Scaling Retail Trading Businesses
How does a retail business scale?
Consider the following key elements of running a retail trading business.
Client Acquisition & Growth Strategy
Retail Product Platform
Pricing, Trading & Risk Management
Client Service Operations
Technical Operations
Do you have a scalable plan for each of these. How do you ensure that as you attract more clients, your yield extraction on that trade volume grows as a higher percentage.
Ask yourself, where your business grows, how do your costs also grow?
Client Acquisition & Growth Strategy
What are the principal considerations a retail client makes in assessment of a trading platform/environment?
Brand Trust. Feeling their money is safe.
Spreads/Commission - cost of execution
Asset coverage - can they do all that they want in a single trading platform?
Customer Service
API access
UI/Ease of use to support style of trading they do.
Locality of the business
Which of these principles are the most important for your retail business? There's no single right answer, it's usually a product of relationships/skills/specialism that the business has that makes a business prioritise a particular set.
As part of your business strategy, its worth focusing on the core principles and values your business has and define your positioning. From this a lot of other downstream decision making can be prioritised/structured.
In this article we talk about Growth and trends and patterns we see emerge from clients, prospects and analysing the ecosystem.
We see increased asset class coverage, choice spreads (or low cost execution) as being a big driver to attracting customers.
On top of the cost of execution criteria, top quality customer service can help retain customers.
Quality of execution environment should be tailored to the quality of customer. No one wants to provide choice spreads, with zero last look to a low-latency hedge fund, whilst this may be appropriate for retail flow conducted on a mobile where connectivity to the trading platform may be multi-second anyway.
In this as yet to be written article we talk about why users Churn? What makes them leave?
What are key strategies/initiatives to look for as this part of the business scales?
cost of acquisition by channel/demographic/medium
lifetime ROI
churn rates
average lifetime trade volume
automation of new flow analysis, do you need to hire more risk managers as you get more business? who coordinates those? will they be multi-region? will they express things as manual business rules?
Pricing, Trading & Risk Management
To facilitate the growth strategy, say by offering incredibly low cost execution, are your presenting more temptation in front of clients? Does your pricing show vulnerabilities? As business scale, any vulnerabilities and particularly, the longer they persist, the more likely those vulnerabilities will be exploited.
Intelligent forms of skewing can add between 5-15$/M on your flow
Whats the relationship between the cost your clients have to trade vs the cost you as a business have to trade? Are you discounting liquidity, are you doing so for the right (good) customers?
As your trade volumes increase, your risk increases. If you externalise that risk, some LPs may struggle to deal with it and widen your spreads, or external trading SLAs (fill ratio/last look).
Externalising risk via passive hedging on ECNs may prove more attractive as LPs struggle with the more toxic flow that may be externalised, but also these ECNs are deep waters where those that are sweeping the market or the low-latency sharks feed. i.e. will your passive market making get run over and prove less cost effective vs a simple full amount stream?
If the client (input) spread distribution is significantly tighter than your exit spread distribution, a market maker is hoping for a high degree of internalisation and/or behavioural trading to kick in i.e. retail traders losing in the long run.
Pursuing this strategy unbounded creates mammoth size risk positions, which can easily make a trading firm insolvent (if only on paper) when outsize risk events occur.
Risk managing and cutting those positions, stymies the link between the retail client opening and closing that position i.e. short circuits the behavioural trading approach to risk management.
Market timing and risk exist strategy is really important to both ensuring your risk exit is cost effective and LP relationship management sustainable.
Asset Classes
Can you just aggregate for pricing? Are the same pricing techniques in one asset class, appropriate for all asset classes?
Client Service Operations
Good customer service results in low client churn and establishes trust and safe guards future trade volumes.
Client operations teams should have the tools, workflow and support to address common client issues.
A clear explanation, visual if possible, well articulated, transparent and reasonable will help diffuse any difficulty with customers.
A prioritised list of common client issues should be constructed.
The frequency of usage of those client issues should be measured on an ongoing basis.
A deeper understanding and analysis of some of those client issues can eliminate those issues in the first place, or ensure that quality of clients service is commensurate with the quality of customer.
It can also be used to automate and satisfy regulators that client execution is compliant.
A common client service scenario can be slippage related. Is your business managing this appropriately? What are your sources of slippage? Are they symmetric? Liquidity Reduction is a judicious, regulator friendy response to certain styles of client trading abuse, blanket markup, less so.
Are your clients in another region relative to your servers?
Technical Operations
Do your vendor fees scale with trade volume? Are they $/M based?
How do you know your servers are at capacity?
What prices are you using to fill client orders?