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Why non-bank liquidity providers remain anchored onshore

15 Jan 2021, 22:50

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The enforcement of strict rules ‘tier one’ regulators has given new strength to offshore brokers but institutional liquidity provisions remain planted. Andrew Wood, Business Development Manager at CMC Institutional in Sydney shared his view on the onshore/offshore debate and what may lay ahead.

There is deep a natural assumption that onshore is the more expensive option, which makes it the less efficient way of doing business. The idea that regulations will constrict what the liquidity provider can offer and cause a broker’s costs to go up prevails, but the reality is much more complicated than that.

Andrew Wood noted: "The new regulatory constraints which have emerged have been targeted at protecting retail traders. So, whilst this may impact the trader with leverage limits or restrictions over what assets they can access, and the broker who has to offer components such as negative balance protection, this simply isn’t a consideration for those broker to broker, institutional relationships.

Furthermore, if your counterparty is being scrutinised by a tier one regulator, this immediately provides an added level of security over the proper functioning of the business. Better still if this is a listed company, that means audited accounts are also freely available, whilst a transparent, weighty balance sheet sits behind it all, too."

With this confidence, the necessary critical mass of volume begins build for the counterparty to be a genuine liquidity maker and not just a recycler. Other big institutions are going to show interest in that liquidity, the well capitalised counterparties have better access to the underlying market and – as is the case with CMC Markets – there’s also a significant internal order book to provide further benefits. That also means more consistent pricing and potentially better depth than can be found in the traditional underlying market.

The price consistency aspect is becoming even more important. Market participants have a growing interest in transaction cost analysis, with access to increasingly powerful tools to help monitor this. Brokers now expect liquidity providers to consistently fill orders at pre-agreed prices and any slippage will be detected quickly enough. This was observed when market volatility took off in March 2020, the bigger players with the higher degrees of connectivity were more likely to deliver in fast moving markets. And when the possibility of an outright dislocation in gold markets briefly loomed, CMC Markets was one of the few who were able to continue to offer two-way pricing throughout, due to their own book, access to futures prices and spot feeds coming in from other participants.

Andrew Wood continued:

"Companies like CMC Markets have no challenge making or receiving payments from any bank, meaning funds can be transferred both easily and quickly, whether that’s for initial deposits, making payments or when topping up margins – something where speed can be critical."

CMC Markets has been working on its expansion of its institutional offering in recent years. Counterparties have shown enthusiasm to work with the company, given the business is publicly held and operates under multiple regulators including Australia’s ASIC, the UK’s FCA, Germany’s BaFin and the Monetary Authority of Singapore. Internal flow has also shown itself to be a great draw, whether it’s for the range of instruments on offer – almost 10,000 – or indeed the ability to provide better market depth. The provision of the retail stockbroking service for ANZ is also significant, especially in the APAC market, in terms of reinforcing the company’s credentials.

Andrew Wood concluded:

"In short, there may be a growing number of reasons why those brokers catering to the retail trader may want to move offshore and indeed CMC Markets supplies many of them with liquidity via our API connection. However, the non-bank liquidity providers themselves have little incentive to operate outside of tier one jurisdictions and it seems they will always find resistance from many when they attempt to do this. Whether that’s attempting to establish and grow upstream relationships with Tier One banks or looking down the line at brokers who will turn to them for liquidity, it seems clear that onshore still wins every time."

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