Paying a fixed monthly subscription for trading infrastructure can help smaller brokerage firms remain viable in a highly competitive market – but only if they can find the pricing sweet spot.
The fixed subscription cost or flat rate model is well established across the publishing and streaming industries. It is therefore no surprise that FX brokers are exploring its merits both as a means of reducing uncertainty around operational expenditure and attracting new trading business.
Eliminating Revenue Uncertainties with Flat-Rate Model
Phillip Nova is one broker that has embraced the fixed subscription cost model. According to executive director, Grace Chan, it has given the firm greater predictability and control of its operational costs and improved expense management.
“Previously, costs fluctuated based on the traded volume, which could be difficult to anticipate,” she explains. “The fixed subscription reduces these uncertainties and provides us with more flexibility to allocate resources to other key areas of our business, allowing us to reinvest in areas of growth and client experience enhancement such as financial education and promotional activities for client acquisition.”
The Singapore-based brokerage expects the savings to increase in line with higher trading volumes, allowing it to scale the business more efficiently. “The predictability of this set-up allows us to maintain or even improve the quality of services, offering enhanced features without passing fluctuating technology costs onto our clients,” says Chan, adding that the technology must be capable of accommodating more complex client profiles.
“For the subscription model to be truly effective, we need Integral (Philip Nova’s trading infrastructure provider) to support our ambitions to expand into new client segments beyond our current retail base and provide the technical expertise and competency to integrate seamlessly with a variety of trading platforms,” she says.
Cypriot brokerage firm FxGrow is also using Integral’s technology on a fixed subscription cost basis.
“With continued expansion on the horizon, keeping technology costs manageable as we scale is crucial,” says Mohammad Mazeh, head of dealing and system administrator at FxGrow. “We want to ensure our success isn’t undermined by escalating vendor costs. The fixed subscription model enables us to reinvest in developing new products and providing educational resources.”
He suggests that the success of this cost model depends on finding a long-term technology partner with the scale and experience to make it work.
A Challenge in Commercial Models
A subscription-based model might have some merit for B2C brokers where retail flow is taken into their risk book. However, as they move up the tiers the commercial model begins to more closely reflect that of the primary liquidity provider – which is typically volume/spread based.
That is the view of Gerard Melia, head of FX sales at StoneX, who says that while higher volume traders might see lower overall fees with a subscription model over time, it is not readily clear how brokers would absorb the opportunity cost unless they are generating similar revenue to the per-trade model.
“However, a subscription based model could offer smaller brokers an advantage, assuming that they can align this commercial model with that of their liquidity providers or figure out how to mitigate any revenue risk from running different models between client and liquidity provider,” he says. “It would probably take some repurposing of existing technology to facilitate a subscription based model but it is not a major pivot from what is already available.”
Active traders would find value in this model as they only need to calculate the breakeven fee based on their current and planned trading activity and it would also benefits brokers as they could charge all clients regardless of their trading activity observes Filip Kaczmarzyk, head of trading and XTB board member.
“It is not clear whether this approach would help smaller brokers compete against larger, better-resourced brokerage firms though because they would still have to carry out clients’ orders on different exchanges or venues and the payment system usually involves paying per order,” he explains.
This can be especially difficult for startups or new entrants as they typically have a small client base and are charged for each order by the exchange or execution broker.
“Existing trading infrastructure can support this type of trading,” says Kaczmarzyk. “But any startup choosing to adopt this business model needs to consider that it will take longer to break even. This approach may be attractive to brokers with large and diverse client bases and clients who in general prefer to pay a single fee rather than multiple fees.”
Finding the Right Price-Point Can Be a Challenge
Ross Maxwell, global strategy operations lead at VT Markets reckons the difficulty of setting the right price point for the subscription should not be underestimated.
“Any subscription-based model might have to be offered on a sliding scale basis taking into consideration account size and frequency of trade,” he says. “This could be policed through levels of subscription, with limits on the total value of trades allowed to be placed.”
He agrees it could help smaller brokers as it would allow them to target new or cost conscious traders who are put off by larger fees from other brokers and that existing FX market infrastructure is more than capable of supporting the subscription based model.
“It would be attractive to scalping and day traders who trade more frequently and can lock in their costs and may even help increase their edge in the market,” adds Maxwell.
However, he also refers to the danger of the larger brokers adopting a similar model and effectively squeezing out smaller competitors by taking losses in the short term and leveraging their technology advantage.
“One of the other challenges that could face brokers should they adopt this model is making sure they do not attract or be seen to promote reckless or over-trading,” says Maxwell.
Vikas Srivastava, chief revenue officer at Integral reckons his brokerage client have reduced their technology costs by as much as 70% after making the switch.
“A major factor driving these savings is that they are not only paying costs for their A-Book trades but also their B-Book trades,” he says. “Cloud infrastructure complements a fixed cost model by removing the need for significant upfront hardware investments and ongoing maintenance costs.”
Paying a fixed monthly subscription for trading infrastructure can help smaller brokerage firms remain viable in a highly competitive market – but only if they can find the pricing sweet spot.
The fixed subscription cost or flat rate model is well established across the publishing and streaming industries. It is therefore no surprise that FX brokers are exploring its merits both as a means of reducing uncertainty around operational expenditure and attracting new trading business.
Eliminating Revenue Uncertainties with Flat-Rate Model
Phillip Nova is one broker that has embraced the fixed subscription cost model. According to executive director, Grace Chan, it has given the firm greater predictability and control of its operational costs and improved expense management.
“Previously, costs fluctuated based on the traded volume, which could be difficult to anticipate,” she explains. “The fixed subscription reduces these uncertainties and provides us with more flexibility to allocate resources to other key areas of our business, allowing us to reinvest in areas of growth and client experience enhancement such as financial education and promotional activities for client acquisition.”
The Singapore-based brokerage expects the savings to increase in line with higher trading volumes, allowing it to scale the business more efficiently. “The predictability of this set-up allows us to maintain or even improve the quality of services, offering enhanced features without passing fluctuating technology costs onto our clients,” says Chan, adding that the technology must be capable of accommodating more complex client profiles.
“For the subscription model to be truly effective, we need Integral (Philip Nova’s trading infrastructure provider) to support our ambitions to expand into new client segments beyond our current retail base and provide the technical expertise and competency to integrate seamlessly with a variety of trading platforms,” she says.
Cypriot brokerage firm FxGrow is also using Integral’s technology on a fixed subscription cost basis.
“With continued expansion on the horizon, keeping technology costs manageable as we scale is crucial,” says Mohammad Mazeh, head of dealing and system administrator at FxGrow. “We want to ensure our success isn’t undermined by escalating vendor costs. The fixed subscription model enables us to reinvest in developing new products and providing educational resources.”
He suggests that the success of this cost model depends on finding a long-term technology partner with the scale and experience to make it work.
A Challenge in Commercial Models
A subscription-based model might have some merit for B2C brokers where retail flow is taken into their risk book. However, as they move up the tiers the commercial model begins to more closely reflect that of the primary liquidity provider – which is typically volume/spread based.
That is the view of Gerard Melia, head of FX sales at StoneX, who says that while higher volume traders might see lower overall fees with a subscription model over time, it is not readily clear how brokers would absorb the opportunity cost unless they are generating similar revenue to the per-trade model.
“However, a subscription based model could offer smaller brokers an advantage, assuming that they can align this commercial model with that of their liquidity providers or figure out how to mitigate any revenue risk from running different models between client and liquidity provider,” he says. “It would probably take some repurposing of existing technology to facilitate a subscription based model but it is not a major pivot from what is already available.”
Active traders would find value in this model as they only need to calculate the breakeven fee based on their current and planned trading activity and it would also benefits brokers as they could charge all clients regardless of their trading activity observes Filip Kaczmarzyk, head of trading and XTB board member.
“It is not clear whether this approach would help smaller brokers compete against larger, better-resourced brokerage firms though because they would still have to carry out clients’ orders on different exchanges or venues and the payment system usually involves paying per order,” he explains.
This can be especially difficult for startups or new entrants as they typically have a small client base and are charged for each order by the exchange or execution broker.
“Existing trading infrastructure can support this type of trading,” says Kaczmarzyk. “But any startup choosing to adopt this business model needs to consider that it will take longer to break even. This approach may be attractive to brokers with large and diverse client bases and clients who in general prefer to pay a single fee rather than multiple fees.”
Finding the Right Price-Point Can Be a Challenge
Ross Maxwell, global strategy operations lead at VT Markets reckons the difficulty of setting the right price point for the subscription should not be underestimated.
“Any subscription-based model might have to be offered on a sliding scale basis taking into consideration account size and frequency of trade,” he says. “This could be policed through levels of subscription, with limits on the total value of trades allowed to be placed.”
He agrees it could help smaller brokers as it would allow them to target new or cost conscious traders who are put off by larger fees from other brokers and that existing FX market infrastructure is more than capable of supporting the subscription based model.
“It would be attractive to scalping and day traders who trade more frequently and can lock in their costs and may even help increase their edge in the market,” adds Maxwell.
However, he also refers to the danger of the larger brokers adopting a similar model and effectively squeezing out smaller competitors by taking losses in the short term and leveraging their technology advantage.
“One of the other challenges that could face brokers should they adopt this model is making sure they do not attract or be seen to promote reckless or over-trading,” says Maxwell.
Vikas Srivastava, chief revenue officer at Integral reckons his brokerage client have reduced their technology costs by as much as 70% after making the switch.
“A major factor driving these savings is that they are not only paying costs for their A-Book trades but also their B-Book trades,” he says. “Cloud infrastructure complements a fixed cost model by removing the need for significant upfront hardware investments and ongoing maintenance costs.”
This post is originally published on FINANCEMAGNATES.
