A couple of weeks ago, MetaQuotes started hammering companies offering prop trading services again. No doubt this brought great joy to all of those involved.
We’ve looked at this before but for those who may be hazy on the subject, the way that a lot of props have been working is to use a ‘gray label’ offering from a broker. So someone signs up to the prop firm but then they use a demo account and platform offered by a broker to actually trade. The prop pays a proportion of the fee they charge for challenge sign ups to the broker for providing this service.
We’ve also looked at this before and said that MetaQuotes’ decisions are probably based on the fact that they don’t charge for demo accounts. Consequently they are basically facilitating higher risk business and gaining no monetary benefit from doing so.
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From what we understand, props can now only get a MetaQuotes license if they are regulated as a broker or asset management company. There are exceptions to this. For example, E8 Markets appears to have set up a St Lucia broker and then ‘partnered’ with it to offer MT5 to clients.
Regardless, this points to a wider ‘problem’ with the prop model, which is basically around revenue and pricing.
One is for props themselves. Props are capped at the amount they can charge for a challenge, whereas brokers are theoretically capped only by the size of the deposit they can take from a client. The most expensive challenges tend to be in the $1,000 ball park. Obviously large size client deposits dwarf this amount.
If you look at the last couple of months, brokers probably enjoyed a good week or two for money making due to higher volatility. Props can’t benefit from these conditions in the same way. There is no deposit, no margin call, and so on. They just have the challenge fee.
ATFX is on a hiring spree – read about it here.
The other ‘problem’ with this model pertains more to companies upstream. If you think about the broker model, you have effectively something like this…
Client > broker platform > bridge > LP
In this instance, the broker has a platform from a third-party. They may charge a flat fee but they will often charge in a more ‘scalable’ way. You can see this with MetaQuotes, whose pricing increases depending on the number of active accounts you have.
Next you have the bridge. Again, bridges do not charge flat fees and their revenue is typically based on volume. This means they make more money the more business a broker does.
Finally, you have the LP. Like a bridge provider, an LP will likely charge you a flat fee for access and then make more money, they hope, the more flow you send them.
As you can imagine, the prop model turns all of this on its head because it doesn’t enable these companies to ‘scale’ in the same way.
If you are basing your pricing on active accounts then you don’t make any money at all because prop accounts are all based on demo accounts. There is no real flow so the bridge provider can’t charge for it. The same is true for the liquidity provider, who could probably only make money from selling a data feed.
This makes me wonder if these sorts of providers will eventually start working out if there is some kind of alternative pricing system they have to apply to props.
Similar problems do exist within the broker space if someone just warehouses everything but it doesn’t seem quite as extreme.
The cost of doing business
There is no way of writing this sentence without sounding pretentious, so here goes. At the end of July, I was in a bar in Osaka and struck up a conversation with two guys from Thailand.
I am nosy and so asked about the ‘difficulties’ you can run into when operating in the country and not paying bakshish.
Both of these guys ran businesses importing food and drink products. And both said after a couple of years of doing well, they were eventually called in by government officials, shown their accounts, and then asked – ‘hey bro, where’s our cut?’
Readers may have seen one of our recent articles on Malaysia, where we noted that at least five brokers – most of whom don’t even do business in Malaysia – have been raided in the past six months or so, most likely for the crime of not paying sufficient bakshish to a head Bumi at the police department.
You hear rumours of similar events taking place in Vietnam, the Phillipines and – to a lesser extent – Indonesia.
Spending some time in Malaysia recently, you get the impression that, for ASEAN as a whole, there is little alternative to this. As one of my oil industry in-laws in Kuala Lumpur put it – it’s just the cost of doing business.
This brings up one of the paradoxes of the industry today. If you are a listed broker, your main growth area is in ASEAN – but your compliance team is terrified of letting you go there. If you are not a listed broker then ASEAN is probably one of your largest markets. And for this reason you may find it hard to go public.
Options brokers are coming
One of the points I’ve made since starting this newsletter is that options would become a ‘thing’ in the UK and Europe.
It seems like this is finally starting to play out a bit, so it will be interesting to see what happens with it.
Webull UK launched options trading in the last couple of weeks, IG Group has done the same, CMC is planning on doing it and so is Robinhood. Plus500 and Spreadex have added CFDs on them and there is at least one UK startup which is purely focused on this market.
Will it work?
I guess we’re about to find out.