Are the Financial Markets Fair for Retail Traders?
There is a long list of financial instruments traded every day globally. Those financial instruments are bought or sold via various types of exchanges and market making activity. With such a variety of different kinds of financial instruments traded and different counterparties being on either side of every transaction, two underlying economic factors are present in every one of those transactions:
- Price of the Financial Instrument;
- Cost of Transaction, and Quality of its Execution.
I remember my days at Deutsche Bank and Citi where I could trade anything I wanted for almost zero cost, call any sales person and get any price for any instrument. It was fun, but it was also a showcase of the long history of dominance hierarchy that financial institutions had toward the other market participants and more specifically, the retail traders. Some will tell you that the markets are efficient, but the truth is that this natural dominance will always create an unfair landscape for some participants. Superiority in this hierarchy is driven by an ability to access the best price of a financial instrument to be bought or sold, as well as the cost and the quality of transaction execution.
The market participants are divided into two major groups: institutions, and individuals or retail traders. Institutions can be banks, hedge funds, mutual funds or any other, often regulated, organizations that are professional market participants. There are thousands of financial institutions actively participating in the global financial markets, while there are millions of individuals doing just the same daily. An overwhelming majority of these individuals are located at the bottom of this dominance hierarchy. They buy and sell stocks, commodities, currencies and cryptocurrency pairs at less favourable prices than institutions, pay an unrealistic cost for trade executions, and can rarely get a transaction executed with the ease, time and quality that should be expected.
Beyond the transactional economics of buying or selling a specific financial instrument, the institutional market players always have a specific strategy and reasoning for their decision-making to gain exposure to one or another direction of the market. Over my 15-year plus career in leading a trading desk, managing risks stemming from running large multi-asset portfolios, I compiled a list of factors that influence any trading decisions. The risk of loss grows exponentially as we go further down the list:
- Market Edge & Advantage;
- Arbitrage;
- Hedge;
- Fixed Income;
- Macro View of Value Appreciation & Depreciation;
- News-driven;
- Technical Analysis;
- Price Swing & Momentum;
- Gut Feeling & Bet.
Despite all the welcome regulations regarding client orders, a significant advantage financial institutions have, is their ability to see the order flows coming directly from their clients. Based on that unique information, the traders are able to have greater visibility and knowledge on what is about to happen, or is happening in the market. I’ll give you an example: a corporate client calls a bank to buy $1 Bn EURUSD; the traders can then create their own very effective trading strategies using that information and for sure manage their exposure ahead of the retail traders.
Lately, I have seen a significant increase of algo funds promising considerable returns to their investors. These funds need a large quantity of data to gain a market edge, and one of the ways they achieve it is through payment for order flows. Some retail brokers sell their trading data to these hedge funds which will, in return, gain valuable information on retail flows and analyze the data to come up with trading strategies. The main reason this business model is questionable is that the trust between the retail trader and its broker is breached as soon as the trading data is sold to a third party.
My career required me to interact with hedge funds in various capacities, and I can assure you that they employ enormous computing power to recognize mispricings in various financial instruments. For example, they look at arbitrage opportunities within the same asset class, or between a specific stock and its correlated index, a stock and its call or put option, or contracts for the same commodity with different expiration dates. These mispricing events are extremely profitable and close to risk-free. Trading conglomerates, such as oil companies, use their market dominance in the sector to “hedge” their physical trading activities with futures contracts or currencies just at the right time. Finally, macro and mutual funds use an immense number of research analysts to develop a fundamental economic view for certain outcomes of exposure to a specific type of financial instrument(s). The activities stated in this paragraph can rarely be called speculative and require a massive amount of resources, regulatory power, and liquidity.
As you can now imagine, the equation is relatively simple and unfair to retail traders: the market-edge, arbitrage, ease of hedging, and access to a substantial amount of research is exclusive to financial institutions. The retail traders, on the other hand, are only able to base their decisions on the freely available news, some degree of technical analysis, the price swings and momentum, and the most common I have seen — the gut feeling. Therefore, taking into account commissions and fees to enter and exit a trade, the retail traders take on a substantial risk with the odds stacked heavily against them.
Today I am proud to be part of the team that disrupts the market participants hierarchy by making trading free, fair and transparent for millions of retail traders around the world. The past does not necessarily have to be our future. The nation of traders of the future is here and it’s name is Quantfury.
Sign up for the Beta at https://quantfury.com, join our Telegram group https://t.me/quantfury, and follow us on Twitter https://twitter.com/quantfury.
Tareck Horchani is the Chief Operating Officer of Quantfury. Tareck has worked for more than 15 years in the Financial Markets industry as an Emerging Market trader at Deutsche Bank London, prop trading and manager of the Emerging Markets FX trading platform at Citibank Singapore, senior macro trader at Louis Dreyfus Commodities and more recently was the head of Asia Pacific Sales Trading at Saxo Capital Markets.
Tareck holds a Master of Mechanical Engineering at McGill University and an MBA from the Anderson School at UCLA
