Michael Cairns is CEO of FX Solutions LLC and Managing Director, Americas and Middle East for the firm’s parent company, City Index Group. Cairns spoke with John Lothian News Editor-at-Large Doug Ashburn about the company’s history, the state of forex volumes, and emerging trends in FX.
Q. How did you get your start, and what brought you to New York from Northern Ireland?
A. My background is in trading. I worked previously in the U.K., first for Ulster Bank, then for National Westminster Bank. I came to New York 20 years ago to take up a position with NatWest Plc, to trade in interest rates – forward FX, interest rate futures, swaps, and some government securities as well.
I have been with FX Solutions since we started in 2001 and I’ve been responsible for a lot of the business rules and business logic calculations within our GTS trading system, a system launched in October 2002. We have added onto it and changed it through the years, but it is still our core system. We also offer the MetaTrader (MT4) trading platform, which is very well known globally, so we would be foolish not to incorporate into our offering as well.
In 2004-05 FX Solutions added a sister company called Financial Labs, consisting of a team of Harvard astrophysicists who algorithmically traded, via API, through multiple money-center banks. FX Solutions handled the reconciliations, the prime brokerage, and basically facilitated the trades. Although Financial Labs was sold on to Bank of America in 2007, much of our current risk management philosophy and price discovery comes from working with those guys.
In 2008 FX Solutions was purchased by City Index. Up until then, City Index had been involved primarily in contracts-for-differences (CFDs) and spread betting, especially in the U.K., so in purchasing FX Solutions they got a global footprint in forex. There were a lot of synergies and we have done a lot in the last four years to embed our software with theirs and vice versa.
Q. What is your relationship with EBS, and how does that work within your GTS platform?
A. Through our affiliated companies we have a strong relationship with EBS potentially providing us with enhanced access to institutional pricing.
Q. One of the most significant news stories of 2012 is the across-the-board fall in forex volumes. What are you seeing and what does it mean?
A. We have certainly had the quiet periods over the summer months, but volume seems to be holding up OK. I have seen the announcements from EBS, Hotspot and various other companies about a cataclysmic fall, but we are not seeing it on the retail side. One structural thing that may have created some of the falloff was last September when the Swiss National Bank pegged EUR/CHF. That definitely stunned the market and removed a lot of price action and volatility. That malaise lasted six or seven months, but we saw a pickup again in April and May and now, given the ongoing structural issues facing Europe, I would anticipate further uncertainty.
Q. Speaking of the Euro-Swissie peg, do you think central bank intervention can have a dampening effect on trading?
A. No; not so much on the retail side. A retail trader can be on either side of the intervention trade, and can view it no differently than any other piece of information – a comment from the Fed or employment data. I don’t think it puts people off; not the retail trader anyway.
Q. What about regulation? How do you see the regulatory wild card affecting the forex climate?
A. That has a massive impact, not so much the business but rather the structure of the market. In the U.S., when we first started, the firm’s capital requirement was $250,000. Now it is in excess of $20 million. If a firm holds positions or, is in any way, a market maker, that requirement is closer to $30 million. This has had the effect of removing a lot of the smaller companies that couldn’t meet the capital requirements. Aligned with that, the US regulators reduced allowable leverage in the U.S. to 50:1.
FX Solutions had offered leverage of anywhere from 5:1 to 400:1 globally. Previously we offered up to 400:1 in the U.S., so the reduction to 50:1 resulted in a hit to trading volumes and also contributed, I think, to a lot of the smaller companies’ pulling out. Yes; they might have been able to meet the new capital requirements but I believe their trading volumes and revenues fell because of the leverage issue.
Q. Which seemed odd to me. Since these smaller retail firms and accounts did not impose any systemic risk, why would they be subject to such onerous capital standards?
A. When Dodd-Frank was first being discussed, I actually met with the CFTC and tried to point out to them that in my opinion, like you say, their approach would not achieve the result that they envisioned. Rather than adding to the problem, regulated companies like FX Solutions were actually helping the regulator and the client by policing the retail Forex industry. I was simply concerned that, as a result of the proposed legislation, many of the regulated companies could be forced out of the US leaving the market susceptible to internet marketing from unregulated foreign brokers.
To me leverage is not a [systemic] problem. We have systems in place, just like on an exchange, with initial and maintenance margin. But here, if you run out of maintenance margin, there is no margin call. There is an automatic close-out of all your trades at the market rate at the time your account goes one cent below your required margin. Effectively, this provides the client with an automatic stop loss. The chances of a customer ever ending up with negative account equity are very low.
Q. What do you see as the current trends in forex?
A. Well, obviously technology has been the key driver of our business. I feel that we offer one of the most accurate price feeds in the industry. What we have seen over the past two years, and what has gained a lot of traction in the past year, is requests for iPhone and Android access to our systems. What I see as the main trend is the massive growth of people accessing our system via mobile devices rather than the traditional desktops and laptops. We have put a lot of resources into developing non-latent access to our system from mobile devices and, coming in the next month in the U.S., we will be releasing some new products – iPad, Android and a few new platform variations as well, and some changes to our pricing.
Our biggest non-U.S. markets are China and the Middle East. In the Middle East we see countries that, two years ago were linked to the internet via satellite, with massive latency and connectivity issues, now running smooth, non-latent internet connections. We have seen trading in excess of EUR50 million from an iPhone. The detail and information that can be displayed on a phone screen now would have been unimaginable three to four years ago.
Q. So the message is “anywhere, anytime?”
A. The message we try and get across to people is that foreign exchange is another asset class. To me, you cannot have a full balanced portfolio without some sort of FX component. It is a matter now of getting people to understand this product. The world is a much smaller place now, and the guy in the street now has much more clarity, transparency and direct access to the prices the banks previously had all to themselves.