Most Brokers won’t offer Multi-Assets
The retail trading industry boasted in 2018 that becoming a multi-asset service would be required for any brokerage wanting to maintain operations. This came after the fallout of the product intervention measures implemented by ESMA. Almost every brokerage provides multi-assets in terms of contracts-for-difference, with the CFDs listed in different classes. However, this isn’t an accurate multi-asset exchange. Adding the stock exchange to these brokerages’ products would allow for their platforms to become multi-asset enabled. There have been a few firms that have accomplished this task. These include eToro, ThinkMarkets, IG Group, Trading 212 and RoboMarkets. EToro is the only one of these exchanges that provide commission-free trading.
However, most of the brokerages maintained internationally haven’t provided assets from stock exchanges. This is due to the significant hurdles that must be overcome, such as the politics behind stock trading and the cost of equity trading. Maintaining an exchange that runs through the London, New York or Hong Kong Stock Exchange can be incredibly profitable, but the operational cost is expensive. Additionally, another significant problem that’s facing brokerages like Binance or Bitmex is user and market data. Hackers have attacked multiple brokerages and comprised their digital currencies in the process. The complexity of receiving an operational license to provide stocks has become drastically harder since these attacks became consistent.
The Former Executive with the London Stock Exchange, Rafah Hanna, who now offers consulting services to brokerages stated: “Exchanges are now very aware of the retail trading industry and have changed their approach by introducing targeted. There are specific new policies and licence fees. Previously a flat Derived Data Licence Fee was enough and pre-audits were not undertaken. Now exchanges, including the LSE, are undertaking pre-audits to ensure, before licensing a broker, that their derived data is not able to be reverse engineered, and the onward distribution of data is appropriately licensed, especially for B2B API redistribution and white labels.”
There’s another part that’s critical for brokerages to follow if they want to implement real equities or contracts-for-difference with single stocks. Brokerages will want to ensure that the stock exchanges their providing CFD products through are compliant with the licensing data. This is particularly easy for white label brokerages; at some point during the stock trading agreement, there will be some white label solutions determined with the respective stock exchange. Reaching this agreement has become mandatory for digital currency exchanges, as has having a license from the same regulator that oversees the stock exchange.
There were a few exceptions before it became a mandatory agreement. These individual exchanges weren’t members of the stock exchange. This has allowed for different brokerages to maintain stocks in whichever financial markets they desire. Rafah continued his comments with, “Some of our clients are looking into adding equities and are finding that the best they can do is set up a white label with Interactive Brokers, but even that isn’t ideal as it brings many technological problems with it.”
The MetaTrader 5 Platform
There’s been a significant problem influencing brokerages decision to move towards multi-assets. The largest is that the MetaTrader 5 Platform isn’t fully compatible with equity trading. Considering that a large portion of brokerages maintains its services through the MT5 platform. Right now, MT4 remains the most used platform, but slowly, brokerages are moving to MT5. There have been discussions of the software being upgraded, but no official announcement has been made. However, as we speak the MetaTrader 5 application isn’t capable of handling equities. Luckily, trading stocks through the MetaTrader 5 application is available. Still, it’s difficult as the program isn’t directly built for stock trading. When and if the program is upgraded, it’s estimated that numerous brokerages will apply for stock trading.
Rafah Hanna spoke about the imposing issues of the MT5 and MT4 platforms by saying: “MT5 is just not ideal for trading in the stock market. Take something basic like a search function. On MT5 you cannot look up a company name – the platform only lists a stock’s symbol. So, if I want to trade in a stock, I have to find its symbol online then go back to MT5 and look for it.”
The task of upgrading trading platforms to account for stock exchanges is immense. Not only is this a shift in operations, but it’s a shift in operational cost and potential profitability. The decision to make the change shouldn’t be taken lightly. Most retail trading firms like to state that they operate entirely on an electronic communications network. However, this is typically a false claim. Most run on a blockchain network that’s designed for digital currency trading. Switching over to an ECN network would be a hurdle that most brokerages wouldn’t be able to overcome. It’s also become incredibly harder to book clients into a never-ending userbase, as stock exchanges allow for only specific percentages of clients to sign up for the service.
The former executive with Integral, Norbert Lukasiewicz, who now provides EFX consulting services to financial institutions worldwide commented on the hurdles that face changing to a different trading model. He said: “Most match-principal brokers have set up their trading systems, back-office software and reporting methods to fit with that particular trading model but offering DMA equities requires the end-client to be an owner of the purchased stock. That means that the typical matched-principal setup must be replaced by an agency model where the broker is transmitting orders on behalf of its clients.”
Becoming a multi-asset brokerages raises numerous questions against any brokerage. The main problem is speed and how these exchanges will be able to maintain superior execution times for clients. Typically, contract-for-difference brokerages have provided fast trading that ranges at 20 milliseconds for firms like FXCM. This is still considered slow for digital currency brokerages, as stock exchange-enabled firms provide execution times in the microsecond’s category. The slight variation in speed will deter anybody trading in stocks with interest in a potential multi-asset broker. Ultimately, this is a latency error that is created by the lower liquidity maintained through stock exchanges. These crypto exchanges that run under the B-Book model for years but cannot do the same with stock trading. These issues will be hard for any digital currency trading firm to overcome.
Lukasiewicz continues his statements publicly by saying: “Exchanges are central limit order books and essentially have a limited supply of liquidity. Because of that, speed becomes essential as it increases your chances of getting your order executed at the desired price, but CFD brokers are used to milliseconds latency, whereas the exchange world is operating in microseconds. To put it, the tech used for CFD trading may not be quick enough for trading equities. If that’s the case, it will result in slow market data and ultimately a very high ratio of slippage on execution.”
The operational structure for these crypto brokers will also deter the firm from being approved for equity trading. There’s always a human component when creating partnerships with stock exchange firms, but regulation ensures that only a small number of digital currency trading exchanges will be approved for stock-enabled trading. The legislation stopping these firms is the lack of employees that have enough knowledge of the stock market. This means if Bitmex, Binance or any other exchange that wants to become multi-asset will need to be trained thoroughly on stockbroking. This won’t be difficult, considering that banks in the United Kingdom allow for share dealing training seminars or classes. This applies to large firms and small.
Aside from not being trained on stockbroking, multiple firms have decades of experience in this financial market. Competing against firms like JP Morgan or Charles Stanley will be a nearly impossible task to accomplish.
The Chief Executive Officer for London-based retail brokerage CityPoint, Salam Alaswad, commented on these brokerages lack of stockbroking knowledge. He said: I think any CFD firm adding stock trading facilities may need to recruit a new team across different departments to deal with the new asset class they are looking to offer. At a minimum, they would have to provide enhanced and thorough training for their existing employees. For the average person, I think an investment platform offered by a bank is going to be much more convenient. There are a minimal number of firms active in the CFD space – I can count them on the one hand – that provide an appealing investment service. Aside from them, I can’t see why anyone would want to move their investments to a CFD broker.”
The Lack of Profit
Whichever retail trading firm can surpass these hurdles will still face one critical problem that faces all brokers in the stock market. The problem is stockbroking doesn’t earn significant sums of profit until the firm becomes famous on Wall Street. This is a task that isn’t easy to overcome for any firm. It’s estimated that in the first three months of a new multi-asset exchange offering products from the stock market, they’ll only make $1,000.00. This could be a false estimation, but stock market analyzers are hardly wrong about this sort of thing.
The issue is that there are substantial data fees and costs for compliance. This makes it considerably harder to make money without a significant client base. Salam Alaswad stated: “CFDs are very lucrative products for those firms offering them,” noted Alaswad. “Adding much fewer products, dealing with the hassle of changing and amending all of your systems and controls may not be a sensible option for many firms. I think that many traditional equity brokers are the ones looking to offer CFDs.”
Even with all these hurdles facing brokerages, it’s still anticipated that numerous digital currency firms will try to become multi-asset shortly. However, don’t expect the entire cryptocurrency and blockchain industries to go multi-asset quiet yet.