Thinking about diversification of brokerage offer is a must nowadays. Continuously increasing competition within forex industry pushes big players let alone startups to find a way to attract new clients as well as to retain the existing ones. To do so we may consider following steps:
- Price competition – lower spreads and commissions
- Marketing campaign i.e. initial cash bonuses for newcomers, trading competitions with high awards or free workshops for customers
- Broaden the offer of financial instruments by i.e. equities, exotic currency pairs, options or option strategies etc.
However, all of the ideas mentioned above seem like necessity today and sooner or later each broker will be forced to proceed with their implementation or will face a risk of losing his market share. Competition never sleeps, especially among FX firms and timing becomes a king.
A solution might be to set a project, which would be difficult to follow by other players. The right answer to our doubts, in my mind, is to offer a new service. Here, you don’t need to focus only on highly skilled retail traders, clients who are not keen to trade on financial markets may participate in trading FX instruments passively and bring brokers significant profits.
One such solution could be running an asset management unit within the company which offers advisory and wealth governing services to clients who cannot actively trade on the markets due to reasons like lack of knowledge or time. Although it seems to be a field where you may still find a space to develop your business it is crucial to think about possible constraints.
Regulators across the world set requirements that must be met to run an asset management department. Depending on location the list of things to be done will vary, but may include obtaining special license, hiring highly skilled (read really well paid, they need to take lots of expensive exams, certificates etc.) money managers, enhancing business infrastructure, like implementing new accounting methods, technology tools, preparing special customer service and support desks, among others.
Those who are not ready to invest such resources may use an alternative solution to asset management. It is innovative and less known, but it can be the right way of attracting new clients, offering a solution to low active traders and encouraging existing ones to trade more frequently. It is called social trading.
The idea is quite simple
- First retail clients analyze performance of other registered traders (those who consider themselves to be successful register as so called signal providers or master traders).
- Then they automatically copy strategies of chosen signal providers (you become so called follower). Some systems offer contra copy functionality, which enables you to automatically open opposite, to provider’s positions.
Of course the first step is to choose the right signal provider, which at first glance might seem quite problematic.
The only way to do so is to analyze historical performance of the provider, which doesn’t guarantee the same performance can be anticipated in the future. However, the same process is being used when thinking about mutual funds and asset managers. It cannot be considered as a flaw in the comparison. Then due to parameters that may be settled, the user flexibility is much higher. Those are among others maximum loss on a single position, number of lots on one followed trade or maximum total position in lots.
Also, the provider may be changed at any time and open position can be closed manually by the follower.
There is a benefit for being a provider as well. Signal providers may be rewarded based on the number of their followers or trade volume generated by them. And what are the main constraints for running social trading service? Well, there are not that many comparing to other services used with the aim of attracting less active investors. Just have a look on below table.
The broker only needs to find the best technology provider and meet the regulators’ requirements, which should not be as strict as in the case of asset management example. At the end there are some good news, you may provide both services since they are not 100% substitutes.
What to consider when choosing a social trading provider?
Since all trades generated with the social trading system will go through service provider databases it needs to be a trustworthy entity.
Check if the social trading provider enables only ESMA compliant brokers or also those from other locations.
How many are signal/strategy providers available to copy?
What requirements need to be fulfilled to enable your clients to become signal/strategy providers?
What tools/statistics are available in order to choose signal/strategy provider?
Is contra copy functionality available?
Are there any additional costs of implementing social trading service?