South Africa enjoys a strong and well organized financial markets economy, with a traditional interest in commodities and equities from most of the well-heeled domestic investors. Over recent times, there has been an increasing interest in retail FX, with many brokers expanding their client acquisition sights toward the nation.
In this week's Forex Magnates Executive Interview, FX trader, signal provider and software developer Stephen Nefdt, Partner at FXB Africa, goes into detail on how brokers and technology providers can approach the market by examining the dynamics of the retail trading environment in South Africa, along with the regulatory stipulations, fostering partnerships with brokers and how to position products in order to engender long term client relationships.
Please elaborate on your career background, and what led you to your position at FXB Africa?
My career is quite varied. I studied mechanical engineering and have a masters qualification in business administration. I was involved in engineering for many years but always had my finger in the pie with regards trading financial markets. I got involved in IT consulting and then project management, and subsequently consulting in the banking sector.
During this period I started trading CFDs and then moved onto trading FX. Why FX? Well it’s a very fast moving market and is multidimensional. In order to trade this market successfully you need to understand how all the markets are correlated and what effect they have on each other. This really tweaked my interest and so began my journey of trading FX. I started a company called Forex Wealth which focused mainly on trading systems and education and later on formed FXB Africa with my partner Hilgard Human in early 2011.
Upon assuming your position, what did you set out to achieve initially, and how did you go about it?
Our initial objective was to partner up with brokers that would support us in our business objectives and assist us in growing our client base. As with most things you don’t always get what you ask for. Truth be told we paid a lot of “school fees”. Initially I think we tried to take on too much and we lacked specific focus. Over time we have learned to focus more on our strengths and I believe we are in a much better space now.
What market does FXB Africa concentrate on? Please elaborate on which market segment is represented, and where does the majority of the client base come from?
Our main market segment consists of individuals that are self-directed FX Traders. We offer a variety of services but they are all related back to FX services. Our client base represents both international and local clients.
South Africa has for some years been an interesting market for retail FX market participants. With the outflow of retail brokers from North America due to the capital adequacy requirment increase by the NFA, do you envisage South Africa as a region in which mainstream retail FX brokers could show an interest in establishing, and if so, how does the jurisdiction compare to Australia in terms of operating cost and client acquisition potential?
We are seeing huge interest from international FX brokers with regards the retail FX space in south Africa both in terms of an emerging economy and a relatively untapped source of retail FX traders. Many of these brokers don’t understand the requirements of setting up a brokerage in South Africa or even if they just want to be represented here.
I foresee that the retail FX market in South Africa is set to grow substantially but before that happens the regulatory bodies need to monitor and institute more control over how FX brokers conduct business in South Africa. When comparing the South African market to Australia I would say we have huge potential as our market is still relatively young when it comes to FX trading. Most of the traders here still trade equities as they don’t understand the FX market and there is a perception that its very risky.
Stephen Nefdt,
Partner, FXB Africa
In recent years our regulatory body the Financial Services Board (FSB) has come down heavily on brokers that are setting up in south Africa without meeting the necessary requirements. The FSB compares very favourably to ASIC in Australia. We have a very strong financial sector in South Africa and regulation of financial services is enforced quite effectively. Operating costs are lower in South Africa compared with othe western nations, which is quite attractive for foreign brokers looking at setting up financial services here.
As mentioned before new client acquisition opportunities have massive potential as long as this is done in accordance with the local regulatory requirements. Many South Africans have been burnt by so called “fly by nights” and are wary of trusting anyone with investment advice or services.
What is the average deposit size among South African retail FX participants, which brokers are popular and what are the volume figures traded on the local market?
The average deposit size for first time South African retail traders is in the region of $2000 to $5000. Generally these traders don’t know the difference between a market maker or ECN / STP broker, they worry more about the integrity of the brokerage.
Given that many of the market makers have created quite a negative sentiment with respect to trading against the client we prefer to associate ourselves with brokers that have more transparency, tighter spreads and good trade execution. I don’t have access to precise figures regarding local volume traded but its nowhere near the volumes traded in the US or Europe. This gives a very good indication of future earnings once this market gains momentum.
As social trading and copy trading platforms have become de rigeur as a tool for retail FX brokers to attract more new clients, and increase trading volume from that target market, do you think that regulatory authorities will begin to consider the signal provider that users can copy, as a financial adviser and therefore, require all signal providers to be regulated as financial advisers?
I agree that social and mirror trading have really taken off and I see all the brokers pushing this type of trading. The problem with this is that any trader with very little experience can produce good results in the short term but it takes a good level of understanding and experience in trading these markets to be able to consistently make profits.
I think its going to be extremely difficult to regulate social and mirror trading it should therefore fall largely on the brokers to vet the traders they use and have certain criteria that the trader has to meet before allowing them to trade, for example they could stipulate that in order to be a signal provider, a client should have held a live trading account for a minimum of 9 months, wih maximum allowable drawdown levels among other things. The regulatory bodies im sure will get involved but as I said it will be a huge task to control. To be honest I can't see how they could enforce the requirement that each signal provider becomes a financial advisor.
Over the last few years, an entire copy trading, FX training and social trading ecosystem has been built around brokers who use MetaTrader 4. Earlier in the year, when MetaQuotes issued a warning to brokers against using social trading providers. Do you envisage a greater degree of platform diversity within the copy trading, training and social trading area as a result?
Yes I do envisage a greater diversity of platforms within this space. Some platforms like cTrader & FxTrader are making some inroads but I believe that MetaTrader 4 is by far the market leader and its going to take a lot to break that mould. The reason being there are so many indicators and EAs that have been written for MetaTrader 4 and in my opinion that’s why MetaTrader 5 has not been successful, there are just too many people using MetaTrader 4 and they aren’t willing to change.
It’s the same mindset as to why Android has gained such popularity in the mobile market because of the superior applications that are freely available. Users want a large selection of freely available software and that’s what MetaTrader 4 has provided. In order for the next platform to compete they will really have to provide something special so it is going to take years before MetaTrader 4 is knocked off the top spot.
How do you view the legalities of FX training companies run by individuals who are unregulated and not registered as financial advisers? A number of smaller entities operate as IBs by attracting a client base to their courses, then signing them up to a trading account with a market maker, and using a demo account to train the client. If for example 20 people attend the course, then they all lose their initial deposit, that is a significant IB commission for the trainer in addition to the training fee. How can this practice be mitigated and regulators ensure that it is monitored correctly?
This is a very real problem and has tarnished the FX market to a large degree. I personally have seen how these scam artists weave their marketing spell on unsuspecting traders only for them to lose everything and come away with a very jaded view of FX markets in general. I believe the only way mitigate this kind of activity as no jurisdiction will never be able to fully control it, is for the regulators to impose huge fines to any individual or company suspected of such activity and or apply the threat of legal action.
To enforce this, a type of “watchdog” authority will need to be formed to monitor all FX related trading and training companies. This authority would need to be linked directly to the regulatory body of that country so each country would have their own “watchdog” which would have the power to take action. In some countries this is already in place but South Africa still has a long way to go to catch up. It is by no means a total solution but would definitely deter most of the scam artists.
FX seminars enjoy a degree of popularity in South Africa, often attended by retail FX clients. What led to the popularity of such seminars and how can they be used to benefit the domestic FX industry?
Yes there are a fair amount of overseas so called “Gurus” who fly in and put on these huge performances flashing Ferraris and helicopters around but ultimately most of them have no substance. A lot of it is smoke and mirrors. It appeals to a large percentage of the population who are looking for a change in lifestyle or the dream of quitting their day job and lying on the beach trading.
Sadly this couldn’t be further from the truth. My experience in FX trading is that it is hard work just like any other job and participants need to educate themsslves and treat it like a bona fide business. As they say, there are no free lunches. However I do believe that seminars that speak to the people and are genuine and realistic about what can be achieved as an FX trader can benefit traders and get them on the right path to trading correctly and profitably. There is a huge demand for retail traders both local and international that want to learn how to trade its just a matter of creating realistic expectations and providing them with the correct tools and education.
What is your view on the increasing cold shoulder which MetaQuotes is giving to third party software providers? Do you think MetaQuotes will become very strong in offering their own internal versions of solutions provided by third party developers, or do you think FX firms will move away from MetaTrader 4 in favor of open, customizable platforms?
My View is that MetaQuotes are shooting themselves in the foot if they alienate themselves from third party providers. It is in their own best interest to nurture these relations and to sort out any issues that may arise. If MetaQuotes continue down this path FX firms have no other choice but to produce their own systems and customizable platforms. Alternatively a platform like cTrader will gain more popularity and will be integrated into more brokers and their systems.
What is your view on the provision of fully customizable solutions to brokers who are new to the market? Do you think the ability to customize a solution to suit a specific niche gives new brokers a means of providing a USP that their competitors may not have, or do you think it is better for a new broker to take an off-the-shelf solution and keep their costs down and therefore, outsource all support to the solution provider, yet be an also-ran in terms of product positioning?
If you are a new broker it is hard enough just getting new customers and enticing them to sign up with you. It is essentially a game of survival. Introducing a new Trading Platform to traders is a challenge in itself. Unless you have real niche market that nobody else is exploiting I think this would be an unwise venture. The best way is to differentiate yourself in other ways is by providing lower costs, better spreads, free education, better trading systems and unrivalled customer support. Many brokers advertise these things but fall short on nearly all of these services. So my view is that it is more sensible to take an off the shelf solution and concentrate on what matters most to the client.
What is FXB Africa's standpoint on portfolio management? Which MAM is used and what are the regulatory caveats surrounding portfolio managers? What is a good means of operating a portfolio management business in accordance with these factors in South Africa?
Firstly we don’t offer portfolio management as we aren’t regulated to do that. However over the years we have sourced some really good fund managers and companies offering these services with excellent returns. We in turn will suggest that clients look at these companies if they are interested in managed funds.
We are also looking at partnering with companies that have a full FSB accreditation and offer managed funds. Once that is finalised we will be able to offer a host of managed funds including our own in house trading robot that delivers over 30% returns per year with very low drawdowns. In South Africa the regulation is quite clear insofar as an individual or company may not manage any funds unless they have the necessary FSB license in place which to my knowledge is a category 2 license. There are many so called fund managers out there that are trading clients funds illegally and are at risk of being penalised according to the Financial Services Board of South Africa.
When seeking partnerships with brokers, what criteria should be considered?
Very simple transparency and honesty are at the top of my list. Safety of funds is next followed by the guarantee of segregated client funds. Further down the line I would rather deal with brokers that provide direct market access ie ECN / STP model. The broker should have access to a large liquidity pool and needs to be regulated with at least one of the major regulatory bodie.
A very important factor for us is that the broker we align ourselves with is willing to assist us to grow our business, must have an entrepreneurial flair and be willing to look at new innovative ideas which could enhance the business for both parties.
What is FXB Africa's plan for the forthcoming year?
Our main focus for the forthcoming year is to grow our sales by introducing prospective clients to our revolutionary trading software (FX Dashboard_Session trader system). We will also be aligning ourselves with strategic partners and brokers in order to rollout this project. Revenue streams will come from software sales, training & brokerage commissions. Lastly we will focus on the managed fund service as detailed above.
The main objective is to provide a service that assists clients to become consistently profitable while trading FX markets. Our motto is to provide honesty, transparency and integrity in all our dealings.
