A competitor of The Industry Spread regularly runs a “largest FX broker” league table. It consists of all the usual names. It is slightly flawed in that it only measures listed firms, and so where the likes of IG, Plus 500, Gain and CMC denominate, it does not include firms such as Saxo or eToro. One thing is clear however, aside from a smattering of listed Japanese FX firms facilitating domestic business, the majority of the world’s largest Forex brokers contain brokers who would not describe themselves as such, and despite its ubiquity in the Forex industry none of the brokers offer MT4 as their principle platform.
All offer a genuine Multi Asset product range, and not just 40 FX crosses with gold and Nymex crude oil bolted on, but thousands and thousands of products. This article will discuss why I feel it’s is no coincidence that the largest FX brokers tend to offer the largest product range.
There are now over 2,000 MT4 brokers offering the standard mix of FX pairs. Along with their white-labels and associated affiliates all battle across search engines and social media to bid and attract clicks to FX phrases and terms. Most FX brokers report cost per acquisition for clients regularly exceeding $1000. Having a Multi asset offering allows brokers to bid on a vast array of terms linked to equities, Indices and commodities. Google report searches for stock market terms dwarf that of forex. Gold and commodities searches are even bigger and yet FX firms are missing out on this low hanging fruit. The rise of Plus 500 can almost certainly be attributed in some part to their success in bidding for non FX terms in territories usually avoided by mainstream brokers.
Potentials clients are driven to the stock market by the media, devouring the success or failure of new product launches and companies. Individuals form their own ideas on trading stocks far more readily than FX. People understand how the Apple share price alters in relation to the success of their latest phone. It is a small subsect who form an opinion on the fluctuations of the Euro against the dollar. Clients that start to trade equites often migrate to Forex and more volatile products, but it is equites that provides them with their entry into financial products.
The market leader IG group provided a breakdown of their product mix and revenues in their latest financial reports. In this it details how shares and equity indices produce 65% of their revenues. IG individual share offering generate revenues only slightly less than that of Forex, and the Equity Index offering is several times larger.
It’s important to note how wide IG’s product range is, and why this is important in generating a revenue mix like this. Where some brokers satisfy themselves that 100 products is multi asset, IG ( and its large competitors such as Saxo and CMC) offer over 5000 different equities, and over 25 different Equity index products. This is important for two reasons. Firstly while it is accepted that the trades in Dow and Dax will comprise of a large proportion of their Equity index trades, people starting out will often look to trade their domestic market. So Italian clients will look to trade the MIB, Spanish the IBEX, and Australians the ASX200. This is what draws them to trading. Secondly, the long tail of products allows all potential clients to open an account with them and trade, whether they want to trade some small mining stock that exists only in their domestic market, or to the global behemoth of Amazon, a firm who dominates through being the everything store and equally taking advantage of this long tail of product offerings.
There is also an interesting correlation as to how revenues alter over time. Essentially as volatility and interest wains between one product type – it increases in others. Investors are attracted to volatility and if a product range seems dull, investors will seek out other asset classes where opportunities exist. If your brokerage doesn’t offer them, your clients will go elsewhere.
There is one final big reason to consider offering thousands of non FX products. Brokerages tend to make more money per trade, and traders of non fx products tend to last longer in the market. A £100,000 trade in a one pip GBP/USD will earn a broker’s $5 each way, where as a £100,000 trade on Vodafone would earn a brokerage £150 on a competitive 15bps commercial offering and frequency of trading for equities tend to be only marginally less than that associated with Forex trading.
As the marginal cost to offering 1,000s of products reduces, and the marginal benefit increases – can your broker afford to be offering only 100 markets?
Dan Moczulski is the CEO of Star Financial Systems. Star specialise in producing turn-key solutions to brokerages in order to create Multi Asset and Multi-Platform powerhouses. Dan has worked in the retail derivatives and fintech industries for over 16 years.