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Industry Insights

Situation
Complication
Solution

Situation

The early days of the retail online trading industry are, or more accurately should be, a thing of the past. Why? Because the latest business and technology transformations have finally made the impossible possible.

With daily volumes estimated at over 300 billion US dollars, retail Forex (your trades) already accounts for 8% of the global Forex market. It has proven to be one of the fastest growing, and nowadays one of the most sought after, segments of the Forex industry.

Tier1 Bank and non-Bank (e.g. hedge funds, dark pools, etc.) liquidity pools are now actively seeking retail liquidity, and as a result opening up once restricted direct access to the interbank market. In other words, all retail trades combined are worth billions - probably as much as those of any given major financial institution - and what used to be a ‘No-Business’ has now become without doubt ‘The Business’.

Robust bridging, aggregation and clearing technology have finally emerged to fill the gap between the interbank market and popular retail trading platforms, such as the MetaTrader, which were historically strictly designed to operate under market making conditions (lacking sufficient technology to provide direct access to the interbank market).

As the industry has evolved, Retail Traders may now benefit from direct access to the interbank Forex market under the same conditions as with any given financial institution, while using their preferred retail trading platforms, including the MetaTrader.

These days, Agency Only Model (100% DMA/STP Execution), Transparent Pricing (i.e. no spread mark-up), MiFID compliant Post-Trade Transparency (i.e. who filled your trade / when / how fast / at what price) and Full Anonymity (anonymous Stop Losses and Take Profits to the counterparty) should ideally be the only standard for MetaTrader users, who should not be distracted by bonuses and other cash promotions.

Unfortunately this is not the case.


Complication

Numerous so called “world-class” renown Retail Brokers (i.e. Alpari, FXCM, FXDD, FX Sol, amongst others) are still resilient to embrace the change.

Not only do they actively prevent access to all the above by raising their thresholds on “Pro” accounts and/or by adding intentional complexity to their offering (e.g. too many account types, terms and conditions, pricing and execution structures etc.), but they also tend to attract retail clients by spending millions of dollars on numerous cash promotions, such as credit bonuses and advertising campaigns, in order to distract their clients’ attention away from what truly matters, which is:

  • The Trader’s Side: How pertinent is the order I want to execute?
  • The Broker’s Side: How accurately, how fast and by whom will my order be executed?

Why add more complexity by selecting the wrong broker when margin trading itself is one of the riskiest forms of investments? Leverage can work against traders as well as for traders, and losses can exceed one’s entire investment. That is more than enough to cope with, so everything else should strictly lead towards Retail Traders’ interests in order to facilitate their chances of success, without any compromises.

The world’s best and most advanced technology would be worth nothing if it wasn’t for the applications leveraging from it. How good can any innovation such as social trading platforms be if in the end your trades are to be executed by a Market Maker who will have total control over your trades’ pricing and execution?

Any broker claiming an STP / NDD / DMA / ECN / PRO offering may nevertheless “make the market” even if partially so (i.e. STP 50% of clients’ orders and make the market on the other 50%). In theory, there is nothing wrong with this configuration as long as the broker runs an ethical business. In practice, regulators such as the NFA and the FCA have both demonstrated condemnable practices conducted against retail clients’ interests by such "world-class" Retail Brokers claiming out loud STP/NDD operations. The temptation to manipulate pricing and execution in the sole interest of the broker remains current practice in the industry.

What truly needs to evolve and be eliminated is the widespread conflict of interest lying behind most of the latest innovations. Social trading networks, automated trading platforms, or ECN/Pro account types, as useful as they are, must now leverage from the latest business models to make a significant difference. Otherwise they will act as nothing more than a cover-up hiding the disappointing truth driving the retail trading industry today ( where Retail Traders are prevented from direct access to the markets).

Are Retail Market Making Brokers and Tier1 Banks both Market Makers?
Simply put, yes. But, although Tier 1 Banks do operate in the same way as Retail Market Making Brokers, and have total control over pricing and execution, there are significant variations between the two.

Firstly, in both cases your profits are indeed the Market Maker’s losses, except that retail liquidity (your trades) only represents a fraction of any Tier1 Liquidity Provider’s business, whereas in fact it represents the vast majority of any Retail Broker’s business, hence the vast majority of its profits & losses.

Additionally, Tier1 Liquidity Providers usually transform retail liquidity into added-value interbank liquidity. Whenever the market suffers from shortage of liquidity (in other words, not enough liquidity available on the market), Tier1 Liquidity Providers tend to source additional liquidity from the rapidly growing retail market in order to resell it at a better price to other Tier1 Liquidity Providers, and this is how they realise a profit.

In theory, in the very unlikely event where every single Retail Trader would realise a profit at the exact same time, and if all retail trades were straight through processed to Tier1 Liquidity Providers (which is hardly the case nowadays as the vast majority of Retail Brokers are making the market, hence preventing Tier1 Liquidity Providers to access retail liquidity), they would suffer an aggregated loss of over 300 billion USD. This would certainly appear as a significant amount if taken out of context, yet it only would represent 8% of the total daily global Forex market volume which may not be sufficient to bankrupt the market players as a whole.

The same example applied at the retail brokerage level would have other consequences. Any Retail Market Maker (i.e. the vast majority of Retail Brokers) may then suffer from dramatic losses, possibly leading to bankruptcy.

Furthermore, trading under a 100% DMA/STP Agency Model grants Retail Traders with full anonymity on the interbank market. Stop Loss and Take Profit limits are kept within their Retail Broker books, out of reach from Tier1 Liquidity Providers, hence preventing any potential price and execution manipulations at the interbank level, such as Stop Hunting or Requoting.

As long as Retail Brokers purposely trap their clients with their misleading and precarious terms, Retail Traders will inevitably suffer from the full exposure of their trading strategies, including brokers’ visibility on their Stop Outs and Take Profits, as well as an undeniable conflict of interest (since client profits are their brokers’ losses).
In other words, trading with a Retail Market Makers equates to kneeling down at their mercy.

Inevitably, over recent years, and despite all the latest business and technology improvements, questionable practices conducted by numerous so called “world-class” regulated brokers have been exposed by renowned financial regulators such as the NFA and the FCA. Such cases have been fully referenced online and we at JFD Brokers invite Retail Traders to run their own research accordingly. Most cases are clear examples of unfair and unethical business practices, which often prevent Retail Traders from realising profits, or worse force their losses.

The question remains, why and how are such Retail Market Making Brokers still attracting traders?
This can be attributed to two main points:

  1. Until most recently there were no viable alternatives.
  2. Such alternatives are not yet known to the retail public.

It is immensely concerning that nowadays new Online Retail Brokerages are being launched around the world every other week. In fact, it is alarming at how easy it is to set up a new brokerage in a few simple steps:

  1. Raise some funds - a few thousand would suffice.
  2. Setup a White Label partnership with a Tier2 or Tier3 unscrupulous Retail Market Maker.
  3. Build a flashy website and kick-off marketing and promotional campaigns online promising great returns and attractive welcome bonuses.

From the most newly opened to the largest “world-class” established firms, nowadays most Retail Brokers misleadingly claim Transparency, Fairness, STP, ECN, NDD and a number of other attractive attributes.

At JFD, we believe it is about time that the retail trading community challenges such brokers with the following important questions:

  • Are you fully authorised and regulated by a officially recognised financial regulator such as NFA, FCA, CySEC, ASIC, BaFin etc.?
  • If so, does your license grant you permission for “Dealing on Own Account” (i.e. permission to “make the market”)?
  • Most importantly, will you systematically provide upon my request a MiFID Compliant Post-Trade Transparency Execution Report presenting which Tier1 Liquidity Provider filled my trades?

If any of the above questions are answered negatively, chances are your broker does purposely maintain a (most lucrative) conflict of interest with you and, as described previously, may not be in business to protect your sole interests.


Solution

Ask JFD: We at JFD Brokers protect our clients’ interests by enabling the retail trading community to make informed and responsible decisions at all times. How? By providing an open access to insider’s knowledge-sharing via the ASK JFD initiative. The ASK JFD section on our site proactively and reactively addresses any grey-areas, concerns, and queries that the retail trading community may have about JFD, our competition and the industry as a whole. Our highly experienced Senior Management Team will expose overtime, and with the highest degree of integrity and transparency, the worst and best brokerage practices out there affecting your trading experience, and they welcome your questions, - particularly those which the vast majority of Retail Brokers would avoid.

Zero Conflicts: We operate a revenue model which is strictly commission-based, and we are exclusively licensed as a Matched Principal Broker (100% Agency Model), meaning we may not hold any proprietary positions, thus we have no exposure, and are therefore only acting as an intermediary between our clients, Liquidity Providers and Major Exchanges. Simply put, we have no rights to “make the market”, hence we have no conflict of interest with our clients and are strictly in business to protect their interests. The more you trade, the more profitable and loyal you are, the more successful we both shall be. Our clients’ interests are our main and sole interest, full stop.

Transparent: JFD Brokers protects its clients by granting them full transparency, both pre-trade (no spread mark-up) and post-trade (full Execution Reports presenting the name of the Liquidity Provider which filled their trade, how fast, at what price and at what time). That is how transparency is understood and implemented, that is how the MiFID Directive sees it, and that is precisely how we believe any Retail Broker should operate. Anything else cannot be qualified as transparent by MiFID standards.

Fair: JFD offers a one-for-all simple solution to all our clients without any discrimination: 1 account, multiple platforms, with access to all markets, backed by a friendly, open and helpful Customer Support. Clients testing our platform starting with a minimum deposit of USD 500 as well as clients fully leveraging from our solutions with deposits of USD 500,000 are granted the exact same treatment. Moreover, every single one of our clients’ orders are systematically STP to our Liquidity Providers on a "Fill or Fill" basis (i.e. no requotes) with both positive and negative slippage enabled (so no broker intervention on price improvement). We feel doing business this way is the only way to justify calling ourselves: Just Fair and Direct.

Anonymous: Another way in which we protect our clients’ interests is by granting them with full anonymity at the interbank market level. While without any exceptions 100% of our clients' trades are DMA/STP to the marketplace, our clients' identity and orders are also kept 100% anonymous (including Take Profit and Stop Loss limit orders) to our Liquidity Providers, thus minimising any information leakage risk. This is absolute protection against the unethical practice of Stop Hunting.

Knowledgeable: We at JFD Brokers provide unrestricted access to professional coaching. Our Just Fair and Direct specifications have attracted some of the highest-acclaimed financial markets analysts in Europe who found in JFD the absolute answer to their clients' growing concerns and complaints with regards to the quality of service and level of integrity delivered by Retail Brokers in general. Again, the world’s best and most advanced technology would be worth nothing if it wasn’t for the applications leveraging from it. In essence, what is as important to us as developing and deploying an absolute trading environment is to attract and support knowledgeable, sophisticated and satisfied clients whom in turn will generate a repeat business and become our ambassadors (through positive word of mouth).

Scalable: We invest in technology rather than marketing, always deploying the most cutting-edge infrastructure money can buy in order to process all trades real-time to the interbank market without suffering from any bottle-necks, including those generated by the most demanding EAs, HFT, and Quant strategies. Indeed, our IT infrastructure supports up to 10,000 trades per seconds within the MT4 environment and up to 50,000 trades per seconds outside of the MT4 environment (e.g. connecting Quants and HFT strategies directly to our liquidity pool).

Low Cost: We sustain the lowest trading costs possible. We have achieved this by scaling down our operating costs (by establishing our headquarters in Cyprus and other operations in Eastern Europe rather than in more expensive locations such as London or New York, and by limiting marketing expenditure to the strictest minimum) while guaranteeing the highest quality of service that our clients deserve and expect from a Retail Broker with worldwide ambitions. We also increase our sources of revenues from by operating retail trading, asset management, IT solutions, and even FX delivery activities under one single proprietary IT and regulatory environment, hence optimising our business efficiency through economy of scale while sustaining a solid and serene business model over time.


On a final note, we at JFD Brokers consider ourselves as genuine game-changers and are immensely proud of the Just Fair and Direct trader-centric solutions we have on offer.

We would like to invite the retail trading community to try us out in order to take immediate advantage of the latest business and technology advancements in our industry. Our specifications have been proven to increase nominal trading volumes and clients profitability in the long run. It is a no-brainer - we expect to increase account acquisitions / client retention, trading revenues, and overall our customers’ level of satisfaction. This is only the beginning and we have many more innovations in the pipeline for you to benefit from.

Once again, our specifications have been proven to increase Nominal Trading Volumes and Clients Profitability overtime. Our offering shall be a no-brainer and we expect to increase accounts acquisition / retention, trading revenues, and overall clients’ level of satisfaction over a Quick-Win.

In today’s financial turmoil, while a majority of "world-class" established Retail Market Making Brokers are increasingly experiencing regulatory pressures, volumes drops, income losses and client disengagements, adopting a transparent and disruptive WIN (Partner) + WIN (JFD) + WIN (Client) model makes a lot of business sense.

We look forward to engaging with the retail trading community and growing a long-term successful relationship with traders and investors of all kinds from all around the world.

We are JFD Brokers, your game-changing partner of choice!

ASK JFD

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Risk Warning:

Trading Foreign Exchange and Contracts for Difference (CFDs) is highly speculative and may not be suitable for all investors. JFD Brokers offers trading on margin. The leverage created by trading on margin can work against you as well as for you. Only invest with money you can afford to lose and ensure that you fully understand the risks involved. Seek independent advice if necessary and review our Risk Disclosure and Privacy Disclosure before opening an account. Copyright © 2012 JFD Brokers Ltd.
 
JFD Brokers Ltd. is authorised and regulated by the Cyprus Securities and Exchange Commission - CySEC (Licence number: 150/11) and is a Member of the Investor Compensation Fund (ICF). JFD Brokers Ltd. is registered with the German Federal Financial Supervisory Authority - Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) (Registration number: 126399), the British Financial Conduct Authority - FCA (Registration number: 580193), the French Autorité de Contrôle Prudentiel et de Résolution - ACPR (Registration number 74013) and is MiFID compliant under the Investment Services and Regulated Market Law of 2007 (Law number: 144(I)/2007). JFD Brokers Ltd. is licenced to provide the investment services of Agency Only Execution (i.e. reception and transmission of orders, execution of orders on behalf of clients) and Portfolio Management in relation to Transferable Securities, Options, Futures, SWAPS, Forward Rate Agreements, Financial Contracts for Differences (CFD) and other Derivatives. JFD Brokers Ltd. is also licenced to provide the ancillary service of Safekeeping and Administration of Financial Instruments.
www.jfdbrokers.com is owned and operated by JFD Brokers Ltd., Cyprus.
 
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