Meet Spotware at iFX Expo next week in Dubai
Earlier this week Seacrest Markets announced it would be shutting down its prop trading arm. Seacrest was one of the more respected players in the industry, so this was not just another small player going out of business.
Interestingly, the company said that the firm would not be closing shop completely. Instead they are going to switch to solely being a brokerage operation.
The company has a broker license in South Africa and presumably has a massive database of potential leads that it can tap into already. Traders are also being offered a 100% deposit bonus if they use their challenge refunds as broker deposits as well.
At the same time this was happening, a firm called Apex Trader announced that it would be shutting off trading in a number of key instruments, namely gold, silver, copper, platinum and palladium.
The company said in a statement that the decision was due to “market volatility”. I have a strong suspicion that it was actually due to ‘clients making too much money’ – but hey, what do I know?
Apex has often struck me as one of the dumber firms in an industry that is hardly renowned for its intellectual prowess. In fact, the company kind of reminds me of a Nigerian Prince scam. The reason for that is because it says it has made almost $700m in payouts to traders.
This is obviously a claim so far-fetched that when you read it, you can almost feel a physical pain as your credulity is stretched way beyond its natural limits. But that is arguably the point. If someone is willing to believe that, then you have your mark.
Anyway, the wider industry is clearly going through some pains at the moment. Like the broker sector, when you have lots of people just buying and sitting in gold, then you end up with more people needing to get paid out.
Unlike the broker sector, there is no benefit when the market crashes, meaning all the celebrations that brokers would have had last Friday, would not have had an equivalent in the prop space.
This points to the main thing that I do not like about the prop sector, apart from perhaps the influencers, which is that the model is short volatility. As I said many times, I always think that being long volatility is why the broker industry is such a great business to be in.
And that leads into the next point, which is I wonder if we are ultimately going to end up in a situation where brokers are predominant in the prop space and that the whole prop concept will basically just become a break even or loss making model used for marketing. Think of it as being the same as how Robinhood uses stocks to market options or Trading 212 markets stocks to sell CFDs.
Towards the end of last year, Drew Niv, who is Chief Strategy Officer at ATFX, noted that the conversion rate for traders moving from the company’s prop arm to brokerage arm is 10%.
That is lower than it is for similar cross-selling products. For example, the conversion ratio for stock traders to CFD traders seems to be about 40% to 50% from what I have seen.
However, if you actually log into ATFunded, which is the prop arm of ATFX, there is not much of a push to switch into their brokerage arm. In other words, I would imagine that you could quite easily improve the conversion rate by putting in more features to switch people over.
As with firms like Trading 212 or Robinhood, who will now have enough historical data to work out what a good conversion rate is and how to switch people into higher revenue products, then I am sure we could have brokers who use prop in the same way.
Ultimately I would imagine that many props are now having to come up with new rules or ‘adjust’ trading conditions to try and cap how much they are paying out to people. That’s never a great situation to be in.
If you then think long-term and how it’s possible regulations will come into play, then that model becomes even more unsustainable than it arguably already is.
Maybe we’ll end up in a world where prop is just a way for brokers to do marketing in gray markets and get access to Google and Meta, with the end goal being to just sell traders back into the broker space.
