Denis Sukhotin

Why Negative Balance Protection is so Important

The recent CHF debacle has been quite instructive for a number of reasons. We all agree that low volatility is a bad thing in retail forex, but too much of it can be catastrophic. However, it’s precisely when the markets stray from that comfortable middle ground that we get a unique insight as to who’s who in this industry. The confusing acronyms and contradictory marketing copy fall away and we see brokers through their actions. This is exactly what happened in January when the SNB removed its ...

Denis Sukhotin

Want it done? Do it yourself.

Recently we announced our acquisition of spot FX aggregator Quotix, a company that has been on our radar for quite some time. We have been known to work with other tech companies in the past, normally in an advisory capacity, but this is the first time that we have taken the plunge and decided to take one on board. It’s a big move for us, but also the next logical step on the path that we have been pursuing, especially since transitioning to an FX Agency Model of order execution in 2012. There ...

Denis Sukhotin

Game Over

  It has been over a decade since foreign exchange showed the first signs of gaining wider attention as an asset class in its own right. Even though this change in attitudes coincides roughly with the rapid growth of the online forex industry, I think the connection between the two are incidental, both having taken place amidst far greater changes that have fundamentally altered our economic horizons. A number of contributing factors; economic, technological and cultural, have played a huge hand in currencies transitioning from a mere medium of exchange to an increasingly attractive asset class. The past few decades have seen the rise of a truly global economy, as well as the erosion of national boundaries due to the widespread adoption of information technologies. These technologies have made good on the promise of connecting us irrespective of geographic or cultural distance. It’s also important to keep in mind that all this has only really been possible since the official end of the Bretton Woods Agreement in 1973, which in many ways marked the beginning of globalisation. Untethering the world’s currencies from the US dollar and allowing them to float freely was the one of the first steps toward the highly liquid, highly efficient global forex market we have today, whose present infrastructure depends on information technology. The cultural changes that globalisation has brought with it (as the economic and technological pieces of this puzzle have fallen into place) can be thought of as the third prong of this process. These factors are inseparable; they are interrelated and highly symbiotic. One of the consequences of globalisation has been that FX is now an unavoidable part of how we do business. Whether this involves possessing sufficient foreign exchange reserves to settle invoices for imports, to adequately hedge against rising prices and market volatility, or to repatriate funds at the correct times; FX, now more than ever, is the key to maintaining a competitive edge for many businesses. In addition to this, the past few decades have seen the rise of an ever more global investment landscape. Investors seeking further diversity in their portfolios have achieved this this by investing further afield (a process no-doubt aided by the increased availability of timely, high quality information). Investments such as these require foreign exchange transactions and this requirement necessitates the development of strategies. As exchange rates and currency fluctuations have figured more heavily in the calculations of investors we have also seen the development of increasingly complex FX derivatives. The above examples cast FX in something of a secondary role, an unavoidable part of global commerce. However, the first decade of the new Millennium saw this balance shifting as a number of circumstances converged to make traditional asset classes far less attractive to investors. The bursting of the Dotcom bubble in 1999-2001 had the effect of wiping-out a great deal of the tech-related growth that had taken place in the mid-to-late-1990s. The stock market crash of 2000-2002 removed a further $5 trillion from the equity markets. This period also coincided with the September 11 attacks on New York’s Twin Towers in 2001, and of course we are still recovering from the financial crisis at the tail end of that decade. Notwithstanding the buoyant effects that quantitative easing has had on the equity markets since the 2008 crisis, the 2000s have largely been characterised by the underperformance of traditional assets, and non-traditional asset classes such as FX becoming more attractive to investors seeking alpha. All of the above, as well as the introduction of the Euro in 1999, which when paired with the US dollar rapidly became the most tradable financial instrument the world had ever seen, have contributed to the FX market’s daily turnover going from just over half a trillion dollars in 1989 to $5.4 trillion in April of 2013. This growth is as clear a representation of the forward march of globalisation as any. Retail FX, being in some ways a microcosm of the broader FX market, has exhibited similar patterns of growth and has been dependent on the same underlying conditions. The same economic, technological and cultural developments noted above have been the prime movers behind the rapid growth of our own industry. We have seen a nascent retail sector which was costly to enter, illiquid, latency-ridden, and stacked the odds significantly in the broker’s favour; evolve into an affordable, democratic, highly liquid and transparent market. What took over a hundred years of development in the case of the equities markets, took the FX market around 40 years, and has been achieved by retail FX in about a decade. Innovations such as algorithmic trading, born out of the interests of high finance, have rapidly been made available to the retail space, helping broaden the options of individual traders and increase the volumes of brokers. Recently the copy-trading phenomenon has brought countless new participants to a market that would otherwise have been difficult for many of them to enter. The fact, however, remains that forex brokerages are businesses with bottom lines, and so our industry is always going to have to contend with certain offerings that create profits in the short term, only to damage the reputation of the industry in the longer term. We have been outspoken about the use of bonuses to elicit deposits, and regard such promotions as fundamentally at odds with the direction the FX industry has been moving in. It is counterproductive for retail FX to be using models developed by the online gambling industry because any association with “the house” is damaging to an industry that has otherwise worked hard and invested heavily to make itself as transparent as possible. Recently EU regulators, including CySEC and the FCA, have moved to clarify their positions on the use of bonuses. While not openly condemning their use, the circulars released indicate that the way they are presently being marketed contravene certain EU directives. We feel the same way about certain products being offered in the space. Binary options, for instance, have taken the world of online trading by storm over the past few of years, and have effectively capitalised on the appetite for trading among individuals not prepared for the intricacies of forex. The adoption of binary options by many retail FX brokers can be seen as an extension of the use of bonuses, in that it’s a trend that has gained traction because it can be wildly profitable for brokers, but one that harms the industry as a whole because it is far closer to gambling than it is to trading. The reason for this is that binary options on gold or Apple stock, or EUR/USD are perfectly interchangeable with binary options on tennis rankings, or album chart positions. No need for orders to leave a broker’s books, no need for liquidity providers, no need, in fact, for anything other than risk analysts seeing to it that the broker takes the lion’s share of the spoils every time. At FxPro we have eschewed developments that we regard as gimmicks. Our goal has been to only adopt technologies and fund the development of products that we feel add genuine value to our traders. Our latest platform is a perfect example of this in action. Desiring to make the FX market more accessible without going against our no conflicts of interests business model, we looked to the world of asset management for inspiration. The idea was to take the benefits of copy trading and algorithmic trading and unite them with asset management, a sphere in which the results do all the talking. In this way prospective clients without the ability to trade manually, or the knowledge to implement algorithmic trading solutions on their own, can still have access to FX in a fair and transparent way. By dividing the labour between algorithmic strategy providers and investors, we devised a model in which all parties stand to gain without any conflicts of interests between them. The developers of strategies earn commissions, investors have access to these proven strategies in an environment that filters-out all but the very best, and FxPro earns commissions in return for offering its trading infrastructure and liquidity. We have also learned a great deal from using combinations of algorithmic and discretionary trading. While models allow for the removal of emotion, and offer the ability to formalise trading styles and attitudes to particular markets, no model is ever complete in and of itself. Confusing the map with the territory is likely to leave you with problems of over-fitting which can nullify the benefits of algorithmic trading. The beauty of the SuperTrader platform is that our analysts know the strategies we offer so well, they have been involved in the lengthy approval process that each has had to undergo. Even if leaders have a proven track record we expect them to demonstrate a deep understanding of the strategies they are attempting to have approved. Each leader’s individual process is highly important to us. For this reason our analysts are familiar with the thinking behind all of our listed strategies, how they have behaved in back and forward testing situations, as well as in a range of possible scenarios with Monte Carlo simulations. This gives our guys a pretty thorough understanding of the strengths and weaknesses of each strategy, as well as which market situations have proven to be problematic and gotten the better of certain strategies in the past. Our stringent approval procedure, on-going monitoring and guiding human hand means that our strategies tend to perform better than when left to their own devices. This is why FxPro SuperTrader is an improvement on both copy trading and algorithmic trading, which is the kind of evolution I am advocating here rather than jumping on bandwagons for temporary profits. I believe that platforms such as SuperTrader will be a mainstay in the forex industry in years to come. They allow us as an industry to make innovative and marketable products out of the expertise we have amassed and the technologies that we have available to us. They hold the promise to increase retail volumes by attracting both traditional and non-traditional investors to foreign exchange, as well as traders. Ultimately the onus is on us to provide value for our clients and make the case for online forex. Going forward all offerings that run counter to this end should be seen as a detriment.