Over recent weeks there have been several new initiatives from brokerages (cough cough Saxo Capital Markets social video ads) aimed at differentiating themselves from their peers. That’s only to be expected in an increasingly competitive marketplace, where many of the providers are little more than glorified resellers of other people’s liquidity and software.
US automotive pioneer Henry Ford famously said of his Model T car “you can have any colour as long as it’s black” and those words could well describe the level of choice for clients in certain segments of the margin trading market today.
So how can brokerages add colour to their offering, stand out from the crowd and bring genuine added value to their clients?
As we have noted recently several brokers have been attempting to do just that.
One provider has adjusted their margin requirements on key instruments another has re-aligned their charting systems to reflect the timings of trading sessions and not just server time, whilst a third, announced plans for a “commission-free” dealing service in US stocks and ETFs.
Plus ca change as our French cousins would say.
All the above are most welcome of course but it’s another initiative that’s caught our eye today and it’s one that may well say something about the future shape of the broking industry. That initiative is the re-emergence of the sales trader.
First some background
The combination of broadband internet, Direct Market Access and a hands-off approach from the regulator, allowed margin trading to grow very quickly in the early noughties. That growth attracted many new entrants. Often from a variety of backgrounds and locations and they bought new ideas, methods and approaches.
One of these approaches was to view the whole business as a marketing exercise, that reduced trading to just the sending and receiving a series of electronic messages.
In effect, these new entrants saw no difference between selling CFDs, FX and Spread betting services than selling any other products online. Purely from a workflow perspective, they were correct and many of these new players were very successful in building both client bases and profits for themselves.
This approach became known as light touch, under which clients were shown the advantages and potential offered by margin trading and were provided with the tools and connectivity to undertake it. But beyond that, they were largely left on their own, what’s more many of the staff at the new providers had little or no trading experience at all.
However, by reducing the business to a pure numbers game these new providers were forgetting or perhaps even riding roughshod over one key element, and that is that trading is people business. The underlying clients are individuals all of whom are unique even if they do share some common characteristics.
Now it’s true to say that margin trading is a business and therefore, notwithstanding the TCF regulations, some customers are more equal than others. The distributions of a broker’s income typically follow the Pareto principle. Or as it’s more commonly known the 80/20 rule which says that 80% of your business will come from 20% of your customers.
Saxo markets have recently begun promoting their sales trader services. Offering higher value and professional client’s access to dedicated and knowledgeable members of staff.
The sales trader will act as a sounding board or an experienced ear, against which clients can test their ideas and strategies, and from whom they may get informed feedback and pertinent information.
The role of a sales trader is to be the link is between the client and the market.
They originated in the investment banks and dual capacity brokerages of the post big bang era; they were the natural evolution of floor trading roles as markets migrated away from exchanges to became screen-based. They kept clients informed, established relationships with them, got to know what they were interested in and what they weren’t. They held the client’s hand as much as was required throughout each trade. This approach is known as high-touch trading.
Now as things stand only the select few will be able to take advantage of or benefit from Saxo’s high touch approach, but there is some cause for optimism.
You see acquiring a client is often the biggest single cost that a brokerage faces. So, it makes sense to try and retain that new customer for as long as possible.
In the past many stock brokerages paid little attention to the retention of their clients, quite frankly, in the worst cases, they saw new clients as being like buses i.e. there would be another one along in a minute.
However, that all changed with the introduction of much stiffer suitability and appropriateness tests in the UK under which clients must demonstrate that they have enough knowledge, experience and wherewithal to become a client in the first place. So, with the supply of potential new clients greatly reduced retention has moved firmly upward on a CFD broker’s agenda.
Now as we’ve noted there are cost implications around the provision of high touch sales trading services, but technology could lend a hand here, rapid advances in the use of big data and techniques such as machine learning and natural language processing, or NLP, have already created intelligent chatbots and many forex brokers have deployed these to support customer service desks.
How much of a leap would it be then to use these types of chatbots to offer similar services to those of human sales trader? Well, watch this space because these systems have already been developed for the institutional markets and it surely can’t be long before they trickle down into the retail market as well.