A key and often overlooked issue that we have been seeing time and time again, with LPs and brokers alike, is that of inaccurate market data. In times of extreme market volatility and high volumes, such as we have experienced recently over the US election results and the announcements in the press regarding a Covid-19 vaccine, these issues have become particularly apparent.
September volumes slumped slightly from August figures, and profits dipped as well. However, most brokers were able to post respectable overall statistics due to relatively strong early to mid-month gains. The month also saw a reversal from August trends, with equity indices pulling back and both oil and gold selling off. The movement in gold drove the majority of PL volatility during the month.
Retail brokers generally state that around 75% of retail investors lose money - the majority of these losses are in the spread value of their trades (because they are trading on wide spreads) rather than because they call the market wrong.
However, studies have shown that over the long-term (if you take out transaction costs and spreads), clients’ trading P&L is generally no better or worse than that of their brokers.
Whenever a firm decides to work with a new Prime of Prime (PoP), there are a number of steps involved and various factors to consider. Firms – particularly retail brokers servicing their own end clients - may not realise that the way the PoP approaches their initial onboarding process, their technology integration and their continued, ongoing support, will all become key factors in the success or failure of their business and their ability to service their own end clients.
After a relatively quiet start to the month, the second half of July brought strong profits for brokers, allowing most to far exceed the results seen in June. Although volumes were only up marginally from the prior month, revenues were robust because of broad-based USD selling and the late month rally in metals. By the beginning of August, metals had reached all time highs and EURUSD was at a level not seen for 16 months.
June profits and volumes were front-loaded with the bulk of PL in the first 10 days of the month, primarily due to broad-based USD selling. Profitability in that period was focused in EUR and JPY pairs, along with indices and gold. Mid-month activity was relatively flat, but the month finished well primarily because of the continuation of the gold rally. Overall, both profits and volumes recovered well from the lows seen in May.
In a follow-up to my recent post on Aggregation & Spreads: The Race to Zero, I’d like to drill down on the best practices that we use to help brokers distinguish between true retail flow and institutional or proprietary trading flow.
How can they tell which is which, and what can they do to ensure they are receiving the appropriate liquidity for each?