New and innovative approaches to entering the retail FX market have become something of a necessity in recent times, with the world’s regulatory authorities having embarked on significant reformation exercises, which have served to change the market and refine it, which whilst essential for the longevity of this particular sector and its ability to develop and flourish, has resulted in high operating costs.
The onset of competition has added to this, and therefore an emergence of companies with a new corporate mantra are beginning to find their place in the market.
In this week’s Executive Interview, John Rebelo, CEO of Sterling Gent Trading, explains to Forex Magnates his view on the methodology required to incorporate experienced gained in the institutional sector in order to succeed in the international retail FX market.
Please elaborate on your career background, and what led you to your position at Sterling Gent Trading?
I served as Chief Dealer FX at Bank of Bermuda, now HSBC Bank Bermuda, for more than a decade. The stretch of time that coincided with my tenure saw traditional voice-broking evolve into some of the electronic systems like EBS and Reuters and culminated with the early advent of online trading.
My colleagues at SGT have also come from major institutional backgrounds including Bank of American London, Bank of Ireland, NordBanken London, and even the old Chemical Bank in New York – now we’re showing our ages!
We provided alpha-driven FX investment management services to some big names. We successfully managed some allocations from some two major Euromoney perennial “Top 10” names and a GCC sovereign wealth fund, just to name a small sample of our clients. We also managed sell-side risk for about 10 years for a couple of larger sell-side retail names, a period that saw a major compression of FX spreads and a proliferation of the Contracts for Difference space into many asset classes.
Upon assuming your position as CEO at SGT what did you set out to achieve initially and how did you go about it?
My colleagues and I brought our collective market experience and risk management capabilities to SGT and also leveraged our decades of industry contacts. You know you’re a dinosaur – and a survivor – in this industry when the Plaza Hotel in New York represents more than a monstrosity on 59th Street, and our Rolodexes reflect that. Incidentally, as I write this, we’re within 1 big figure of the 50% retracement of the post-Accord absolute range in Cable – a reminder that no matter how much technology evolves, successful risk management is still predicated upon being able to quantify where the market is – no matter who is on the other side of the trade.
We set out to provide some buy-side management services and we leveraged that success by launching our sell-side Dealing and Brokerage operations. We had more than a decade of successful risk management under our belts for a couple of larger retail names in the space, hence we were familiar with platforms including MT4 and overseeing a 24-hour book of retail risk for tens of thousands of Live Accounts.
We amplified our commitment to the sell-side part of the industry by becoming regulated as a Principal Dealer under the Securities and Investment Business Act, 2010 of the Financial Services Commission of the British Virgin Islands.
Sterling Gent Trading began as an institutional participant, and has now expanded its service toward the retail side. Will this be offered from the British Virgin Islands or will the firm utilize a US or UK office as a base for the retail business and retain its institutional FX business in the British Virgin Islands?
The BVI has served both our Institutional and retail operations quite well. On the Institutional side, we have successfully had large institutional clients take our name. Asian clients in particular hold the BVI in high esteem, as reflected in the centre’s close trading and legal ties with Hong Kong and China.
On the retail side, we’ve learned that most – if not all – jurisdictions that matter in retail FX have executed memoranda with the Financial Services Commission, meaning we can as a BVI entity can leverage SGT’s experience by providing outsourced risk management activities to Riskless Principals and similarly situated counterparties who directly face retail clients.
Nevertheless, SGT has several exciting initiatives in process to expand our global presence on both the Institutional and retail side. First, we’re closely evaluating how MiFID-2 will shake out, and we anticipate a successful licence application that will allow a subsidiary to directly on-board retail clients in the European Union. Second, we have other licence applications in progress in other jurisdictions to expand both our ability to on-board retail clients and distribute trading technology. Third, a Group entity is in the process of obtaining an Investment Advisory and Investment Management licence in a highly-regulated and very well-respected jurisdiction, something that will benefit our Institutional and retail operations. Last – and certainly not least – another initiative involves an incorporation of a formal collective investment scheme. This initiative will yield some sexy opportunities in the exchange-traded products space.
What is your perspective on the future of open platforms as opposed to MetaTrader 4 in the retail sector? Do you think there will be a switch toward cTrader and tradable, along with fully customizable software add-ons as traders become increasingly knowledgeable, or do you think that MetaQuotes will continue to dominate due to its fully-integrated nature and the familiarity among traders?
Like many industry peers, we are an MetaTrader 4 licencee and inherently recognise the necessity of catering to an EA-driven retail space. We will soon be introducing and launching an open-source platform, as a growing buy-side segment is demanding trading technology that they can write to and develop social trading platforms around. The long-term survivors in this industry will be able to pivot between various trading platforms including MetaTrader 4 and open-source technologies, with the latter clearly providing more opportunities for traders.
How do you view the contraction of retail FX business in North America, with the majority of retail FX firms now considering the cost of operations to be non-viable? Do you think that there is a business opportunity for Sterling Gent to accrue US clients via IBs and strategic white label partners based in the US?
There are a couple of different ways to look at the US’s role in FX. The 2013 BIS Triennial revealed that total FX turnover in the US is more than three times greater than it was in the 1998 BIS Triennial, yet the US’s global share of FX turnover activity on a percentage basis is only marginally higher – even with the US Dollar on one leg of 87% of FX transactions.
At the retail level, it’s a pretty simple mathematical formula. Simply look at the financial cost of licencing, regulatory, and compliance hurdles in the US, and consider how far that regulatory capital can be leveraged on marketing and client acquisitions in other jurisdictions. We’re not here to slam any jurisdiction or regulator, but we’ve had countless conversations with clients of all shapes and sizes who want no regulatory, legal, or banking exposure to the US for myriad reasons.
A couple of high profile scandals and bankruptcies in the US over the past couple of years have rendered our decision to not be involved there a smart move.
Many US retail traders and Introducing Brokers have sought permissible access to the CFD markets rather than being limited to exchange-traded products for most asset classes. The futures lobby is strong in the US and that’s an evolution we are unlikely to see anytime soon in the wake of the major scandals and bankruptcies.
As more retail traders require the STP model of trade execution, whereby direct market access is offered without a dealing room, spreads are now low. How is business still viable with such low spreads and reliance on partnering with IBs? Can a profit still be turned if spread is 0.3 pips?
As many sell-side industry participants have painfully learned, a pure STP execution model necessitates a lot of buy-side trading volume. Absent that volume, it renders it pretty difficult to pay an IB a market rate of rebates and remuneration. It justifies a lot of our focus and expense on buy-side initiatives where a significant amount of flow is generated by coders-cum-traders.
In terms of overall profitability, it really means learning early on that ‘not all flow is created equal.’ On-boarding a client simply for the sake of having your sales staff reaching their monthly Net Deposit hurdle rate can be ill-advised.
We have a close association with a technology provider that is poised to become the dominant global leader in FX Bridging and Prime Brokerage technology, combining dozens of unique liquidity streams with advanced analytics to boost ‘per million’ profitability. This commitment to wholesale liquidity distribution and technology with advanced analytics will allow Riskless Principals to maintain their brokerage margins. The moral to the story is “Evolve or Devolve.” Who said Charles Darwin never traded FX?
In terms of regulatory supervision, do you favor light environments such as the British Virgin Islands or Cyprus as practical regions in which to operate a retail FX business over the established regions such as the US with their fine reputation but high operating costs?
This is the second or third time the US has been topical in this interview, and even though we?re not American, let’s share an analogy that some of your readership can relate to.
You don’t have to be the New York Yankees of retail FX in order to be successful in this industry. Pick your spots. Build a big farm system by educating new traders. Do something better than your competitors that will result in higher profitability ratios. Get that runner over from first base to third base. The retail FX model of yesteryear where Brokers would bucket their clients is long gone. It’s all about “On Base Percentage” now and helping your clients succeed, not fail.
We can find similar analogies in other leagues such as the English Premiership League and elsewhere.
Who is Sterling Gent Trading’s technology partner? Does the firm use a fully white-labeled solution, and which firm provides the liquidity feeds?
SGT is an MT4 licencee, an ACT Forex licencee, and we will soon be bringing an open-source platform to market to support more asset classes and more than 300 tradable instruments. We are building a social trading solution around the open-source platform, an exciting initiative for us that lends itself well to some sophisticated trading strategies and wholesale distribution.
We have multiple trading lines with significant liquidity aggregation, and our aforementioned association with the technology provider that is poised to become a dominant force in retail FX will serve our ambitions well.
What is the next step for Sterling Gent Trading in terms of new markets and new products? Does the institutional offering involve partnership with a larger institutional firm, and what will Sterling Gent Trading offer? Will it be a technological provision to brokers?
We will be expanding our offering of tradable instruments to more than 300, including Direct Market Access of some Share CFDs and ETFs. We’re adding another 20 equity indices to our roster and adding more instruments in the Metals and Commodities complexes.
We have a major emphasis on technology, both with the open-source platform we will soon be marketing and the unique liquidity provision offered through our association with the Bridging company. These liquidity provision capabilities are currently being expanded to become platform-agnostic.
How does Sterling Gent Trading conduct business with its white label partners and IBs, and how is risk management conducted? Are IBs able to A or B-book clients themselves, or do they have to accept the order flow provided by Sterling Gent Trading’s dealing desk or liquidity feed?
The MT4 model White Label and IB model is fairly uniform across the industry with a monthly recurrent technology cost. The open source platform technology that we will soon be marketing provides us with a more advantageous pricing structure and quicker deployment options.
The open source trading platform also provides our White Label partners with both A-Book and B-Book capabilities. These White Label partners do not need to take our liquidity exclusively, though we are confident that our feeds can satisfy the most demanding retail trading needs.
What is your opinion on white label products, in terms of the best means of establishing a white label? Do you think there is any merit in a potential partner going to an existing broker such as Sterling Gent Trading, paying $5000 for a white label MT4 license, then around $15,000 to $20,000 for integration of the CRM/back office system/website/payment solution plus the cost of regulation, or do you think it is better for those wishing to start up business to have their own MT4 license and then take a prime broker solution from a company such as Boston Prime or LMAX?
The optimal solution involves presenting White Label partners with a zero-cost, turnkey solution. This comprehensive approach allows us to combine our regulatory umbrella, bespoke trading technology, trading lines, liquidity, administrative and compliance staff, dealing experience, and sales and marketing capabilities into a single solution that we call “Broker in a Box.”
The FX industry is becoming less MT4-centric, and the emergence of new open-source solutions is creating a new cost dynamic that actually allows new industry entrants to get started quicker and less expensively. We truly believe the technology and prime brokerage solution the Bridging company has devised – coupled with their major investment in its development – will soon become disruptive and revolutionary. It’s time for a transformative sea change in retail FX.
What is Sterling Gent Trading’s plan for the near future and how will this be achieved?
We will successfully execute on the buy-side and sell-side initiatives that we enumerated in this interview, and we intend to play a seminal role in the disruptive and revolutionary technology that will soon be unleashed. This will provide retail FX sell-side names with significant upside potential in the MT4 space, and then from a platform-agnostic approach.
Separately, the open-source trading technology we have been discussing will make the industry more accessible for both buy-side and sell-side participants. We’re excited about our social trading wrapper.