Tom Arran Tom Arran, Friday 28th June 2019, 9:42 AM GMT+0000
FX Brokerages

Will Retail & Institutional Trading ever Co-Exist?

The norm with FX Brokerages has always been to separate institutional clients and retail clients. This has even extended to individual traders through the brokerages and financial institutions. However, there is a chance that this is all about to change and that these two client categories will begin co-existing with each other.

It’s not the markets that act as the critical difference between institutional and retail clients. It’s the currencies that they trade with, which are determined by purchasing and scalability. The amount of institutional trades enacted is lower than that of an individual retail trade. This is typically reflected through the trading systems used by the FX Broker.

However, a new version of trading is trying to be passed legally by FX Brokerages worldwide. This new system for trading would allow for retail and institutional clients to trade on the same network. The system will somehow manage the different capitals, risk management and order routing between institutional clients and retail clients. This will apply up to 100 Million USD Transactions.

The Issues

There are a series of issues that will plague this style of trading, though. The first and most significant hurdle that’ll need to be overcome is bridging the gap between small/large retails clients and small/large institutional clients. Transaction costs will need to be estimated by the trading valuation of the client. This requires longer settlement dates, which in turn will mean clients are receiving their profits slower. This for large institutions will prove to be difficult, and another system will need to be enacted to ensure these financial institutions receive their settlements promptly. Developers are currently designing the software required to manage these various trading valuations and settlement periods. However, even the most sophisticated FX Trading Exchanges will still struggle with co-existing these retail & institutional clients.

There’s also an additional issue with hedging, which is the process of managing the risk of retail and institutional clients. Systematically, their hedging is different from one another, and this is an area that will require dozens of developers to design. A system which uses detailed analysis for trade aggregations is needed to bridge the gap of hedging between institutional and retail clients.

Another issue is streamlining solutions for post-trading, which will be problematic. Central and Local Banks both work to keep FX Trading out of their transaction networks. This is because they cost more money, take longer to settle for the clients and increase FX Market exposure, which in-turn is horrendous for the banks. No bank will want to manage these small trades, and will only one to process larger institutional clients.

The final issue is regulation, which is always changing for the FX and Forex Markets. Currently, small and large retail clients don’t have to undergo the same regulatory standards that large institutional clients must accommodate. Bridging the gap between retail and institutional trading would mean that small retail clients would have to abide by the new regulation standards from the European Securities and Markets Authority.

Conclusion

Bridging the gap between these two forms of client trading is possible. However, it isn’t for the best as it’ll dramatically change the market space and over time, abolish small retail clients. It’s most likely that these new systems are coming as it’ll cost less money, energy and time for the FX Brokerages.

Tom Arran

Author: Tom Arran

Tom has over 10 years experience on crypto currencies, first mining bitcoin on an old university computer for 20 cents a coin to now day trading bitcoin in between helping to start whichbroker.com. Tom has previously held roles at a leading EU brokerage and provided insight and consultancy work for number of UK banks in Crypto. Tom Arran can be contacted at [email protected],

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