Life hasn't been easy for Masahiro Funada since he took up the CEO position at Z.com Trade last year. A month after he made the move from GMO-Z's Hong Kong office to London, the European Securities and Markets Authority announced that it would be introducing leverage caps, marketing restrictions and risk warnings for retail brokers.
The implementation of those rules has been accompanied by an extended period of low Volatility in the foreign exchange markets. Those two things combined have lead to shrinking volumes for retail brokers across the board.
But Z.com Trade and Funada aren't feeling daunted. With the backing of Z.com Trade's parent company, Japanese technology giant GMO Internet, and prior experience in leverage capped markets, Funada and his team have a set of long-term plans for the European market.
Last month, we caught up the Z.com Trade CEO to discuss ESMA's regulations, the broker's investment in technology, and the differences between the Japanese and European retail trading markets.
ESMA’s regulations - along with lower volatility - have had a fairly dramatic impact on brokers’ volumes since they were introduced last August. How has Z.com Trade been affected by them?
As we have seen reported quite widely in the industry media, the new ESMA regulations have undoubtedly affected the trading volumes of brokers based in Europe, and this has been the case for us as well.
Prior to the regulations being implemented, we prepared for an eventual decrease in trading volumes, and we as a group have had experience of leverage restrictions in both Japan and Hong Kong where affiliated companies of ours operate.
We believe that the ESMA regulations are a positive in protecting the investor and that it will be a step forward for both clients and the sector in general in the longer term.
Not long before those regulations were introduced, you guys launched a mobile application - Pipster - with Finatext. How successful has that been? What is the relationship between that service and Z.com Trade - are they one and the same or two separate projects?
No, the brands and services are completely separate. Z.com Trade is the global brand of GMO CLICK, from which we offer our FX and CFD trading services. The Pipster mobile app is a separate service which is provided in collaboration with our partner, Finatext UK Ltd.
Finatext is part of a global group which is known for its innovations in trading technology and big data, and have incorporated their expertise in developing this new mobile app service – Pipster.
The app launched earlier this year and is currently in its pilot phase, with a full launch scheduled shortly. Early feedback has been extremely positive, and we have plans to continue enhancing the Pipster service with Finatext further throughout the year.
Going back to ESMA’s regulations, Japan has had similar rules for some time now. Given that your parent company is Japanese, how do you see the regulations affecting the market in the short-to-long run? Can you speak a bit about what the Japanese looked like pre- and post-leverage restrictions?
We have heard the comparison of the Japanese FX market quite a bit. However, it is important to understand that the market dynamics are quite different.
As is generally reported, trading volumes in Japan actually grew after leverage restrictions were imposed back in 2013, with clients depositing more capital into their accounts in order to maintain a similar level of effective leverage.
A key difference though is that traders in Japan do not necessarily have the same choice as traders across Europe do to open trading accounts in other countries, due to the regulatory restrictions on non-JFSA regulated entities providing services to residents of Japan. In Europe we have obviously heard of traders switching to services which are outside the scope of ESMA’s controls, and although there has been some intervention from local regulators, such as ASIC recently, the point remains that the barrier to a trader in Europe opening a trading account with an offshore provider is comparatively lower than that of a Japanese trader.
It may depend on how ESMA and local regulators in Europe are able to work with overseas regulators to control how offshore service providers can offer their services locally, so the controls they have introduced in the interests of client protection can be maintained. We would still expect the market to stabilize in the longer term after a period of consolidation; however it may be a rocky road ahead until that time.
Do you also think that your parent company’s experience in dealing with similar regulations means you are better prepared to deal with any of the negative consequences of the regulations?
The consequences that we are seeing in Europe are quite different to what was seen in Japan so it may be going a bit too far to say we are better prepared, however, response to regulatory change and understanding the importance of taking a prudent, longer-term view is how I would say we are well equipped.
We do also have a regulated entity in Hong Kong in our group as well, where similar restrictions apply. I would also not necessarily say that what we are seeing now is an absolute negative – this is simply a change to the dynamics of the market, that will hopefully encourage companies to innovate and enhance their services. In the long term, this can only be a good thing for traders.
Many brokers are also weighing up their expansion options. You already have a Thai business, but do you plan on expanding into any other emerging markets, particularly in Africa and South East Asia?
Our business in Thailand operates in a slightly different area to us. The entity is regulated by the SEC in Thailand, and they offer an online securities brokerage service where clients are able to trade shares, so it is a little removed from the FX & CFD trading space.
We have no plans at present to look at entering new markets, however, what we do have on the horizon is making some significant enhancements to our Liquidity and technology to better serve an institutional and professional audience.
We recently carried out some significant upgrades to our liquidity sources to incorporate direct lines with a number of tier 1 banks which we have available now, and with the backing of GMO Financial Holdings and our group, we believe we can offer a significant competitive advantage as a well-capitalized and reputable venue within the institutional and professional market.
This would only be one example, however with the resources we have access to across our group, we are extremely well-placed to price competitively on JPY crosses for instance – and there are a number of other interesting possibilities that can be achieved through synergy within our group. There will be some developments on this front in the months ahead, so I encourage you to watch this space!
Generally, when interviewing senior executives at a broker about their business(es) in East Asia, I have to ask about the difficulties a European has understanding the nuances of both local markets and culture. In your case, things are reversed. So, what challenges does a Japanese-owned firm face when doing business in the UK and Europe? How do you communicate those challenges back to senior management in Tokyo?
We touched on this to some extent with the points regarding the impact of regulation, however I would say one of the key differences in the European market is that companies tend to be ‘global by default’, whereas the nature of regulatory controls in Japan results in companies focusing solely on the (huge) domestic market.
This does bring about some interesting challenges, particularly when you consider the options a trader has access to and how we must adapt to this. However, it has certainly been an experience in getting used to this myself and communicating these challenges back to the team in Tokyo!
Nevertheless, GMO Financial Holdings and the group remain committed to the European market for the long-term, and we feel that we have had a presence in the market here long enough to understand how best to execute our upcoming plans.
Do you see any changes in the demands your clients have - I mean both in terms of asset classes to trade and technology?
Not necessarily – obviously “multi-asset” is a word we have heard for a while now across the industry and no doubt there is demand for this; however I would still maintain that demand for FX and having a strong FX offering will always be the pillar of service providers in this industry. There is perhaps a tendency to focus just on offering something new, and I do get the impression the recent “multi-asset” wave does have some aspect of this, rather than more concerted innovation in improving existing business lines. I would say for us we will no doubt incorporate what we can on the multi-asset level; however our primary commitment will always be in providing a best-in-class FX offering.
In terms of technology, we have heard for a while that the transition to MT5 is coming on the retail side, however we have never really felt this ourselves – this may be more on the professional side of the market, however what we do tend to hear is that as more markets around the world develop, there are more demands for localized connectivity options or more tailored support in facilitating access to global liquidity hubs more smoothly. This is certainly something we are looking at ourselves.
To finish off, do you have any exciting upcoming plans? Can we expect any new technology, asset classes or office locations in 2019?
Definitely – you will see further news of this in the coming months. However, we have plans to enhance our liquidity provision services to professional and institutional entities throughout this year and beyond.
We have already added multiple direct lines with tier 1 banks which are live and being utilized by our existing clients to highly positive feedback – and as mentioned earlier, we are working with our parent company and the group as a whole to deliver a true alternative in the professional and institutional liquidity provision space.
