“We could see that the industry was losing some control,” said Andrew Edwards, the CEO of Saxo Capital Markets. Sitting high up in one of Canary Wharf’s many skyscrapers, looking out onto the brown banks of the River Thames, our interview had just started. It was a strange way to begin.
Though in public they may express support for the European Securities and Markets Authority’s regulations, most brokerage executives are anxious about the impact that the Leverage -capping rules the regulator introduced last August are going to have on their businesses. A quick look at the downgraded revenue forecasts of some brokers and it’s easy to see why. It was a surprise then, to hear Edwards say that Saxo Bank hadn’t just supported the rules but had actively pushed for them.
“What we saw was a race for the bottom,” the Saxo Capital Markets CEO said. “You had brokers passporting across Europe taking almost no responsibility for their actions in other jurisdictions. And, because there was practically no difference in what they were offering, high leverage and welcome bonuses became the main way of attracting clients. So in some quarters the industry began to resemble the gambling world. We didn’t think that was sustainable and, three or four years ago, we started asking the regulator to make some changes.”
Planning ahead
Bigger, more established players in the retail trading market have - for better or worse - often been critical of their smaller rivals. But the fact that major companies, whether it be IG Group or Plus500, have said they are likely to see revenue declines because of leverage caps would suggest that, even for those larger firms, high leverage played a role in bringing in cash. So, I asked Edwards, are leverage caps really not a big problem for Saxo Bank?
“Undoubtedly, if you look back, we have had smaller profit margins than some of our competitors,” said Edwards. “But I think that’s now playing into our hands. Kim Fournais [Saxo Bank’s founder and CEO] has been thinking about a long-term strategy for years, way before we even started asking for regulatory changes. We knew that selling high leverage derivative products to retail customers is not a healthy business to be in. So we started taking action.”
Taking action has meant broadening the set of services that Saxo Bank offers. The Danish broker now provides its clients with access to cash stocks, futures, options, mutual funds, and bonds. It’s also led, to a lesser degree, to a narrower focus on a more upscale clientele. Edwards tells me that the average Saxo Capital Markets client deposit is now around £15,000 ($19,000) and clients - at least in the UK - are encouraged to deposit a minimum of £1,000 ($1,270).
“Today, Saxo Capital Markets’ revenue is split quite evenly,” said Edwards. “A third is in derivatives trading, another third is in partnerships and the final third is from investment products. That means we’re in the middle. You have companies, CMC or IG, who are firmly in the trading realm. And then you’ve got Hargreaves, Halifax and Barclays Stock Brokers , who are all in the investment market. We sit between them. That can be a tough place to be too because we are trying to be the best in both markets, not just do ‘okay’ in them.”
Stuck in the middle
Squaring this circle can be tough. A lot of traders are investors, but not all investors are traders. One way that Saxo Bank has attempted to tackle the different needs of the two groups is to launch a platform solely for investors. Announced in late 2018, SaxoInvestor is currently only available to Danish and Singapore residents, but the broker is aiming to make it accessible to the rest of its clients in the coming months.
The broker has also put a lot of effort into developing its various digital platforms. More tangible evidence of this came last month when Saxo Bank hired Niels Jorgensen. Formerly the head of a video game studio, Jorgensen was in charge of LEGO’s digital business before he joined the Danish broker. And although it may have seemed a strange hire from the outside, according to Edwards, it was exactly the sort of thing that could help Saxo Bank get ahead of its competitors.
“Our industry has - understandably - an incestual set of hiring practices,” the Saxo Capital Markets CEO said. “You see people hopping from one broker to another. Niels is the kind of person that can come in and bring serious, positive change to our organisation. And he’s working on strengthening what is already a fluid, consistent online journey - from digital marketing through to a client’s trading experience.”
Free in theory, not in practice
Another, increasingly popular way of attracting investors is the drive towards commission-free trading in equities. Popularised in the US by Robinhood, similar offerings are sprouting up in Europe - most recently by social trading giant eToro. Such services have come under scrutiny for hidden fees or, in the case of Robinhood, potentially shady dealings via the selling of clients’ order flow. And Saxo Bank, it seems, won’t be jumping on the bandwagon.
“A lot of these ‘free’ trading platforms have strings attached,” said Edwards. “They talk about free trading, but it's only three trades a month that are free. They talk about zero custody, but then they have a platform fee. So we are trying to ensure we have the best technology on the market - both in terms of operational efficiency and at the client end.”
Just as retail trading has come under scrutiny from European regulators over the past couple of years, investment platforms have faced strong criticism from the FCA in 2019. The UK regulator released a report in March of this year saying that it may ban companies from charging exit fees - the money a firm takes when an investor withdraws their money from a platform.
In the same report, the financial watchdog said that investment platforms should make it easier for investors to move their money between brokers. For instance, the regulator has argued that an investor should be able to keep their portfolio intact and move it to another provider, as opposed to selling everything, moving to a new provider and buying it again. These concerns, however, don't appear to be affecting Saxo Bank.
“Pricing is not the core issue for us,” said Edwards. “You might be able to offer something marginally cheaper than the other firms operating in the investment market. But I think the more important thing is that we provide a better set of services and technology to clients. And I think that’s an area we are doing very well in.”
Growing through acquisition
Another firm that, like Saxo Bank, straddles the line between trading and investing is BinckBank. A stockbroker based in the Netherlands, the firm also offers its clients access to trading in a number of derivatives products.
In December of last year, Saxo Bank confirmed that it would be buying the broker for 424 million euros ($474 million). That deal is expected to go through in the third quarter of this year after it was approved by BinckBank’s board in April.
From the outside, the deal made some sense. After ESMA’s rules were implemented last August, consolidation in the retail trading industry was expected. Still, to some, it was unclear as to exactly what Saxo Bank planned to do with the firm.
“The BinckBank acquisition buys us a great footprint in western Europe,” said Edwards. “Their focus is on options markets in Belgium, Holland and Germany. Those are three countries we haven’t been big in and [BinckBank] are experts in both those markets and in options trading. That’s great for us because it means we can grow in three important markets, add a new set of products and the expertise required to do a good job selling those products.”
MT4 brokers - falling by the wayside
Aside from BinckBank, there has been talk of big players buying up smaller retail brokers who, with a MetaTrader 4 white label (and not much else), wouldn’t be able to withstand the effects of ESMA’s regulatory changes.
“I think there is likely to be consolidation in the industry,” said Edwards. “But it’s going to be amongst the mid-tier and larger players. If you have 20,000 clients and £50 million of assets under management, a bigger company might consider buying you. I don’t think anyone will want an MT4 broker with a thousand clients that have tiny deposits.”
Edwards’ firm may not be looking to buy any brokers at the moment, but the firm is working on establishing partnerships with other financial institutions. The Danish firm already provides a white label solution to Banca Generali in Italy and two South African banks, Old Mutual and Standard Bank. And, according to Edwards, more and more firms are coming directly to Saxo Bank hoping to strike a deal.
“A lot of brokers are really good at providing foreign exchange trading services but they struggle to offer new asset classes,” said Edwards. “So a lot of these firms are coming to us and, whether its single-stock CFDs or investment products, asking for a white label. We’re quite picky about who we work with and you could say we are creating our own competitors. But our view is that these companies are going to offer these products anyway, so it may as well be with us.”
Heading east
Finishing off our interview, we turned to that most wild of wild west markets - China. With dodgy introducing brokers, payments problems, a lack of regulation and advertising bans - there’s an almost never-ending sea of problems that firms must swim through if they are to make any money in the world’s second-largest economy.
Luckily for Saxo Bank, the broker’s main shareholder - automotive group Geely - is Chinese. And that looks as though it’s going to help things for Saxo Bank when it comes to doing business in the Far East.
“I think that every CEO who has tried and failed to operate in China will tell you that they wish they had just focused on Europe - it can be a major headache,” said Edwards. “But we are not going in under the radar like most people have. We have a strong plan in place with Geely and I think we are going to be building a solid business in China.”
Less than a year after serious regulatory constraints were placed upon it, you wouldn’t expect a company to be particularly upbeat. And yet Saxo Capital Markets - and Saxo Bank more broadly - look to have shrugged off the impact of leverage caps.
Not only that, but the group looks to have completed the transformation into a true multi-asset brokerage - something that many firms in the retail trading space are only just beginning to attempt. Other firms may have been “losing control” in the wider retail trading industry but, amidst Canary Wharf’s grey clouds, all is well in Saxo Capital Markets' offices.
