How brokers can win the trading tech wars: Insights from iFX EXPO 2023

Last week’s iFX EXPO International 2023, held at the City of Dreams Mediterranean Integrated Resort in Limassol, Cyprus, welcomed a series of insightful discussions. A panel that particularly stood out focused on the role and evolution of trading technology.

How brokers can win the trading tech wars: Insights from iFX EXPO 2023

Moderated by Elina Pedersen, CRO at Your Bourse, the panel titled “Trade Tech: The Golden Compass Towards Win-Win” dove deep into the current dynamics and future prospects of the trading technology realm.

Pedersen was joined by an all-star panel of guests, including Cristian Vlasceanu (CEO of Centroid Solutions), Andrew Saks (CPO of TraderEvolution Global), Petros Kalaitzis (Head of Cyprus at Tools for Brokers), Wassim Khateeb (CCO of FXCUBIC), and Alexandros A. Patsalides (Head of Deriv Prime).

As the financial sector grows ever more competitive, brokers continually search for advanced technology to offer their investors better services. Amidst this ongoing tech race, two paths emerge: utilizing third-party trading platforms or developing proprietary in-house platforms.

In-house development or third-party solutions?

Alexandros A. Patsalides from Deriv Prime initiated the conversation by discussing the foundational technology that brokers must prioritize. He emphasized that new brokers, despite not being tech-focused, should consider regulation as an essential first step.

Once compliant, they can then focus on setting up the core systems such as back-office systems, CRM systems, trade execution platforms, aggregation engines, and collaborations with liquidity providers. Without these core components and especially without liquidity providers, the quality of trade execution could be compromised.

A central theme emerged around whether brokers should opt to build their own technology or leverage third-party solutions. Alexandros Patsalides felt that while startups and even mid-sized brokers might benefit from outsourcing in their initial stages, it becomes crucial to develop in-house capabilities as they scale. However, he also cautioned about the potential pitfalls of running before one can walk, noting the importance of leveraging ready-made solutions during the early stages.

Cristian Vlasceanu, CEO of Centroid Solutions, echoed these sentiments, considering technology as the lifeblood of a brokerage business. He underlined the pivotal role of FinTech, suggesting that financial institutions should start identifying as FinTech companies. Brokers should leverage technology to offer state-of-the-art solutions to their clients. He brought forward the perennial debate between “buying” versus “building” tech solutions, indicating that the decision largely rests upon the company’s stage in its lifecycle and the expertise at hand. Integrations, ecosystems, and partnerships play a significant role in this decision-making process.

Andrew Saks, CPO of TraderEvolution, delved into the pressing need for mobile-responsive platforms, especially given the influx of younger traders who are accustomed to app-based systems. He highlighted the challenges brokers face in offering a comprehensive, intuitive system that provides a plethora of features – from market depth to heat maps. As traders’ portfolios diversify and their demands increase, brokers must adapt swiftly to provide a seamless multi-asset and multi-product experience.

“This is an important aspect which is difficult and expensive for a broker to build in-house. There are also other aspects such as having control over those asset classes that brokers want to actually be able to offer those new and more demanding clients as well as existing customers who have become experienced traders and they can move toward trading trade exchange-traded products to expand their remit from just trading spot and CFDs. They may also eventually wish to expand the range of products and markets that they trade to the extent of becoming a professional trader and maybe offer their expertise to investors who have become their clients.

Andrew Saks continued “Brokers might look towards providing a multi-asset and multi-product offering. To do that it requires a lot of technical ability and it requires the need to bring the back office onto the infrastructure of the broker. In the past that has been an expensive endeavor. For example, it has cost companies like CMC Markets £100 million to do about five years ago and £200,000 a month for support on an ongoing basis.”

“In many cases, technological challenges plus the cost tend to put people off, but a solution to this is needed because we are at a point now where we should be all able together to do this in a cost-effective way to be able to move the trading platform environment” continued Andrew Saks.

“And by that, I mean the front and back office so that everything is operable from a broker’s side without huge costs and technological complexities. This is the next stage for the retail side of the industry” said Andrew Saks.

“In my opinion, some of the medium-sized, moderate to medium-sized companies that perhaps should be looking more now towards expanding their asset class range and taking control of their own customer base-related intellectual property in order to be able to add new asset classes as time goes forward. I think that’s probably the most crossroads we are at right now” said Andrew Saks.

The rise of Exchange-Traded Options

Wassim Khateeb, CCO of FXCUBIC, added to the discussion by stressing the importance of timing in the life cycle of companies, and whether a broker should build or outsource trading technology. He pointed out the invaluable insights a broker gains when they partner with a technology provider, benefiting from the feedback of multiple brokers.

In line with Khateeb’s sentiments, Andrew Saks of TraderEvolution noted that brokers face requests to expand their range of products, highlighting the current trend of exchange-traded options in addition to OTC products such as CFDs.

“I’ve noticed that many recent requests from clients to brokers appear to be to ask brokers to add options to the range of products,” said Andrew Saks

“Some of the larger brokers like Interactive Brokers have recently expanded that type of asset class – and I mean Exchange-Traded Options rather than CFDs. Being able to adapt to those requests quickly and without massive upheaval such as having to actually regenerate your whole infrastructure in order to cope with something that is a trend as big as that is a difficult thing and it’s better to be equipped for that trend for those sorts of trends” said Andrew Saks

Andrew’s view is that brokers need to be adaptive, ensuring they can integrate new market data feeds efficiently without overhauling their entire infrastructure.

“I mentioned options because that’s the trend that is happening right now, but for all we know in a year’s time there might be a sudden trend toward other asset classes such as ETFs. Therefore it’s a question of being able to adapt a brokerage to be able to plug in those market data feeds quickly and effectively without having to redesign the entire trading infrastructure which would potentially alienate existing clients by having to move them to a new platform. it is best to have the availability ready for when that might happen, and that really requires being liquidity agnostic as well as asset class agnostic” said Andrew Saks

Cristian Vlasceanu, CEO of Centroid Solutions, echoed the idea of technological flexibility. He pointed to the advantages of connectivity providers, capable of expanding to multi-assets owing to their wide range of integrations. Vlasceanu stressed the complexities and costs involved if brokers were to disregard established technology providers and try building in-house.

Volume fees vs. Software licensing fees

Discussing industry revenue models, moderator Elina Pedersen said she finds the volume fee insignificant. “I feel that very often you hear brokers saying, ‘well we don’t want to be charged a volume fee’, where in fact in the industry the volume fee is anywhere between dollar to $3 per million. And what we see is that actually just by using the correct execution engine that is co-located with the liquidity providers […] you’re looking at getting more than $10 per million more on profitability. So, that dollar of $3 becomes absolutely irrelevant. But on top of that, if we use risk management tools […] this can be improved even further.”

Andrew Saks lamented the volume fee model, calling it problematic. “It causes a broker to worry about scalability as a result of having to pay more and more volume fees to an external provider that has no investment or interest in their business,” he said.

Andrew suggested a shift towards software licensing fees, allowing brokerages more operational freedom and growth without constantly worrying about escalating costs.

“As is the case in other software-dependent industries, brokers should be able to have ownership of their platform infrastructure in a way that their back office is operable by their own staff and all clients are deployed and hosted on the broker’s own CRM, with everything set up in the back office and displayed on the front end, whether that might be trading terms, or asset classes in a way that the broker wants to display things to each client. Software licensing either via a monthly licensing fee or via an outright purchase of the source code is the pragmatic way to scale a brokerage, and should be reasonable. It should not be prohibitive for the brokerages to be able to grow. I think that sounds like a very fundamental basic point, but it’s really important because other industry sectors in the world don’t volume capitalize their software. They do it by being a genuine software vendor and deploying it to their customers. So the customer takes the software and uses it for every purpose they need with a licensing fee” said Andrew Saks

Petros Kalaitzis from Tools for Brokers chimed in on the dominance of platforms by MetaQuotes. He reiterated the need for healthy competition in the industry to ensure customer experience is at the forefront. Kalaitzis believes the future lies in a hybrid model, where brokers combine outsourced software while controlling key elements like back offices.

Addressing the high cost of marketing, IP, and AI

Andrew Saks, the CPO of TraderEvolution, delved deep into the intricacies of the role of the mobile platform. The underlying narrative was the importance for brokers to differentiate their mobile products, stressing not just the availability but the uniqueness. Being different is not just about offering something novel; it’s about offering something that stands the test of time and market volatility.

Andrew Saks also brought up the challenge brokers face with the cost of marketing, especially in CFD and FX sectors, and the importance of integrations like TradingView for brokers’ sustainability.

“The cost of paying affiliates is very, very high, the lifespan of a new trader or a novice trader might be low. Brokers have to withstand the marketing cost, which is between $1,200 and $1,500 a month to acquire a new customer, then the resource-hungry aspect of training the customer to use the platform and then receipt of their initial deposit, which might be lower than the marketing cost, and their lifetime value is three months. So that’s very, very problematic” said Andrew Saks.

He continued “Being able to access a bank of traders that are already experienced and used to using a specific charting software, for example, means that you don’t have to pay all those marketing costs or worry about those marketing restrictions.”

Alexandros A. Patsalides from Deriv Prime touched upon the importance of intellectual property (IP) for brokers. His argument centered around the idea that a successful broker, upon reaching a certain scale, must possess its own back office, which in essence would be their own IP. This, he suggests, acts as the hub connecting various tools and platforms.

Patsalides also shed light on the industry’s competitive nature, distinguishing between the “red ocean” strategy – a market saturated with competition – and the “blue ocean” strategy where competition is irrelevant. His suggestion was a hybrid approach, leveraging both in-house development and third-party collaborations.

The conversation shifted to AI and its role when Elina Pedersen, the panel’s moderator and CRO at Your Bourse, mentioned the ubiquity of AI across the expo. Cristian Vlasceanu, the CEO of Centroid Solutions, chimed in with his perspective, emphasizing that the rise of robot trading or algo trading, backed by AI, is merely the next evolutionary step.

Vlasceanu pointed out that while AI has the potential to revolutionize retail trading, it’s crucial to be cautious, considering the quality and integrity of the data AI processes.

In essence, the panel discussion at the iFX EXPO 2023 underscored the symbiotic relationship between financial services and technology. As brokers strive to offer unparalleled services, the choice between third-party platforms and in-house solutions will remain central to their strategies. The “golden compass” in this journey will be a blend of adaptability, foresight, and the wise leveraging of available technologies.