What to Expect When Moving from Retail to Wholesale (Institutional) FX
It is widely accepted that the foreign exchange industry exists in a constant state of evolution, something that is especially true in the fields of liquidity provision and price construction. In the retail world, this shift is seen in many ways, such as in the huge increase in demand for digital sales which has almost doubled in the past year.
In the wholesale client space, the industry is also seeing massive acceleration, again driven by both technological developments, and crucially the ability to self-serve an increasing number of services, ensuring clients can bank when and where they want to.
In that regard, here are a few points to help you understand what to expect when moving from retail to wholesale FX:
Retail: Most, though certainly not all retail brokers work with individual clients. Upon completing an electronic trading platform application, either via the automated system or with a live salesperson, a prospective individual client can immediately begin using the platform as compliance is then processed. Thereafter, following the client’s funds clearing, and the broker’s account is credited, the broker will make a deposit to the manager of the electronic trading platform, and the client can begin trading immediately.
Wholesale: The process for determining whether a firm or person can be deemed wholesale generally begins with a live salesperson looking at the client’s set up to determine if it can be classified as such under the regulatory jurisdiction chosen. Clients are normally corporations with varying ownership structures and ownership structures. All corporate documents, such as articles of incorporation, as well as proof of residence for each owner, will be required by the broker’s compliance department.
Netting vs Hedging
Retail: Clients can hedge trades using an electronic trading platform by opening a long and a short position simultaneously in the same currency pair, and also select in which order the trades should be closed. The ticket hedging function itself enables the retail broker to assign swaps (overnight financing) to both long and short positions that are open.
Wholesale: A wholesale brokerage could offer an electronic trading platform as a front-end platform option but would use their own robust back-office technology to maintain all of their client equity and positions as the true statement of record. Although clients would have the ability to both hedge positions and to close trades in any sequence they choose on the platform, the wholesale brokerage’s back-office engine would treat these trades quite differently.
Retail: Whilst the average deposit per client varies between $3-15K over the lifetime of a retail account, with small deposits made over time by the customer, many retail brokers accept deposits through bank wires, credit cards, and online payment providers. Generally, the bank or credit card company will charge 2% of the deposit amount for credit cards and online payments.
Wholesale: Firstly, to be classified as wholesale, some regulatory jurisdictions require an initial deposit of $250K to $500K, but regardless of that requirement, wholesale client deposits tend to be much higher than those found in retail. Due to the high amounts involved and the regulatory restrictions, wholesale clients typically send funds via wire transfer.
Retail: Retail brokers who use an electronic trading platform may choose a B-Book model where they store the risks in-house, or an STP model where trades are sent directly to the trading market for execution. The prices shown in the B-Book model are generated by the broker rather than directly from the market.
Wholesale: Some wholesale brokerages provide the perception that they operate a hybrid B-Book/STP model. It is therefore important for potential clients to conduct due diligence before choosing which broker to deal with. As a true wholesaler or even prime for that matter, a broker would follow a fully transparent STP model with multiple banks and liquidity providers composing an aggregated spread and fill to maintain strict consistency. Market orders are executed in an order-by-order manner. This “true” connection to a prime brokerage is undoubtedly the next best solution for clients without a direct prime brokerage relationship with a tier 1 bank.
In a different vein, though retail and institutional traders are two distinct types of traders, retail traders often become the other. A retail trader who generates positive returns and accumulates the capital of other investors may want to organize into what is essentially a small investment fund. Nonetheless, this growth has no bounds, thus retail traders could become institutional traders one day.