An incredibly angry tirade took place this week between senior FX industry executives relating to how trades are executed. FinanceFeeds looked into it in great detail. Here is the full report including our discussion with those involved, and a full analysis
Decorum and composure are certainly two facets which describe the approach by which the majority of conversations are conducted between representatives of rival companies in the various sectors of the FX industry worldwide.
Over the past ten years, relationships within the business to business area of the FX and electronic trading business have developed tremendously, going from a very non-transparent, online method of conducting partnerships between platform vendors, brokerages, liquidity providers and integration companies which were in their relative infancy at the beginning of the Millennium, have been fostered to such a refined degree via specialist conferences and events, that every executive in every area of the industry knows each other personally and in many cases on a similar level to that of a close friend.
The most important and valuable aspect of the current dynamic in which the global FX industry has now become something of a small village, so intricate is the communication and longstanding the platforms for dialog and development. This has resulted in a tremendous degree of transparency, and ability for all areas of the industry to be able to conduct business in a very efficient manner, and most importantly, a friendly one too.
However, there are some small downsides, one of which is thankfully quite rare, manifests itself in the potential for argument beyond the usual politically correct debates seen on discussion panels in conferences.
Last week, such an argument occurred, and was aired publicly via the LinkedIn platform, among some direct rivals within the all important prime of prime brokerage sector, with regard to the method by which trades are executed.
This has always been a sore point, as brokerages, liquidity providers and even banks are not required to disclose the method by which they executed their trades, they simply have to be able to demonstrate that they act according to the trader or end user’s interests under ‘best execution’ guidelines, which are vague a best, and being challenged by senior industry executives to the extent that regulators are even considering dropping such guidelines.
Since the implementation of MiFID II across the European Union, in which infrastructure requirements were standardized by the European regulatory authority ESMA, some complex procedures were put in place, namely RTS27 and RTS28, which FinanceFeeds has discussed at length with specialists in this procedure.
Last week, an explosive diatribe which can only be described as a furious, raging argument took place among prime brokerage executives, ignited by Yuriy Maevskiy, an FX project manager who has spent the last ten years within Cyprus-based brokerages.
Mr Maveskiy’s comment sparked an unprecedented battle among some of the leaders of the FX industry, from IS Prime, Advanced Markets & Fortex, and INVAST Global, who interacted vigorously with each other.
Responding to a LinkedIn publication by Eduardo Delgado, Managing Partner of Fintexify, in which Mr Delgado responded to an RTS report by the regulators by observing “It shows the own broker/LP as the only trading venue where 100% of the flow is executed: This means that the FX broker/LP is internalizing all the orders’ flow it’s receiving, taking the counterpart to the trades are managing the risk internally. It shows different brokers or liquidit provider and an unknown company as execution venues where x% of the flow is executed: This most probably means that the broker is sending the flow they want to STP to the LPs, and the flow they want to b-book to the unknown company”, Mr Maevskiy put forward his viewpoint.
“What do you think about IS Prime RTS28 ? It shows there IS Prime is 100% , but IS Prime states that it is matched principal broker – so it acts as STP” said Mr Maevskiy.
This lit the blue touch paper!
Jonathan Brewer, Managing Partner at IS Prime began the responses by addressing Mr Maevskiy “Yuriy, the RTS28 report is interpreted differently by different providers (you may have seen a disagreement between myself and some of our competitors in this subject in the past on Linkedin).
IS Prime is indeed a matched principal broker, and as such, all trades are conducted with clients as principal (and then simultaneously hedged, also as principal). The reason why IS Prime’s RTS28 report shows 100% IS Prime is for exactly this reason. IS Prime faces clients as (matched) principal, and as such, all of IS Prime’s client trades are executed as principal with IS Prime. With respect, our interpretation of the RTS28 report is somewhat different to Mr. Delgado’s.”
Gavin White, CEO, INVAST Global
Mr Maevskiy then replied “Jonathan Brewer , I got your explanation. But “interpretation” is tricky thing… ESMA should give clear definition, so there will not be other interpretations. However, as we have seen, ESMA noted that RTS27 and RTS28 are useless, and the most of clients did not use it at all, while brokers, honest brokers spent a lot of resources to prepare it and be compliant all the time – in order to deliver the best result for its clients.”
Robert Buxton, Sales Director at IS Prime joined the conversation, replying “This is a common misconception, continually parroted by people who do not have a proper understanding of RTS27/28 reports. As we all know RTS28 reports “identify the top five execution venues in terms of trading volumes where investment firms executed client orders”. What people often don’t understand (or choose to gloss over) is that, when trading with an FCA regulated IFPRU 125k matched principal broker, the client’s counterparty on all trades is the broker itself and not the underlying LPs. This therefore means that 100% of client are orders are executed with the broker, which is what should be shown on the report.”
“It is the broker’s hedge trades that are executed with the market, not the client’s trades – as this report is designed to show where the client’s trades are executed (not the broker’s) putting otherwise is incorrect” said Mr Buxton.
Mr Maevskiy then said “Robert Buxton, good point. From this angle, I understand it and it makes sense – in all brokers agreements it is written that the broker is a final counterparty to the clients trades. Maybe it would make sense to provide/disclose price providers – because questions happens about pricing , huge spreads, spikes etc.”
Natallia Hunik, Chief Revenue Officer at Advanced Markets & Fortex then added her consensus, stating “Yuriy Maevskiy as stated above, many brokers interpret it differently. However, in my opinion, interpreting “matched principal” the way IS prime does, it misleading and in fact defeats the point of the report, which is providing transparency to the investors. I have seen many reports done right and in transparent manner by industry participants and this, IMHO (in my humble opinion- Ed), is a very good thing for the industry. These brokers will earn more respect from their clients because they are not hiding any information and are being transparent about their execution policies.”
Jonathan Brewer, Managing Partner, IS Prime
Mr Brewer then stepped up the pace of the discussion by responding “Natallia Hunik, while we are delighted to be the beneficiaries of your “H” opinion, I would be a touch careful with regards to what accusations you level at competitors in a public forum. We comply exactly with the letter of the RTS28 regulations, *you* misreport unless you are acting as agent on behalf of another provider who is acting as principal. You are also misrepresenting that a client is trading with (for example) BAML when they trade with you, *especially* if you have marked up the price.”
“If reporting correctly enables our lesser “competitors” to incorrectly sling mud at us, then so be it. For the record, with regards to transparency to clients, we disclose the ultimate LP with which any trade was hedged to any client upon request. And, on your final point, we don’t lack respect from any of our clients, which is why you seem to feel that you need to resort to making misleading accusations on LinkedIn” argued Mr Brewer.
Ms Hunik then replied “Jonathan Brewer I haven’t made any accusations, question from Yuriy was very specific and I answered it specifically. Or are you saying I may not have my own opinion? I believe I do have a right to state it in a public forum. As such, my belief is different from yours, and that is a very common thing that people do not agree. Good to know you disclose upon request from the client, I believe it does it fact reflect well on IS prime if that is the case. I also encourage you to look over plenty of RTS28 reports posted over the past few years (matched principals ones as well) and they all look different. But there are a few that look like yours as well.”
At this point, Gavin White, CEO at Australia’s INVAST Global waded into the debate, agreeing with Ms Hunik’s observation. “I couldn’t agree more Natallia” he said. “That’s an incredibly disingenuous interpretation of the spirit of the RTS28 reports and regulation. What’s so scary about being totally open and honest about where you hedge and where you don’t. Clients of INVAST Global see pre-trade and post trade exactly which LP we are hedging their trade with. No tricks. No smoke and mirrors. No obscuring disingenuous answers. As a client of a Prime of Prime, you really have to ask yourself – why the lack of transparency?”
Mr Brewer then approached Mr White “Gavin White, well, we do more client volume than you guys and Advanced Markets combined, so our clients clearly don’t feel all that oppressed. I would encourage any remaining clients that either Advanced Markets or INVAST have to contact us. I will happily explain our model to you directly, and also guarantee to beat all trading conditions provided by these supposed self appointed arbiters of transparency.”
Mr White then took the discussion further by replying “Jonathan Brewer methinks you doth protest too much my friend. That was a very aggressive response to a fair and genuine opinion from Natallia Hunik. Natallia has been a leader in the global industry for a decade. Her opinion comes from solid experience and deserves full respect I would have thought. You can get away with interpreting your transparency obligations the way you do, but surely the question for your clients is …. why would you be going to such trouble to do that? Why the aggression when it is questioned?”
“Why not just transparency about the way you do or do not hedge? Transparency of the PoPs (for very obvious reasons) is a very important issue for all clients of Prime of Primes… it’s great that it’s being dragged into the light of day. Clients owe it to themselves to dig down on this issue. Bad things hide in dark places. The only solution is to shine a light there. If you aren’t doing that with your current PoP – and if you have no idea how they are hedging your flow (or if they even are) you leave yourself open to potential abuse” said Mr White.
Natallia Hunik, CRO, Advanced Markets
Mr White continued ” Aggression and arrogance are the refuge of the pirates and tyrants. You are revealing your true character. Just explain your hedging model to all of us here? Do you guys ever hold market risk? Or are you truly keeping No market risk as you seem to be trying to imply to everyone here. Also what entity (jurisdiction) do u sign clients to? What’s the true relationship if any between ISAM and ISPrime because I find it confusing. I’m looking forward to this – over to you Jonathan Brewer ! PS, don’t kid yourself about our relative share of the market because from your comment, you are living in a fantasy land. If you cant explain, or are unwilling to explain, your hedging methodology here, maybe Jeff Wilkins can help?”
“IS Prime is indeed a matched principal broker, and as such, all trades are conducted with clients as principal (and then simultaneously hedged, also as principal) and then simultaneously hedged, also as principal. Hmmm – really??? Simultaneously? Do you attest to that? Because under your license, aren’t you obliged to do exactly that? So – you simultaneously hedge all flow as a principal? But – Who do you hedge with? Obviously that is crucial because if you are hedging with another entity that you own, isn’t that monumentally misleading clients and disingenuously interpreting regulations that are there to protect the interests of clients?” said Mr White.
FinanceFeeds spoke today to Mr Brewer in order to clarify his position on this matter, and gain an inside perspective as to what was such a bone of contention that needed to be brought to the public eye.
Mr Brewer told FinanceFeeds “Our central point on RTS reports specifically is that they are designed to show the counterparty that clients trade with. All of our clients trade with IS Prime as principal, hence the RTS28 report showing 100% IS Prime UK. The group’s top five execution venues are UBS, Deutsche Bank, Credit Suisse, JP Morgan and XTX Markets.”
“However, our clients trade with IS Prime, they do not trade with UBS or other execution venues directly. This is an important distinction and as such, reporting hedge venues on an RTS28 report is simply factually incorrect and also misleading. Any effort to suggest that we B-Book 100% of order flow is simply incorrect and shows a fundamental misunderstanding of the difference between principal (whether matched principal or not) and agency” said Mr Brewer.
Mr Brewer continued by explaining “It would be very easy for a client of a prime of prime to think that they were trading with, for example, UBS, but they are not. There have in the past been cases where a retail client of a retail broker has phoned the FX dealing desk of a major investment bank to discuss their trades. This is a clear example of how this misreporting can be misleading.”
Following our conversation this morning with Mr Brewer, FinanceFeeds spoke to Gavin White at INVAST Global, who elaborated on why this matter was such a red rag to many bulls.
Mr White explained “My comments are not intended to suggest or refer to any particular party/parties and I would appreciate it if you use my quote in that context. Regulations are there to protect all industry participants, especially retail investors. They must be obeyed and there must be no shadowy areas permitted to persist.”
“Unfortunately, the FX industry has always had a minority of players who prefer to operate in the shadows. The bad part is that it can impact the image of the rest of the industry, who are playing by the rules. If a small number of individual firms are choosing to “interpret” the rules at odds with the majority of firms in the industry, it must be addressed. When those who have tried to bring the issue to public discussion are bullied and howled down by senior industry executives, it’s time for the regulators to act” Mr White told FinanceFeeds today.
As far as last week’s conversation progressed, Mr Brewer continued to ask this matter to be clarified by other participants. “Gavin White Taking ill informed shots at the market leader is the refuge of the weak. Just do what you do better rather than throwing darts at us. Just because you can’t understand why we’re more competitive than you does not mean that we’re doing something “disingenuous”. For the record, I didn’t start this particular unedifying mud slinging, and as discussed previously, Natallia has been taking aim at IS Prime (and others) for months on this non issue” said Mr Brewer.
“I’m putting my money where my mouth is in a fair competition. My offer stands to all Advanced Markets and Invast clients, I will beat any terms that you get from either provider” continued Mr Brewer.
“Dark places Jonathan Brewer dark places” said Mr White. “That’s where bad things happen and where bad people do bad things. There should be no dark places. Just answer the questions, it’s very simple . What do you have to hide?? Shine the light!! You know you can’t beat our terms with our clients. You can’t even match our terms currently. You know that, but again you choose to dirty the waters with disingenuous statements that you don’t appear to truly believe yourself. So it’s just another old-fashioned, bully-boy blast of hot air from you, trying to intimidate everyone and avoid the questions. What could be wrong?” asked Mr White.
Ms Hunik returned to the conversation, saying “Jonathan Brewer I am sorry to disappoint you, but IS Prime was the last thing on my mind when I was reading though ESMA papers and making explanatory videos and articles to share with the FX community.”
“I believe in industry collaboration, rather than competition. I also believe that industry has been severely stained by “shady” practices, which makes it even more important to promote openness and transparency in what we do. Regulators are reactive and before we get more restrictive measures introduced, we all can do something to promote healthy collaboration and protect clients’ interest first. If your thought otherwise, I think it might be again your very subjective interpretation of events” said Ms Hunik, who retained her composure throughout.
FinanceFeeds spoke today to Natallia Hunik, who elaborated on her perspective on the value of RTS reporting in the FX industry.
Ms Hunik told FinanceFeeds “There has been a lot of debate recently on the merits of RTS reports. While it adds to the brokerages’ workload, I believe that they provide immense value for investors. The extra layer of transparency is great for the market overall, but it does require a significant amount of time and resources to implement.”
“It appears that many brokers were not ready for such transparency and, for example, do not feel very comfortable disclosing counterparties. For that reason, we do not see many brokers showcasing their RTS reports on the main website’s directory” said Ms Hunik today.
“When I think about it, I wonder if it’s because the market is not ready for this transparency or, is it because our business is so “relationship-based” that relationships ARE the secret sauce? Perhaps it’s because every broker out there has offshore entities and other interesting setups that they are not comfortable disclosing. Whatever the reasons, we forget that the primary goal of MiFID II is to bring transparency into the financial markets, and with that comes certain standards that all regulated financial firms in Europe will need to abide by” – Natallia Hunik, CRO, Advanced Markets
“Why do I think traders SHOULD care?” Ms Hunik asked FinanceFeeds today.
“Simply because no one else will guard your interests and your money better than you do yourself. In the recent, and not so recent, history of the retail FX market we have witnessed many regulated and unregulated brokers doing things that have eventually led to their collapse with the subsequent loss of client money” she said.
“Liquidators can try to recover the lost funds however most of the time these efforts are futile. Therefore, as an investor, you need to do your own due diligence and look at what is going on under the hood of the broker. Typically, that is a secret that is kept behind the closed doors, but with RTS reports you at least get a glimpse as to what is going on. Remember, brokers are really good at marketing and telling the story, but the proof is in the pudding” concluded Ms Hunik during our call today.
Turning back to the point in hand, Mr White then addressed Mr Maevskiy, whose initial response to this subject had ignited this debate in the first place. ” Yuriy Maevskiy you are absolutely right of course! That is the whole point of RTS28 it’s ridiculous for Robert Buxton and IS Prime Limited management to suggest RTS28 is meant to confirm if the client is trading with their broker. Of course the client is trading with their broker. They are trading an OTC derivative on a bilateral basis. That’s the definition of a CFD.”
“The whole point is disclosure of hedge venue – to ensure there is no conflict of interest between the broker and their client that can lead to harm to the client (who might be unaware of how their flow is being priced and executed) and needs to be protected. Prime of Prime clients need to be smart and question these things. Why would a Prime of Prime broker seemingly go to such trouble to hide their hedging and pricing activities?
If you are not shining a light on these exact issues, you are potentially being cynically hoodwinked by those you think are working in your interests” said Mr White.
At this point, Mr White referred to the beginning of the conversation and the initial point raised by Eduardo Delgado. “Thank you Eduardo. Great post Yuriy Maevskiy. This is a serious issue for all clients of Prime of Primes and the industry globally. You have correctly identified it and dragged it into the light Yuriy – well done. The most telling thing is how Jonathan Brewer, Raj Sitlani and everyone else from IS Prime Limited has suddenly gone quiet and backed away from the conversation. Clients are the obvious losers when some PoPs are following the rules and others are not.”
Mr White then stated that when a provider is seemingly going to so much trouble to avoid reporting properly, it needs to be investigated in order to protect the interests of the industry, citing known reporters in the FX industry including myself and Michael Greenberg, CEO and Founder of Finance Magnates as those with the ability to do so.
At this point, Jon Grah, a long established participant in the retail FX business and long term provider of commentary within FX industry news sites stated “Gavin White, look closely at the visible advertising sections (mainly banner or “sponsored” sections) at all the major OTC forex blogs and forums and compare with the type of business model that those sponsored brokers are using. This may reveal to the reader where the loyalty of the so-called “FX News” outlets truly are which of course compounds the whole “transparency” thing.”
What a cynic!
Angus Walker, General Manager at Global Prime added his perspective by saying “In summary, RTS28 is useless and it’s up to brokers and PoPs to utilize post-trade reporting and TCA to provide end users with actionable information and real transparency.”
Mr White’s response was ” Angus Walker – I agree that prime of primes should be transparent with their brokerage clients pre and post trade – that’s exactly what INVAST Global and most other prime of primes are already doing. RTS28 is a regulatory regime designed to keep in check those few shady operators who aren’t doing that and aren’t transparent with their clients, so RTS28 is meant to force them to be. Prime of Prime brokers can’t say, “we don’t think it’s fit for purpose, so we aren’t going to comply”. If they do, it’s a red flag to any reasonable onlooker. And it’s a red flag sophisticated and intelligent brokerage executives should not miss or ignore.”
Mr Walker said “Gavin White I understand your side. Having worked with IS Prime for several years, I was never disappointed with the level of detail in an execution report or transparency over how and where trades were executed. In other words, IS Prime did for a client what RTS28 couldn’t. They provided the end user with meaningful information about how well they performed for ‘their’ trades. Warts and all.”
“Lastly, brokers don’t need a regulatory directive to compete on price, execution and transparency. We can be offended by the disparity around brokers disclosures in RTS28 or we can be better. I’d rather be in the camp focusing on the latter” said Mr Walker.
FinanceFeeds spoke to Yuriy Maevskiy today, who clarified his position on the entire RTS28 debate.
Mr Maevskiy’s considered viewpoint in detail is as follows:
RTS28 ( CDR 2017 / 1018 regulatory technical standards under Article 27(10)(b) of MiFID II ) was introduced in 2018 to shed a light into …. and answer on question where the clients routed for execution, in another words, who is execution venue for each class of financial instruments.
The firm is required to publish data for each of its top five execution venues based upon trading volumes for orders executed for both retail clients and professional clients on annual basis.
The firm is also required to publish certain information, including the percentage of client orders executed on the execution venue in question. Such information needs to be broken down into passive (order that provided liquidity), aggressive (order that took liquidity) or directed (by the client) orders.
A part of disclosing the execution venues, the firm must to describe close links, conflicts of interest and common ownerships with respect to those execution venues. If a firm has any arrangements in relation to payments received or made, discounts, rebates or other non-monetary benefits received – then such information must be disclosed as well.
RTS 28 is a part of a firm’s obligation to provide clear and transparent information about its counterparties.
On the practice, the brokers interpret RTS28 in different ways. For example , there are some STP brokers which by nature must route the clients trades for execution to liquidity providers (execution venues), specify itself as execution venue – that, basically, means the broker is internalizing all the orders’ flow it’s receiving, taking the counterpart to the trades are managing the risk internally.
What is see that “interpretation” is tricky a thing… It is giving an opportunity for brokers to hide its counterparties for different reasons ( the broker is b-booking its clients, or using counterparties with bad reputation etc). In my opinion, ESMA should give clear definition, set guidelines how exactly the report should be, so there will not be other interpretations…
The rules must be equal for all market participants. And the clients will get access to reliable information regarding the broker’s activity.
However, as we have seen recently, ESMA noted that RTS27 and RTS28 are useless, and the most of clients did not use it at all, while brokers have been spending a lot of resources to prepare it and be compliant all the time – in order to deliver the best result for its clients.
So, probably, soon, we will see the significant changes in the broker transparency. The question is with what sign ? Future will tell.
Indeed it will. Clearly there is need for reform if such a massive argument ensued after a mere mention of it.