Luis Sanchez CEO of BMFN
Luis Sanchez CEO of BMFN

Retail trading in China - Some thoughts about IBs and the market

Everyone understands and is aware that the retail FX business in China is 99% conducted via the IB. The majority of brokers provide all the necessary tools, features, products, rebates, commissions, marketing camp’s, gifts, etc., oriented to attract, keep and satisfy their IBs. Their entire business model is based around IBs. For example at BMFN we have over 10,000 IBs and we have developed all the tools and automated them in order to assist our IB partners.

First Published: e-Forex Magazine 79 / Expert Opinion / December, 2017

Every year more and more FX brokers appear in China. For example, Money Fair is a financial show in Shanghai, where at least 1 million people visit throughout the weekend. This year the show was 95% FX, a very high percentage compared with past years, and this is an indicator that the regional FX market is growing fast. This market growth will encourage the development of new lines of business independent from the IB business.

Putting up barriers

So why has the retail FX market not developed in China as fast as elsewhere and what is needed to facilitate this? This is the question that many people ask. There are many factors to consider, but we need to understand first the Chinese culture, the way Chinese people live, what they want and what they are used to. Do Chinese people want return on their assets? Yes - and they are constantly looking how to increase their profits and are open minded for new products. But do they have the time to trade? Do they want to learn how to trade? Do they think that trading is simple? 

The culture here represents a very strong roll, and products have to be developed fast and according to specific needs.  
An important point to consider is what an IB may be telling the client. For example they might say that trading requires a high level of knowledge of the financial market, years of trading experience and in-depth understanding of the FX market. So, as a result, many retail clients may feel  this a big obstacle to entering the market. They may think that they don’t have sufficient knowledge to be able to manage their funds properly and also that they don’t have the time to learn how to trade themselves and if they do learn, how many years will it take for them to be proficient at it? With this first barrier to entry most clients prefer that someone else manage their funds. 

IBs may also tell retail clients that the use of electronic platforms is highly complicated, with too many features, too many indicators, options, and too many tools. As a result retail clients may also see this as a second barrier to entry.

Finally, some IBs may also explain that another factor to consider is what pair will you trade and what instrument? Currencies, index, oil, ETF, etc etc, so once again the retail investor feels that this is definitely too complex for them to do and would prefer that someone else manages their funds. On top of this add in the fact that a retail client might be from a small isolated town that has never heard much about FX and it is not suprising that they don’t feel very confident in trading the market themselves.

What can brokers do?

What can brokers do to overcome these issues? And perhaps more importantly should they go after retail clients directly or stay with the existing IB and MM model? An IB can bring in thousands of dollars on a consistent basis, but an individual retail investor. How much can they bring in? 50 USD, 300 USD. It clearly will require a huge effort and investment from a broker to find sufficient new clients that will be equivalent to one good IB. So this is the first thing to consider.

Every day in China people receive half a dozen calls selling them different things, so the majority of the people don’t even answer the calls, and if they do, they hang up in 5 seconds. So imagine even if you can reach this person, how do to explain what the FX market is and the opportunities it presents over the phone. It’s really very challenging. Furthermore one is not allowed to sell leads and data in China, so it is very difficult to get sales contacts and telephone numbers to call on a daily basis. Running marketing campaigns is expensive and complicated with poor results. So it’s not surprising most  FX brokers prefer to  invest in IB’s and MM’s.

For those brokers that do still want to enter the retail market in China solutions to these problems are not easy to find. Education is one option. Providing potential clients with an educational program in a very simple way so they  can understand the ABC of the FX market can be very useful and of course it’s much better that they at least have a basic idea of the market rather than no idea at all.

Focusing clients attention on just the key functionality of trading platforms is another good idea. Buy, sell, open and close etc. And also the most tradable pairs. At BMFN we have developed a simple app that offers trading via mobile devices only. Clients can download it, open an account and start trading, all in 30 seconds! We are offering this to our retail clients and other brokers that want to quickly enter the business. We recently launched this platform at the Money Fair expo, and it was a great success. Clients find it simple, user-friendly, effective and providing as good execution as any other platform. More information is available at www.eforex.com. 

To conclude, retail trading in China is shaping up to be very interesting over the next few years but today the market is still dominated by IBs and MMs. Chinese people need more time to learn more about the markets and become more confident in trading themselves.