Ross Newell,  Institutional Business Development Manager at CMC Markets
Ross Newell, Institutional Business Development Manager at CMC Markets

Does the client always know best? Exploring the pitfalls and potential of multi asset brokerage

There’s no escaping the fact that today’s retail trader now wants the ability to look well beyond a select group of FX pairs when developing and executing their trading strategy.

There’s no escaping the fact that today’s retail trader now wants the ability to look well beyond a select group of FX pairs when developing and executing their trading strategy. But with a seemingly unlimited range of instruments and assets on the table, when it comes to selecting the most appropriate array of products, what should white label providers or introducing brokers look for in developing the perfect mix, linking their customers with high quality liquidity? After all, the costs of simply publishing an exchange price feed are far from immaterial and there’s a technology burden to consider too, so striking the right balance when giving traders a sensible choice can prove critical in determining the long-term profitability of any business.

Customers hold the key

The reality is that every broker will find their clients have different requirements when it comes to which instruments they want to trade. Whilst core products like US Dollar pairs and Sterling or Euro crosses will inevitably dominate in the majority of markets, beyond that there’s likely to be interest in trading assets such as the DAX, DOW, Gold and maybe oil. Where the need lies after that however is something of an open-ended book and can present a significant part of the challenge. Some counterparties are in a position to offer thousands of different instruments, but as Ross Newell, Institutional Business Development Manager at CMC Markets, notes “this is where the benefit of strong client relationships can truly play out. If you’ve got a lasting two-way dialogue with your customers then they will be more than happy to keep you informed of what they want to be trading. As an intermediary, you then need to make sure you’ve got a broker to broker relationship with a counterparty who has the capacity to help you respond to those needs as they arise.”

Having that flexibility to respond seamlessly to the changing client demand is critical, but there’s a good argument for not just rushing in and providing the widest possible array of price feeds from the outset. Thinking that by simply offering the broadest choice you will become the go-to broker is deeply flawed. Not only does this risk being an expensive proposition, with many customers still only being focused on a small core of assets, but there are also technological challenges when it comes to plugging into and maintaining multiple price feeds. Again, by using a single, well regarded counterparty to consolidate these can take away some of the hassle, but as CMC’s Newell adds, “it’s again about understanding what your customer wants and finding the best way to address that need.”

It’s complicated

Many investors today evidently want the ability to construct ever more sophisticated trading strategies, rather than simply taking a punt on Euro-Dollar, so that’s what makes for the principal catalyst here. But, whilst it may be possible to access any of these instruments from a range of brokers, again there’s a solid benefit for the end-client to working from a single account. That means one interface, one set of relationships, enabling cross-margining of open positions and comes without the headache of having to transfer funds between providers too. Smaller brokers also have the ability to plug in price feeds from different counterparties, but as noted already there’s a technical challenge there and in most instances, they’re likely to be able to strike better terms with counterparties – and strike a better quality relationship too – if volume can be delivered. It seems that there’s little to support the argument that risks can be mitigated by simultaneously plugging into multiple partner brokers. 

Brpkerage operations
Many investors today want the ability to construct ever more sophisticated trading strategies

Bear traps

Brokers need to be mindful of just how much extra work can be involved as they add to an ever-growing list of fringe products, rather than just sticking to what they know works best. As CMC’s Newell observes, “Currency and index products are easy to program and easier to hedge, given the typically better underlying liquidity here. Put that against equities, with their potentially complex corporate actions, low liquidity and high costs associated with stock borrowing which in turn makes covering short exposure more complex. We can’t overlook the fact that we provide an ever growing number of B2B clients with access to single stock CFDs, where our back office software takes out much of the heavy lifting in administering these transactions, but the inherent complexity – plus those obligatory exchange fees for pricing – certainly support the idea that brokers need to consider just how many lines they add with a degree of care.”

And those exchange fees aren’t easy to brush off, either. A proprietary OTC price on a typical currency pair can be offered free of charge, but once you’re looking at serving an instrument where the price is derived from an exchange traded asset, the exchange fee provides your client with valuable confidence that they’re getting best execution. In other words, attempts to circumvent this burden are unlikely to leave a positive impression over anything more than the very shortest of terms.  

Finding the right jurisdiction

But once a brokerage has decided on the correct mix of assets to offer on to clients, the debate doesn’t end there, as precisely where counterparties are sending their regulated business has been a hot topic of late, too. Regulators are increasingly wanting to drill down to allow them to understand that each client’s interests are being properly addressed. As financial markets operate on an ever-more globalised basis, this presents added challenges, especially in situations where liquidity provider, broker and end-user client may all be domiciled in different countries. CMC’s Newell notes “we’ve addressed this challenge head on, so rather than looking for the path of least resistance as some have done by pushing business offshore, we have expanded our regulated offering. We now have the ability to paper counterparties through Singapore, Australia, Germany or the UK regardless of assets traded and we also work closely with all our counterparties to ensure they are transacting business under the correct domicile.”

Multi asset offerings will only continue to grow in popularity, but there’s a whole host of moving parts here and some careful consideration is necessary if brokers are to get the best deal, both for themselves and their clients.