2022: The Year of Trader Power!

As an effervescent mixture of government policy and the personal and corporate reaction to said government policy along with the innovative minds of those who have sought to either get around the circumstances and prosper or to invent whole new methods of trading have been major facets this year.

The year 2021 started with a crash, literally! It was in mid-January that the meme stock phenomenon began to take hold across the European and North American markets, with Reddit groups for the first time in electronic trading history being able to not only bring down the stock prices of publicly listed entertainment giants such as GameStop and AMC Entertainment, but create their own grass roots movement to influence the global markets and even bring over 30 market makers to their knees.

ETX Capital proudly began the year with the ability to fully manage the GameStop short. We were one of the very few retail electronic trading companies that continued to operate an uninterrupted service, with the TraderPro platform and our customer service and dealing staff fully functioning throughout what was an unprecedented circumstance that suddenly caused volatility.

A large number of other firms made it impossible for their customers to close trades or to contact them by telephone, resulting in a class action litigation in the US against over 30 retail electronic trading companies, banks and brokerages.

This fascinating episode set the tone for the year, and 2021 has been a year of uncertainty and market opportunity.

The question is, what will 2022 be like? Will we all still be looking at market commentators on television talking about oil prices, energy companies going bankrupt, airline stocks and the decimation of the entertainment industry?

2022 holds even more in store than that.

Firstly, it could well be that 2022 will become the most empowering year for retail traders for a very long time. There has become far more transparency regarding Payment For Order Flow (PFOF) which is a form of compensation and benefit which a brokerage firm receives for directing orders to different parties for trade execution.

This means that perhaps the traditional and somewhat expensive method of passing orders to third parties for execution may well become a bit more obsolete.

In order to move with the times, brokerages now have to adapt and become more multi-asset, and offer their own range of services and trading instruments, and begin to challenge the retail banks.

There was a time at which retail FX brokerages were intent on being able to offer the same service to retail traders as institutional trading desks do to their institutional clients. Nowadays, the focus has moved away from that and toward becoming a challenger bank.

Being an ultra-modern multi-asset broker with fully integrated proprietary trading infrastructure is the way forward.

In 2022, we will begin to demonstrate yet further advances as ETX Capital prepares to lead the modern era of trading with our fully comprehensive fintech facilities which are leading edge in terms of execution and technology, yet draw on our 50 years of commercial expertise.

This year is the year in which the London-based disruptive fintech firms should be regarded as being in the same industry sector as the brokerages.

Additionally, investment banks with a large market share in FX order flow execution at Tier 1 level are beginning to emulate the innovators of the retail world.

This is the first time in history that the boot has been on the other foot. In the past, Tier 1 banks with their elderly, dare I say legacy, Single Dealer Platforms have been in an almost dictatorial position toward their liquidity takers. Brokerages which send orders to the Tier 1 banks on what is known as an ‘A book’ basis have often had to capitulate to extremely one-sided trading conditions, usually weighted in favor of the banks.

For example, if a regulated FX brokerage chose which trades to process and which to reject, not only would there be a barrage of quite justified customer complaints, but the regulators would be at their door immediately with a suitable reprimand, yet many Tier 1 banks who are themselves market makers, conduct ‘last look’ execution all the time, without any repercussions and with the entire industry accepting it.

This is a longstanding practice in which liquidity providers, often Tier 1 banks, provides a quote rather than a firm price into the trading system or execution venue and effectively cherry pick the orders when they are sent.

With modern trading entities, non-bank market makers are rising in popularity and have taken the top market share slots from the most established Tier 1 banks.

This dynamic is likely to continue and the lines between traditional brokerages and modern fintech should become far less rigid. Indeed, those which do not enter the modern fintech arena are likely to be left behind.

Whilst 2021 began with the meme stock flash crash, and was punctuated in the middle by Elon Musk’s Twitter tirade which crashed the cryptocurrency market by almost $1 trillion, we have learned that these events garnered a totally different response than anything like that would have done in the past.

Instead of running a country mile from memes or crypto, many more investors got interested and it gained a tremendous following whilst the prices were down.

This is a case of evolution and revolution in one package. Quite simply, the world’s economy is very different today to how it was a few years ago and astute investors are looking for these modern opportunities.

Therefore 2022 is likely to be a year in which even more investors, both retail and institutional, move into new asset classes, especially empowering ones such as cryptocurrency which can be influenced by the ‘crowd’ rather than controlled by investment banks.

We may well be entering the age of empowerment and democratization for traders… exciting times are ahead!

Andrew Saks, ETX Capital.