it on Apple Podcasts and Spotify. More details in the copy trading article below.
Before that, we have our first guest post – exciting times ahead.
What next for white label providers?
It’s been a tumultuous month for brokers and other providers across the industry. Market volatility was already enough to keep companies’ hands full. Major technological hiccups only served to compound the problem.
One of the questions that has emerged in that time is whether this represents a sea change or if things will continue as before. Speaking to various people in the industry, it does appear that there are lots of executives who believe this represents a new reality for the retail trading sector.
Match-Trade Technologies is one company that is in a unique position if that is the case. The company has developed its own trading platform, Match-Trader, which can be used by participants in the white label market or as a stand-alone solution for brokers that want to maintain full control over their server.
In the following guest post, Match-Trade Technologies CEO Michael Karczewski describes how his company has been impacted by recent events and how Match-Trade is helping new and existing clients to deal with them moving forward…
Match-Trade has experienced all of the recent turmoil in the forex market first hand, with the past couple of weeks being some of the busiest in our history. Our sales team kept receiving messages from customers interested in the Match-Trader platform, which is encouraging – but I must admit that it did not surprise us too much either. After all, there are only a few platforms on the market that are offered as server licenses.
In most instances, clients wanted to make sure that their existing technology stacks continue to function properly. GK Chesteron famously wrote that you shouldn’t pull a fence down unless you know why it was put up. Brokers use specific technology for a reason and taking knee-jerk steps to pull things apart can end up turning a small problem into a large one.
But the past couple of weeks have clearly been more than just a minor bump in the road for lots of brokers, with many companies now looking for new add-ons to their existing set-up. Companies selling an MT4 / 5 white label may have to replace them completely to ensure business continuity.
As a result, a mix of clients, old and new, have been coming to speak with us. On the one hand, we have seen an increase in the number of white label providers looking for advice. Making rash decisions isn’t likely to be a good idea in any situation, but for companies or individuals in the space, who have thought things through and are looking for a provider, we may be able to help.
White label providers can purchase a server from us and sell our Match-Trader platform to other brokers. This is an all in one package, with payments solutions, liquidity, and branded trading apps all part of the deal. As a result, and although it would be suitable for any broker, we have found that it’s particularly appealing to the sort of smaller or earlier stage businesses that white label providers tend to cater for.
Another core component is the ability to integrate the Match-Trader platform via APIs with any application and make specific customisations. What we’ve seen is that many established brokers and white label providers, along with their clients, want to be able to play with and modify their platform so that it’s their own. Beyond boosting their brand, this enables them to cater to the nuances that exist in the different regions they do business in.
These features are also important to the brokers that we work with and who have been approaching us over the past couple of weeks as well. As with white label providers, the ability to adapt our trading platform to their own technological environment has proven to be a key attraction of our offering.
For larger brokers, we’ve also seen how appealing a flat fee structure is. Match-Trade clients pay a fixed monthly fee, which doesn’t rise as your turnover increases. This has always been the case and, although it’s frustrating that they weren’t aware of it before, it’s been satisfying to see how attractive a proposition this is to some of the brokers we deal with.
There is an obvious reason for that too. Brokers that have switched over to us in the past years have made significant savings. We provide our in-house technology and offer our clients comprehensive solutions to get everything they need for their brokerage in one place. That’s why we can offer better conditions than multiple providers combined.
Finally, and perhaps most importantly given the events of the last month, white label providers and brokers can create their own branded apps. This is then uploaded by the client on to the app store themselves. Not only does this help build the broker’s brand, but it means they don’t have to worry about being impacted if one of the tech giants decides to cut off another company using the trading platform.
Of course, we know there are likely to be plenty of brokers out there that are happy with their set up. It’s also easy to blow an event out of proportion. What may seem like a major turning point can turn out to be a minor incident.
Still, for brokers and white label providers that think the opposite or simply want to know what other options are on the table for them – we’re here to help. Just remember not to pull any fences down without speaking to us first.
Developments in the land of copy trading
A few years ago, I remember talking to a former colleague about retail traders moving on to crypto – this was as Bitcoin was undergoing one of its regular price crashes.
“In the end,” my colleague said, “they always come back to FX.”
To me that captures neatly one of the paradoxes of the CFD market. On the one hand you have a core set of products that will probably always be there and make lots of money. On the other, the sector is an innovative one.
One area that this is arguably visible is in copy trading. Having copy trading or copy trading features on your platform isn’t new. Covestor, a platform that let you mirror other people’s trades, was founded almost two decades ago. The same is true of Zulutrade which was founded in 2007. That it has been around for so long may be why copy trading isn’t likely to induce much excitement among readers.
A couple of factors have made me think this is one of the more interesting parts of the industry today though.
One was that I recently read an article on one of eToro’s ‘popular traders’ here in the UK, a guy called Jay Smith. According to his LinkedIn page, the total value of the portfolios copying his eToro account is $150m.
Clearly we are not talking about Berkshire Hathaway, Pershing Square territory here. But $150m would put you on par with a hefty chunk of the UK’s closed-ended fund sector. At current exchange rates, for instance, it would only be slightly smaller than one of Invesco’s popular UK equity funds and a debt fund run by M&G. Note that this is without the marketing and sales teams those companies have access to, as well as the institutional audiences they can sell to.
It’s always plausible that this is BS and Jay is not being honest about how much AUM (AUC?) he has. But assuming he isn’t, this is pretty remarkable. Some random guy sitting at home has effectively built up a level of AUM that is on par with a fund created by a large asset manager.
There are even features here that are arguably better than a typical closed or open-ended fund. For instance, you can see the real time performance of someone’s portfolio. In contrast, fund managers only have to publish fact sheets once a month and it’s not uncommon for you to only see their full holdings in half or full-year financial results.
Another factor that makes me think copy trading could become more appealing is because of the range of asset classes on offer. In the past, most providers only offered CFDs. There may be some savants out there who can make money trading these but most people do not. From the outside, this makes the whole thing seem dodgy. Would you want to invest in a fund where the manager was only using CFDs?
In contrast, if you are running a standard, long-only equities fund, it seems plausible that you could make money. And the performance charts, again assuming they’re real, that are put out by users on eToro suggest people are doing just that.
There is also a more theoretical reason that I find this space interesting. Trading arcades have been a popular way for wannabe traders to try and get funded, so they can start making serious money.
From the arcade’s point of view, you are constrained by the physical space you have and how many people actually know about you. If you run an office with 30 desks, you can’t really have more than that number of people trading under you. On top of that, if people don’t know about you, then they aren’t going to come and trade with you.
A broker can mitigate some of these problems. Its reach is much larger and it’s not going to be constrained by physical space. There is a downside in the sense that you can’t impart knowledge to traders in the same way that someone running an arcade could. But the upside is that you have a much larger number of people that can join your platform and then go through a survival of the fittest type process to see who is actually competent and who isn’t.
This seems to be the angle that The Trading Pit, a relatively new company, is going for. They offer futures and FX trading – the same two asset classes that arcades focus on – and then look like they’re trying to filter out good and bad traders. The ‘upside’ here for the company is that the fees they charge seem to make it a win-win. You pay to try and become a trader, making them money, and presumably, if you are good and do make money, then they take a cut of it too.
That points to another conundrum that comes up whenever I’ve discussed copy trading with people in the industry. Leaving aside the novelty of someone in their home ‘managing’ lots of money, it’s not entirely clear how this generates revenue for the broker offering the service.
There appear to be a couple of methods here. One is more cynical, which is that most traders are ultimately going to go bust. When they do crash, they’ll wipe out everyone they have with them and the broker cleans up. Of course, this means taking on the risk that (1) they’ll never go bust or (2) their drawdown still leaves them in the green overall – although this could be negated by the point at which the bulk of copy trades were made (ie. if most people bought in at the peak, then presumably the broker would still make money).
A less contentious point could be dealing and trading costs. It could be possible, for example, that Jay Smith has dealing and other transaction fees that total 0.5% of his AUM per annum. Assuming his $150m figure is accurate, that would mean making fees of $750,000 per year. The trouble is that, in the grand scheme of things, this is not a huge amount of money and you would need a lot of AUM, which doesn’t seem to exist at the moment, for it to be a viable model.
Other arguments that I’ve heard for copy trading are that it’s a good way of bringing in clients. eToro CEO Yoni Assia has said before that half of the clients that join to trade in one asset class will move on to trade in another. Presumably this holds true for copy trading as well.
The final point, and one I find most interesting, is this could ultimately evolve into a kind of asset management platform. I don’t know enough about the regulatory side of things of how this would function but it seems plausible that you could have a scenario where the platform provider gives a wannabe trader access to capital, with the ability to set performance fees. Those fees are then split between the platform provider and the trader. This also has the advantage, unique in the CFD world, of potentially being beneficial to all parties involved – the platform and strategy provider make money on fees, and the investor generates a return on their investment.
This seems to be somewhat similar to what the Trading Pit is doing but I think the most advanced company in this area is Darwinex. And because what they’re doing is relatively unique and interesting, their co-founder Juan Colon is the first guest on the CFDs Weekly Podcast, which you can listen to below – enjoy.
