October 18th is Past – What Now?
I think everyone is done freaking out. The big deadline for U.S. forex regulation has come and gone, and most of the dust has settled. I won’t summarize all the changes that come with new regulatory framework here – they are enumerated in plenty of detail anywhere else one might look.
Instead, I’m going to write about: what now?
Contrary to the reactions of some forex brokers (closing or selling their U.S. operations) and commentators (claiming forex is “done” in the U.S.), a fully regulated environment did not come about as a complete surprise.
We started Shift Forex at the tail end of a 10-year period of mild regulation, fully aware that a stricter era was on its way. We registered with the NFA despite the increased cost of doing business and restrictions on business activity, seeing clear benefits to operating as a legitimate firm in a market criticized for shady operators and even scam artists.
Our three main business areas reflect what we believe are three drivers for customer and FX industry growth in the coming decade.
1. Consulting – Marketing and Sales
Today, U.S. brokers fear they will lose customers because they can no longer offer 200:1 leverage or “hedging” on their platforms. They forget that the most successful firms of the past decade succeeded not by competing on product features, but by helping a generation of would-be traders discover that forex existed.
Most new customers at firms like FXCM and Oanda are new-to-forex types, people who are much more concerned with understanding how trading in pairs works or what a pip is than with why they should choose one platform over another.
Find a new pitch – the old one.
When we consult forex brokers, we remind them to broaden their reach and target investors and traders who have no memory of 200:1 leverage, hedging, “guaranteed fills,” “no commissions,” or any other temporary marketing gimmick.
Instead, they should sell new-to-forex investors on what differentiates the FX market from others: it is the largest market in the world by volume, trading is available 24 hours a day, and it is known historically for strong trends that result in good trading opportunities.
2. Managed Forex
One concept governs our belief that managed forex is the next wave of growth in FX:
The universe of self-directed traders is limited. The universe of investors is by comparison limitless.
Knowing this, we cast a wider net and offer solutions to anyone with investable assets, rather than the comparatively small group of self-traders.
Brokers who understand this shift should focus their technology on front-end trading tools that appeal to money managers and back office functionality that allows IBs, CTAs, CPOs, and hedge funds to onboard and manage customer accounts as seamlessly as possible.
3. Consulting – Liquidity and Technology
Here again, our model for growth in the 2010s stems from our understanding of one key concept:
Over the long haul, investors and traders will reward transparency, credibility, and reliability.
The most fickle customer is the one who already has a forex account. Yet even he/she will remain with a broker who offers reliable service and execution; transparent operations and fair pricing; and legitimacy and credibility through size, regulation, and professionalism.
In this realm, pricing and execution transparency have the most room for improvement. We have been advocates of industry best practices for execution for years, and finally some of the brokers are coming out to voice their agreement by publishing trade execution data, platform uptime data, slippage statistics, historical prices, and the like.
Brokers should spend heavily on R&D and technology solutions to reduce latency, reduce trade rejection and slippage rates, improve platform uptime, and be able to accept any type of trading strategy and order type. The best voice for promoting great execution is a customer speaking based on their experience; therefore brokers who offer good and fair execution over a period of years will reap long term rewards both in terms of customer numbers and trading volumes.
Players who truly take stock of their market position and improve in the areas that will matter most in the next decade of forex growth will be best positioned to benefit long term. No more looking backward!