“Mind The Gap!” – The life and times of a man on the move Episode 93 – FinanceFeeds

In this weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment

Just how much is the value of nothing?

During the course of recent weeks, I have been approached by a series of private individuals in what can be described as very much emerging regions for retail FX, largely across South Africa, Ghana and certain areas of South East Asia.

Whilst all of those regions bear absolutely no similarity to each other in terms of lifestyle, culture, language, business environment, retail customer bases or commercial opportunity, the one thing they do seem to share is a small business infrastructure operated by introducing brokers (IBs) and self-appointed ‘money managers’ who really are quite simply MetaTrader 4 users who operate their customer accounts via a MAM attached to their own trading account.

The approaches by several individuals in those regions recently have been to ask if I know anyone, company or individual, who would sell a MetaTrader 4 client license – and by client I mean non-server – in order for them to have an almost ready made brokerage.

I made a few cursory enquiries to see if I could help out, however drew a relative blank because there is a disparity the size of the Hoover Dam in terms of what sellers expect to get for their MetaTrader 4 client, and what any opportunist potential start up in the townships around Johannesburg is prepared to pay to acquire it.

I was prompted again this week, as the will to buy appears to be very strong, however who is in the right here?

Buyers, according to these conversations, are prepared to pay approximately $100,000 to acquire the MetaTrader 4 client, whereas sellers, which are relatively sparse by contrast to those wishing to buy, want upwards of $250,000. As the Everly Brothers once famously said… Dream Dream Dream.

One particular seller responded to my enquiries by stating that they would take $190,000, however when I relayed this to a potential buyer in South Africa, he said that he had already approached that particular seller two months previous, and had been given a price of $250,000. Of course, no buyer has been forthcoming at that price, so clearly lower expectations are beginning to form.

Most of those looking to acquire a MetaTrader 4 client system are looking for what they consider to be a whole business, including MetaTrader license, active clients, and the brokerage business that operates it. I say operates it, because there is no ownership of a client base for brokers using MetaTrader 4, as the intellectual property is all hosted on MetaQuotes servers.

For this reason, it is impossible to own or scale any aspect of a business that leases its technology from MetaQuotes, and impossible to grow a business to IPO levels, because no auditor would find anything to value, as there is no internally owned property.

Therefore, what exactly would anyone be buying for $100,000?

Not much, is the answer.

Certainly, $100,000 does not seem like a large outlay to be able to acquire a ready made business which has everything in place and already has revenue generating clients, but the important thing to bear in mind is that you would not be acquiring a business at all.

It is more a case of paying $100,000 to become an affiliate marketer for MetaQuotes, and when you look at it this way, that is damn expensive.

There is no backward compatibility support for MetaTrader 4 anymore, largely because MetaQuotes decided a few years ago to step outside of the general practice of software companies by suddenly discontinuing all support for it, in order to force brokerages onto the already ageing MetaTrader 5 solution, and in doing so, considering itself to be a platform monopolist.

Yes, it is a monopolist, but only in the affiliate marketing based off-the-shelf sector.

Developing and owning your own platform used to be a very expensive endeavour, and hiring staff to support it would be resource hungry rather in the same way that banks and large institutions have enormous teams and project divisions which are on site at all times.

There are some incredibly sophisticated proprietary platforms around these days, developed by very well established companies such as CMC Markets and Swissquote, all of which are flagship products and have had development and support investment to the value of far in excess of the total annual revenues of over 100 brokerage businesses in Cyprus.

That is the top end of the market.

However, coming from firms that have tremendous expertise in developing platforms for banks and institutions as a vendor rather than in house teams, there are now more choices as those companies angle themselves toward the retail FX market. Specialists such as DevExperts and CQG have very high quality solutions, and yes, they may cost more than $100,000 if designed specifically for your brokerage, but not much more in the general scheme of things, and you would actually be buying a product that is specific to your company and would be able to own your intellectual property, that being the client base.

Thus, it is fair to say that buy paying any money at all for a MetaTrader 4 with clients and a license (usually in a worthless offshore region) is unwise, and that the value of such a package is around zero.

Even for up and running firms making $500 million revenues per month as is the case with MetaQuotes’ largest client, IC Markets, the actual value of the business is very little, due to it being an affiliate marketing, churn/new deposit model which is now under a Seychelles license.

When the Chinese government finally chops off the IB channel, what then? There is no ongoing value. Just enormous monthly revenues. This, therefore is similar to a franchise model, rather than a wholly owned business.

As smaller retail FX firms have evolved from the b-book closed environment to the provision of genuine market access, in many cases the marketing strategy remains completely outmoded and remains in the dark days of lead buying and affiliate marketing. I have over a long period of time looked at the unsustainable expense of this model and how modern engagement techniques are far more suited to quality brokers.

Attracting and retaining clients is now one of the biggest challenges for brokers as the FX industry matures and as CPA (Cost Per Acquisition) which is a major factor within an online advertising model grow highers, averaging $1000 per funded client in western countries, perhaps more in emerging markets due to the lack of security of funding methods, and the small average deposit sizes.

To tackle the issue, some of the smaller retail brokers to whom cost of acquisition and retention is extremely important, have been ever more active in developing their differentiation angle via various means, ranging from promoting the social trading experience to offering deposit bonuses and cash rebates, as well as loyalty programs and interactive marketing campaigns, while automating data intelligence for the sales teams.

On that note, trading platforms such as MetaTrader 4 may pose an issue given that the ubiquitous trading platform acts both as a key facet with which to onboard clients and as a retention problem, becoming one of the main criteria when choosing a broker to open an account with, which also means those brokers risk being easily substituted following a minor incident or an aggressive marketing campaign by a competitor.

This may well appear as though it is a complex lesson in mathematics; a matter in which accountants must balance the cost of leasing trading infrastructure from a third party platform supplier against the cost of buying media and generating leads, then subsequently factoring in the cost of sales staff to call the leads and then add up the profit post-conversion.

The reality is that in today’s retail FX industry, where the end users have become ever more sophisticated and can absolutely tell if a broker is surviving from their deposited capital instead of connecting to a live market, which has exponentially improved the standards in terms of execution of trades within many medium sized retail brokerages, however it has left a conundrum, that being the completely outmoded marketing model which is not compatible with the commission business that brokerages offering genuine market execution now provide.

Most importantly, however, aside from the 1231 near-identical MetaTrader 4 retail entities that currently exist, is that the execution model required nowadays means that brokers should do what brokers are supposed to do – charge a commission for processing trades to their liquidity provider and provide their clients with an aggregated price feed consisting of prime of prime liquidity from Tier 1 banks and non-bank market makers.

This is excellent for customers if conducted correctly, but means that brokers pay a dollar-per-million charge for their liquidity management system and market liquidity, and can charge a commission rather than have the vast margins that had been the case within so many smaller brokerages several years ago which resulted from the profit and loss model that many operated.

The brokers that came to market in the middle of the last decade with a profit and loss model (living from client losses) were never able to gain market share among quality jurisdictions where the established competition was already operating a good quality trading environment for clients – and rightly so, nobody laments the passing of firms which do not have their customers’ best interests in mind – instead coming from the affiliate marketing and media buying sector.

Ergo, in places like South Africa, where regulation is very strict and advanced, this needs to be a major consideration.

Clients can come and go as they please from a MetaTrader platform, they aren’t owned by the MetaTrader licensee, plus operating a lead churning business is infra-dig in the eyes of the South African FSB.

Now, many of those entities have adopted proper execution, facilitated by the market infrastructure specialists and prime of prime brokerages that serve the retail FX industry, but their marketing techniques in many cases remain in the mid 2000s, and in the retail FX industry, the mid 2000s is akin to the dark ages.

The fact of the matter is that high CPA of today requires ambitious goals when it comes to the client base, which means having enough available funds to embark on large marketing operations and have a unique value proposition to lower the CPA.

The quest for differentiation may also lead to the in-house development and maintenance of proprietary software despite the obvious costs because in addition to promoting their own platform to their clients and increasing the rate of client retention as they grow accustomed to an environment they will not likely find elsewhere, these brokers can also reduce their costs or even make profit out of offering white labeling solutions to other firms.

Simply, buying leads and hoping for sales calls to convert them into live clients is futile, therefore buying a ready made lead list on an offshore MetaTrader 4 is equally futile.

This is because the same leads are being recycled between brokers, the same leads are being targeted by firms offering similar propositions, and the media buying cost vs the actual conversion rate is as low as 1% in the retail sector.

Hence, one-off retail clients from non-aligned countries, with very little capital and in some cases no chance of being able to satisfy compliance requirements are depositing between $200 to $1000 as a first time deposit, and the cost of acquiring the customer is now past $1500, with a lifetime value of just three months.

Whichever way that is viewed, it is a loss.

One of the reasons for the high cost and lack of efficiency is that, according to two London-based media analytics firms that have provided digital marketing data to FinanceFeeds, the potential customers are in many cases no longer potential customers because these are leads that have been to over ten brokerages, hence the same people are being bombarded by the same calls from almost identical companies, and many have lost their initial deposit with the first company, and are therefore now worn down by the repetition of calls.

During meetings with several retail FX brokerages in Cyprus a while back, it was explained to FinanceFeeds that the dubious practice of onboarding clients by asking sales staff who have worked for other brokerages to bring leads with them – effectively stealing from their former employer for a fee – is still very much in existence.

As I have driven around the island on various trips to Cyprus, I have seen advertisements made by some small retail firms which are aimed at recruiting sales people, with the recruiters specifically stating that a ‘bonus’ will be paid to new employees who are able to bring a database with them, effectively encouraging the stealing of intellectual property, and whilst this is insidious enough, it contributes to the small lead pool that is being overtargeted.

Companies wishing to reduce their costs and increase the quality of their client base, which in turn will increase the image and reputation of the broker should look toward partnering with entities that can help them get their message in front of dedicated traders from bona fide regions who have had a long period of activity and therefore will have a longer lifetime value and be more of a sensible read-across for the broker.

Anyone buying an up and running MetaTrader 4 in an attempt to morph from a small IB in an emerging market to a broker will find themselves in the same situation very quickly.

It is not simply a case running out the existing clients quickly and then acquiring leads from popular retail websites with large traffic, for the reasons already stated here.

It is also very clear that entities and individuals peddling leads at $20 to $30 per lead have either stolen them from their previous employers, or are offering recycled leads with very little chance of conversion, and in trust-based South Africa, where face to face relationships between client and introducing broker are paramount, and clients expect the introducing broker to place their business with bona fide long established firms such as IG Group (HUGE in South Africa) or Saxo Bank, this will not work at all.

Thus, IBs wishing to become brokers should do exactly that – become a broker. And that means building your business from the ground up, and designing a system (or having it designed by a specialist software company) that will appeal to your traders and then concentrate on good quality service, execution and pricing.

Yes, it will cost $500,000 rather than $100,000, but you would be generating a future business, and not throwing $100,000 down the drain.

Wishing you all a super week ahead!