Fred Wilson (@fredwilson) is a must read for me. Use the below link to find his predictions for 2016.
Back in 2007 or so, something happened to the Margin Trading Products (“MTP”, aka FX & CFD Brokers) industry. The industry’s largest brokers started to offer the MetaTrader 4 trading platform. By many firms adopting a third-party platform, which was and is still available to almost any startup brokerage, the marketing battle was no longer a comparison of proprietary platforms (with little pricing pressure). The battle for market share was now a all out price war with spreads being cut and outrageous bonus offerings to clients. As an Introducing Broker (“IB”) in those times, I benefited as I could easily move client accounts from one brokerage firm, to whichever broker was offering me and my clients the best deal. Since clients did not have to learn to use a new trading platform if they were to switch brokers (previously a large deterrent to switching brokers), the only defense of market share was price cutting and bonus offers.
But in the last year, with an increasing frequency, we are seeing the large MTP brokers going back in time to focusing on their own proprietary platforms and direct client marketing (bypassing Introducing Brokers). FXCM (NYSE: FXCM), Gain Capital (NYSE: GCAP), London Capital Group (LSE: LCG) have all made significant efforts in the last 12 months to develop and push their own trading platforms. This means more in-house technology builds, but a more valuable client when that client chooses to trade on a proprietary platform. These companies have also worked to increase their direct client marketing to bypass the expense of paying an introducing broker for client accounts and client orders. At FXCM, 90% of their IB Sales staff have been let go, and Gain Capital has cut as well. Further we see London Capital Group buying a trading platform company 4 months ago and launching the platform as their own this week.
So what is the take away for someone like me who helps operate a smaller brokerage without the global reach or the financing of the largest players? A few thoughts:
- The larger players have financial pressures of being public and want to change from a variable cost per client order (IB-focused sales) to a “fixed” cost per client account (direct client-focused sales). These firms believe their direct marketing efforts are controllable and have a better ROI.
- As a smaller firm, I can choose to learn from them and follow their lead, or I can look to take over the network of Introducing Brokers that are being cut by the large players.
- Finally, I need to think about the trading platform(s) that we offer. Do we continue offering a third-party platform as our primary offering? The marketplace currently demands that platform (MetaTrader4). But I need to think about what our secondary platform is, and if we have the capabilities to either buy and operate an outside platform, or build our own. **I am well-aware that running a brokerage is much different than running a software firm**
So what will we do? We will ensure all our marketing campaigns have two-tiered approaches so that we can maintain and grow our IB network, but also increase our direct client marketing efforts. that process is simple, but not easy as it is more work to do. As for platforms and our dependence on a single, third-party platform at this time, I am leaning towards adding a second (though still third-party) platform as a differentiation from our competitors. While not an ideal offering, I am not at a stage to build our own platform. So finding a qualified platform that is not yet well-adopted by my competitors is on my to-do list for Qtr 1, 2016.