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Top 10 Tips for Selecting an FX Prime Broker and Liquidity Provider

Jonathan-BrewerThe Retail FX trading marketplace is experiencing rapid growth. Retail spot trading is currently US$313 billion or 7.9% of total spot trading. It has nearly doubled since 2007 when it stood at US$136 billion*, and the rise is set to continue.

Such growth presents huge opportunities – but with an increasingly crowded market, how do you select which FX Prime Broker to partner with? What should you look for in a liquidity provider? And what are the areas to consider if seeking a white label solution?

London-based Sucden Financial offers a ‘one stop shop’ for retail brokers seeking access to FX, whether they require a liquidity-only or a fully front-to-back technology solution. The organisation’s Head of e-FX Business Development, Jonathan Brewer is ideally placed to offer advice on key areas to consider when selecting a prime broker. His top 10 tips are listed below:

1. Trust: This is paramount as it’s important to find an organisation who can work with you on a long-term basis. In today’s volatile climate, a company’s reputation and strength are key – you don’t want to find that your broker is not in business in a year’s time.

2. Integrity: Is your broker trading against you / your clients? For example, as an ECN Broker we believe in the importance of matching trades between market participants and absolutely not trading against our E-FX clients. When selecting an FX prime broker in the retail space, ask them about their execution model and whether they can demonstrate STP.

3. Pricing: Pricing is critical – make sure you compare the pricing available on the market and that these prices are available on a range of industry leading platforms, offered on a 100% STP basis.
When choosing a white label solution, liquidity is ultimately the most important factor. The tighter the spreads, the greater profit margin there is available for the broker. Having tight spreads and deep pools of liquidity naturally helps the broker to lower trading costs and improve their competitiveness.

4. Is your Broker also a Competitor? Many of the major FX brokers also offer their services to retail clients and are therefore a major competitor to their broker clients. Select a broker which does not offer its FX liquidity or MT4 services to retail customers – this will avoid any conflict of interest.

5. Broaden Your Options: The last six months have been tough for FX brokers and, as such, they’ve focused on trying to differentiate themselves and diversify into other products. We have seen a significant rise in demand for retail brokers to offer CFDs as part of their portfolio, particularly indices and commodities.

Whilst FX is and will remain the key product, be aware that many clients are looking at alternatives, too. Select a broker with a broad and evolving offering. On top of FX and bullion, index and commodity CFDs and DMA single stock CFDs are also increasingly in demand.

6. A Bespoke Approach: In this increasingly crowded market, having tailor-made solutions can really help a retail broker to gain a competitive edge. As an example, we recently built a DMA single stock CFD solution into MT4 in response to a particular client request, enabling trades to be covered on an underlying exchange. Partner with a prime broker who can offer far more than ‘off the shelf’ products.

7. Human Interaction: Whilst electronic trading is a huge growth area, make sure you select a partner with responsive and proactive client support. Assess the level of service you will receive, make sure that execution support teams are available on the phone on a 24 hour basis to deal quickly and efficiently with your enquiries. Avoid selecting a broker which relies on an automated answering or call back service and make sure you will be given the direct telephone number of someone who can help you at all times.

8. Reliability of the Feed: Is your broker’s price feed consistent and reliable? There are some brokers who offer competitive pricing, but their clients experience regular price spikes which cause problems, for example, by incorrectly triggering client stops. You should look to see by how much the broker’s prices widen around value date change and periods of high market volatility – this can vary a lot between providers. You should also consider whether your broker is skewing their prices against the positions that you are holding, as this will cost money to you and your clients.

9. Balance sheet: Look at the size of the balance sheet of the firm that you plan to trade with. Their balance sheet will have an effect on the size of trades they are able to execute for you. To a certain extent, it could also impact on the security of the funds that you place with them.

10. Regulation: Choose a reputable regulated partner.

Brewer concludes with a final piece of advice, “I think one of the mistakes companies make in the world of electronic trading is forgetting that trading itself is a relatively simple process. Clients want to buy and sell quickly and the vast majority want a platform that’s simple. It’s nice to have bells and whistles but a lot of it can simply be noise. Keep it simple – and aim for high quality in terms of bespoke solutions and exemplary service.”

About the Author
Jonathan Brewer is head of E-FX Business Development at Sucden Financial in London – an organisation with 40 years’ experience in a broad range of financial markets. With responsibility for E-FX strategy and sales, he has played a key role in driving Sucden Financial’s E-FX business forward over the last few years. For further information on Sucden Financial, visit www.sucdenfinancial.com

Sucden Financial Limited is authorised and regulated by the Financial Conduct Authority.

*Figures published by Aite Consulting