For almost two decades, retail FX brokerages have been almost totally reliant on the MetaTrader 4 platform, which is effectively an off the shelf, standardized solution geared very much toward affiliate marketing and b-book spot FX.
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 $1500 per funded client in western countries.
To tackle the issue, some of the smaller retail brokers to whom the 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.
As the infrastructure of OTC electronic trading firms becomes the increasing subject of regulatory remit as defined by the pan-European MiFID II which uses the coercive powers of the European Commission to ensure all market infrastructure and execution policies are standardized across multiple jurisdictions, brokers find themselves faced with high expectations from extremely analytical traders in the most high-quality regions for electronic markets, and difficulty differentiating themselves from other retail brokerages using the same third-party platforms.
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.
In reality, so ingrained has the MetaTrader platform become that if its developers change the method by which it is capitalized, a whole different reality would be faced by most retail brokers globally.
In just over one week, the MetaTrader 5 platform will transition toward a ‘leasing’ model, giving brokers even less chance to own their own intellectual property, and creating a higher cost per month.
FinanceFeeds has long understood that the lead recycling and CPA model that the MetaTrader platform promotes is not something that belongs in the financial services business, and is more akin to affiliate marketing and that brokers using the full solution are effectively placing their entire value on MetaQuotes servers, therefore having no intrinsic value themselves.
Today, in the advent of this massive change, FinanceFeeds spoke to a series of senior executives across the entire component spectrum of the electronic trading business.
Jonathan Baumgart, a former FXCM senior executive who for the last few years has operated his own FX industry consultancy Atomiq Consulting, began to air this matter publicly yesterday, by stating “Now that MetaTrader 5 is on a ‘leasing’ model, FX brokers must make a cost/benefit decision akin to renting vs owning a home.”
“In our opinion, it is now more cost-effective for an FX broker to invest in its own technology rather than perpetually lease it. We can help these brokers either develop their own software or acquire source code. It would be foolish to do away with MetaTrader 4 or 5, however, the cost implications will require each broker to take careful thought about the long term financial costs of perpetually leasing software which they do not own” said Mr Baumgart.
This matter of importance led to FinanceFeeds speaking to Roman Nalivayko, CEO of multi-asset trading solutions provider TraderEvolution Global, who explained “There are a few ways brokerage companies could obtain the core technology for their business: in-house dev, buy a source code, White Label solution, or use software from a vendor.”
“Aspects that are differentiating these options are time, cost, complexity, and control over the business,” said Mr Nalivayko.
“In-house development is the option that gives full control over the development process and business, plus ownership of the IP rights. In terms of budget, this is the most expensive option, plus requires serious expertise. Time to market is one of the longest of the mentioned options. For companies that plan to become public, it is probably the only way” explained Mr Nalivayko.
“Buying a source code license will speed up time to market and give brokers a free hand in terms of further platform development. The cost of the license may differ but the ongoing expenses will be relatively high since a fully-fledged development team is required” he continued.
“The first two options in addition to budget and expertise will require to have a visionary who will define on a constant basis the platform development. Without this part of the puzzle, the platform will become outdated very fast” explained Mr Nalivayko.
“White Label solutions are widely used on the market. Smaller companies can’t afford to run their own infrastructure and this barrier brings business to the bigger players. This solution has the shortest time to market and a strong dependency on white label providers. Also, such solutions usually have quite limited capacity to differentiate. Despite all the cons, white label brokers are a big part of the market” he said.
“The fourth option is to get the software from the vendor. Time to market as well as cost may vary. There are a number of vendors available on the market offering SAAS and individually deployed solutions. The good thing about vendors is that their platforms are being updated and evolving constantly, but brokerages have to make sure that the vector of this evolution is in line with their company’s vision and values” said Mr Nalivayko.
“During the selection process in my opinion it is important to take into consideration as stated above the vendor’s development vector, the vendor’s sustainability and predictability, and if close cooperation is possible or not. As for the platform itself, it should not lock the brokerage company but being a flexible universal solution that allows quickly to react to the new challenges and opportunities, have the decent capacity to differentiate, ability to integrate custom front-ends, ability to create own extensions and not fully rely on platform vendors” concluded Mr Nalivayko.
FinanceFeeds then spoke to Jon Light, VP of Trading Solutions at Devexperts, who explained “It really depends on the broker, their size, staff and volumes.”
“Yes, for a large broker with large volumes and a technology team it makes sense for them to own their own system in the long run, a volume-based model really does not suit them. It does take a big investment, however, from IT staff, servers, networking through to full software licenses or building in-house” said Mr Light.
“But a smaller broker such as one starting up or specialising in targeting a specific region is likely not to have adequate IT resources, in this scenario the SaaS model really does remove the technical barriers and costs to get them operating. They can concentrate on building their business and growing their volumes. Without a SaaS option, they are not likely to get started, as they would not probably have a huge upfront investment” continued Mr Light.
“Devexperts was known as a boutique software development company specialising on custom platforms for large financial institutions. At the same time, we were receiving a lot of requests from small and medium-sized brokers to employ our technology. So we released DXtrade SaaS to provide an affordable platform that still uses our well-known technology. For those “leasing” a platform that also means that maintenance can be left to our highly capable team. We launched our SaaS platform in 2020, since then we can now cater to the full spectrum of brokers” he concluded.
Regarding “develop their own platform or acquire a source code” there is another opinion, which came from Evgeny Sorokin, SVP of Software Engineering at Devexperts. He said “In your experience are in house built platforms generally less reliable? What kind of team is required to maintain a good trading platform?”
“Generally, yes, they are less reliable. Brokers cannot always afford top-notch engineers since many prefer working for software companies. Few brokers can maintain best engineering practices that are expected at a technology vendor. So yes, it is common that the software, even trading software, built in-house by a brokerage firm is less reliable” said Mr Sorokin.
“On the other hand, in-house platforms have their benefits: for example, there is no vendor lock-in or risk of a vendor going out of business. Also, there is an ability to develop proprietary features without revealing the business details to a 3rd party. If done right, business and IT are close to each other so the feedback cycle is faster, and there is less room for misunderstanding” said Mr Sorokin.
“We at Devexperts believe in a hybrid and suggest developing a custom platform with a professional trading platform provider. This way brokers have bespoke customization for their needs while relying on a reputable software house” he said.
“To develop and maintain a trading platform you’ll need a number of roles: product owners, business analysts, designers, developers, testers, DevOps engineers, database administrators, network engineers, security specialists, site reliability engineers, technical support specialists. At some stages, these roles can be combined, but during active development of the platform or during its growth phase, there is a pile of work for everyone. The broker deciding to develop their own platform in house should double-check if they will be able to employ and control all of these roles” concluded Mr Sorokin.
In London, FinanceFeeds spoke to Daniel Moczulski, CEO of Star Financial Systems, who explained “One of the great things about MT4/MT5 is how easy it is to onboard clients. They are already familiar with the technology. They already have the EA’s etc and so can hit the ground running. Conversely, it’s also easy for them to leave. Clients have no loyalty to your brand. It’s hard to build brand loyalty when the only way a client engages with you is via the same platform as all your competitors. I think this has led to a race to the bottom on spreads and in marketing propositions. We can’t all be “built for traders, by traders!”
“It’s not a case of necessarily replacing MetaTrader 4 but adding to it,” said Mr Moczulski.
“People want to invest in a brand, they want to learn how a platform works, and get rewarded for that “time invested”. In having a platform that seems unique to you, you can allow the client to build up that knowledge equity in your brand,” he said.
“One issue that is becoming increasingly relevant to shareholders of brokers who are achieving scale, and are looking at an exit strategy is the need to show potential investors/buyers that you own some part of your technology stack, or can differentiate yourself from your completion. What is your USP, why is your proposition unique? Why will you hold onto clients for years to come? It’s very hard to put money into a business when the client base could up and leave to a new platform is seconds. There is no barrier to exit; there is no way you can apply a decent multiple to revenue streams” concluded Mr Moczulski.
On the brokerage side, Jeremy Kintslinger, Director of Global Prime in Australia said “Platform leasing costs pale in comparison with volume-based execution fees with bridge/aggregators, prime brokers and liquidity provides. Creating your own platform has it’s own associated risks and requires huge resources. Why not partner with a team like TraderEvolution who already has a fantastic offering and can modify the platform to suit your needs if required?”
On the other side of the globe, Natalia Zakharova, Global Head of Sales at FXOpen, a brokerage with licenses across the world, explained “In my opinion, each broker has to carefully evaluate if they have both the technical and the financial means to go for their own platform. It might be a great option for those who are strong on the IT side – although I think most of them have already invested in developing their own platform years ago.”
“At this point leasing might be more feasible for new brokers or those who tend to offer a wide range of platforms to their users. Moreover, the cost of this might be much lower than maintaining a team of developers and bearing the risks. However, a prop platform can always be leased further to other brokers. So there are many things to consider” said Ms Zakharova.
Mitch Eaglstein, Technology Executive at FDCTech echoes that line of thinking, explaining to FinanceFeeds today “Platform technology exists, and is available to forex brokers; why should brokers spend precious resources marketing other companies platform & brand ( MT4/MT5)when they can market their own platform & have full control over its branding and design?”
“MetaTrader 4 I can see some point as it has a cult-like following with a unique expert adviser solution. For Mt5 there are good multi-asset class platform alternatives, more brokers will move toward owning their own “storefront” said Mr Eaglstein.
“Companies like FDC, Devexperts and others will provide source code and customization for a multi-asset platform solution. With the new MQ pricing model it’s actually less expensive to buy customized trading platform source code from FDC and then to perpetually lease MetaTrader 4 and 5” he concluded.
What is absolutely clear is that many executives think that a standard, small FX broker isn’t going to be able to connect directly to NASDAQ, or develop their own platform. For example, the $4000 per month leasing cost of a MetaTrader 5 platform is less than the cost of hiring one very good developer, and you’d need 30 of them or more to design an in house platform and then a similar number of full-time staff to support it. CMC Markets explained to FinanceFeeds five years ago that its Next Generation platform which cost over $100 million to develop costs $200,000 per month to support. In any case, it is clear that building an in house platform only makes if a brokerage has very big plans.
“Even if you have money, you also need to know what the hell you’re doing and you need some seriously smart guys,” said the CTO of a well-known platform firm.
As far as other methods are concerned, a senior programmer explained to FinanceFeeds today “cTrader is great, but when you have competition like TradingView (which I use daily), people anchor the charting experience to that. Meanwhile, brokers are used to b-booking it all and manually hedging, so cTrader just isn’t striking enough at either to make it a ‘must-have’ these days. It’s always been a ‘nice-to-have’.”
For certain, the platform sector is now a very important consideration for all brokerages and must be taken very seriously indeed. Just as the multi-asset drive is here, MetaQuotes has upped the ante. It is time to take stock and evolve your brokerage!