It has been a year since FxPro transitioned to an Agency Model of order execution across all of our trading platforms. Under this model, client trades are sent straight through to a pool of leading liquidity providers, with FxPro’s revenue dependent on a mark-up or commission charged to the client. In contrast, market maker brokers usually gain when their clients lose money, as they take the opposite side of the client’s trade. Only the largest firms may choose to take a more risk-based approach by hedging exposures. A year on, we take a look at the impact the Agency Model has had on our business, our clients and set it against the wider trends within the FX industry.
There were four reasons that motivated our move. Primarily, we wanted to remove any conflict of interest between us and our clients, a conflict that is inherent in the market maker model. Removing this would allow us to concentrate on retaining clients and building a trading environment that would encourage them to stay with us. Secondly, we wanted to improve trading conditions for our clients. We achieved this goal by establishing relationships with key liquidity providers and passing on the benefits. Thirdly, there were regulatory considerations. The forex industry has seen significant growth in recent years and, inevitably, enhanced regulation of the sector followed. Indeed, in many jurisdictions (US, Japan, South Korea), the effect of this has been punitive for the industry. It was prudent for FxPro to move to a model that was more transparent and less likely to be subject to restrictions, either via higher capital requirements or other regulatory constraints. Finally, the decision came down to simple business sense. We wanted to move to a more stable business model, dependent on efficiency of execution, rather than one reliant on managing risk and market volatility.
One of the main challenges of the transition was establishing the ideal pool of liquidity providers, to ensure competitive pricing in the range of currency pairs traded by our client base. This meant building robust links to our liquidity providers, comprising ten of the world’s top banks for FX. We’re confident that our pricing is amongst the best available in FX, which ensures that our clients experience competitive trading conditions at all times. On the technology front, the main goal was to reduce latency to milliseconds, so that trades could be passed straight-to-market (also referred to as back-to-back), virtually eliminating execution risk to the business. We also introduced systems to keep all pending orders on our servers until triggered, further ensuring client anonymity and competitive execution, regardless of type (such as stop-loss, take-profit, etc.). When triggered, they are sent immediately to market with no manual intervention from our side. This is particularly important around data releases and other periods of market volatility, when market makers may often delay orders for several seconds, substantially increasing the risk of slippage for the client.
For clients, the transition has been seamless, with few, if any, visible changes made to our trading environment. The introduction of the Agency Model demanded an on-going commitment on the client education front to underline the many benefits that the model offers. In time, this led to a shift in the type of clients attracted to FxPro. We discovered that new clients were less interested in short-term marketing gimmicks and were more likely to place successful trading as a long-term goal. Plus, the Agency Model has enabled us to fully embrace every type of trader, including so-called scalpers and robot traders, who market makers are known to be selective of.
The numbers bear this out. Client profitability has improved by a factor of two over the past year, with a more pronounced improvement noticeable among those clients utilising Expert Advisors on the MT4 platform. We have also seen a lower client attrition rate, the proportion of clients of more than 1 year duration rising by almost 20%. Furthermore, our own survey of clients, taken towards the end of last year, showed that FxPro rated highly in the areas of trustworthiness and customer support, both of which were key barometers in judging the success of the move to agency execution.
For the coming year, we plan to build on the progress made since the transition and concentrate on building tools to support clients for the long-term. With this goal in mind, we have launched several new tools to help both those who want to build their own automated strategies on the MT4 platform and for traders who want to follow the strategies of others. Our own in-house research shows that, on average, traders who use an algo trading system enjoy 5 times* better trading results and more stable returns that those who trade manually (*Source: FxPro, in-house research, 2012). This is why we have just launched a comprehensive library of pre-built, downloadable, Expert Advisors (EAs) for our clients. Furthermore, our new FxPro Quant Strategy Builder allows clients to easily create automated trading strategies in a user-friendly, online ‘drag and drop’ environment. We are also developing a new mirror-trading platform that is due to be released later in the year. Being an agency broker, we are incentivised to create such products to increase the profitability of our clients. In contrast, a market maker’s primary motive is to entice clients with introductory bonuses and other gimmicks, with no interest in creating and promoting tools which offer effective, real support to traders.
FxPro recently launched an industry-first, FxPro Vault, a valuable risk and money management tool that will help clients to manage their trading accounts and transfers. The Vault promotes better risk management as clients can transfer the amount they are willing to risk to their trading account, leaving the remainder in their Vault, ring-fenced from trading risk.
The coming year is also likely to see further change in the industry. The recent crisis in Cyprus will be a factor for some smaller firms based in the country. We have always valued the security of our clients’ funds, protecting them within segregated accounts at global investment grade banks. We also gained a full FSA (now FCA) license for our UK operations as a way of offering further peace of mind to our clients. More brokers are likely to contemplate a change to an agency model of order execution, as the industry moves towards viewing this as the norm, aided by education, technology and most likely nudged there by potential regulatory changes.Publication source