A few months ago I went for a beer with someone in the CFD world and, because we’re both really cool and fun people, we ended up talking about different methods of onboarding clients.
The conclusion was that, although getting clients directly is the optimal solution, it can be very difficult to do so. As my counterpart put it, a new company looking to enter the sector would probably need to raise about $1bn if it wanted a realistic chance of success. That is almost certainly an exaggeration, but not a massive one.
This got me thinking about how viable it really is to set up a company in the FX/CFD sector today without raising substantial amounts of money from investors. Looking at capital requirements and regulatory costs, there’s an argument to be made that you shouldn’t set up a broker unless you have solid financial backing.
But the reality is there are still lots of people that want to try their hand at setting up a broker and not everyone can access a large amount of capital, so there will probably continue to be smaller companies entering the sector. It’s also worth keeping in mind that many companies that are large and respectable today, weren’t really in that position when they started out. IG Group, for instance, almost went bust in the late 1970s and was only kept afloat by its founder winning £600 playing bridge.
To my mind there are probably three key areas to consider here – regulation, technology and onboarding customers, although I do appreciate there is much more to consider when setting up a broker.
With regard to the first, we’ve all enjoyed having a good laugh at companies going to far flung corners of the earth to get regulated and then pretending it has any purpose other than bypassing regulatory restrictions in other jurisdictions (“yea man, I mean St Vincent and the Grenadines has a really burgeoning tech scene”). For a smaller player in the market though, these sorts of regions can often be the only places that are accessible to them.
The problem here seems more reputational than practical. As a lot of dishonest players do go offshore, you have to contend with the perception that you may be one of them. Conversely you also lose the brand power that comes with saying you are regulated in somewhere like the UK.
However, it’s worth keeping in mind that there is no reason to stay offshore if your business succeeds. As one executive in the sector told me recently, start up brokers that intend to actually run legitimate operations tend to have the long-term goal of growing their business offshore initially and then, either via acquisitions or direct applications, getting licenced in a more respectable jurisdiction.
Incidentally, this is not a new phenomenon. There are some major brokers today that started offshore and then moved to acquire UK/EU licensing. At the same time, since 2018’s regulatory restrictions came into play, there have been plenty of ‘respectable’ brokers acquiring offshore licensing and then funnelling clients to that entity – so maybe you don’t need to go ‘onshore’ at all?
Next we have the tech question. Again, assuming you don’t have a lot of money behind you then you probably aren’t going to build your own trading platform. Until recently, MetaTrader was the go-to option for companies starting out. Although there were difficulties in acquiring a white label from MetaQuotes, this author understands that demand continued to be strong and it was nearly always the platform startup brokers wanted from tech providers.
However, this has changed since MetaQuotes stopped issuing white labels in September. It’s plausible this will be reversed in the future but assuming the restrictions on white labels remain stringent, this means it remains difficult for start up brokers to access either MT4 or MT5 in the near term.
Speaking to people at the FMLS evening drinks a couple of weeks ago, it seems like Match Trader and cTrader have been the primary beneficiaries of these developments. However, it wouldn’t be surprising if most tech providers saw a burst of interest after the events involving MetaQuotes unravelled earlier this year. Whatever the outcome is, it seems as though the technology choice for a start up broker is much less obvious for brokers today than it was a few years ago.
Finally we have the question of how to actually onboard clients. Getting clients directly is the best outcome but this is a very competitive market and it’s hard to do. Beyond some generic SEO efforts or some kind of cheap but effective marketing (does that exist?) it’s hard to see how this can be done.
The result seems to be that brokers then end up relying on IBs to get clients. This is not ideal. When I spoke to Drew Niv a couple of weeks ago, he said that close to 100% of FXCM’s problems when he was running the company were the result of using IBs. We’ve also looked at the problems IBs can cause here before.
Unfortunately the eternally hated IB / affiliate seems like he will remain in play because there aren’t really viable alternatives for brokers that are just starting out. I’m happy to get any hate mail saying otherwise.
Capital.com continues to hire IG Group people
In the last issue of CFDs Weekly, we looked at the stream of people from IG Group who were joining Capital.com. After that I went on holiday for two weeks and now I come back and see that it’s still going on.
Since the last CFDs Weekly issue went out, Capital.com have hired Andy Francos, formerly head of SEO at IG, as their Head of Commercial Marketing. They’ve also hired Greg Adams, who was Head of Risk Assurance at IG and spent almost two decades at the company, as Head of Risk.
When will it end?