Global financial crisis
The GFC affected the finance industry as a whole and some of the scars will last forever. Perhaps worse than this however for the futures industry specifically, were two bankruptcies at major US brokers, MF Global and PFG Best. While running these two companies, crooked CEOs dipped their hands into clients' money. It was meant to be segregated, meant to be untouchable, and yet it went missing.
The bad thing about this is that it happened in the first place. The systems were flawed. It was appalling behaviour and will never be forgiven. But good has resulted from those events - segregation and protection of client funds has become a major selling point for brokers worldwide and to this extent, New Zealand is no exception. Let clients know that their money is safe, and deposits will come.
Safe funds
The greater the lengths that brokers go to in order to keep client funds safe, the more deposits they are going to have from clients, plain and simple. I think this trend will only grow in the future and brokers must go to the greatest lengths possible to show that client funds are safe. There is still more that brokers can do with ongoing change vital and something that is been constantly reviewed by the brokers themselves, their clearing firms and the exchanges too.
I believe that this terrible industry news will eventually be considered a positive turning point for the industry. Perhaps it already is. If a desperate or just plain idiotic CEO in the future wants to get his or her hands on clients' cash, I hope and expect that this will be outright impossible for them to do. The boards at brokers can themselves make this outright impossible if they choose to, and then publicise their procedures.
Difficulties
There are a few more things that have made recent times difficult for the US futures industry. One has been a significant period of low volatility in the markets. Put simply, this refers to low movement and since traders need movement to profit, low movement equates to less trading. Less trading equals less revenue for the brokers and exchanges. Yet if bankruptcies and low volatility were not enough already, low interest rates that were a by-product of the GFC have stripped another major source of revenue for brokers.
In days gone by, brokers earned interest on the significant sums of cash in their bank accounts, be they segregated funds or their own. This was a huge part of their earnings and yet today in the US, banks pay virtually nothing on deposits. In New Zealand this is less of an issue, with interest rates very high in comparison to the US.
Good news
There is good news on the horizon however in a number of ways. Volatility in the markets has picked up these last few months and futures brokers and exchanges plus forex and CFD brokers worldwide are all starting to report more positive revenue figures. Such a low volatility period is rare and those that have been through it now, have a business more capable of withstanding it in the future.
Secondly, the period of such low interest rates looks set to change soon with rate rise expectations already forecast in the US. This will improve earnings for brokers, magnified by increased client deposits as the overall economy improves, people start spending, jobs get created and safety of client funds continues to improve.
FIA expo
The attendees of the FIA expo include trading exchanges from Japan, Taiwan, Canada, London, Europe, Russia, Australia, Mexico, Korea, Hong Kong, Singapore, Dubai, Turkey and more. The NZX is a notable omission and I believe they should consider putting New Zealand on the world stage at events like this and learning from what others are doing.
Participants use the derivative markets for anything from a farmer hedging their risk on a future grain or commodity price, to a stock investor offsetting their portfolio risk by trading an index derivative, to a foreign investor or business looking to offset currency risk. The reasons are numerous for individuals and businesses alike to consider learning more about the futures markets. Speculation is just one aspect of this industry and while large, is far from the only reason that people get involved.
Opportunity
I believe good times are coming, lessons have been learnt from the bad times and that the industry will have growth in the years ahead. For such a small industry like that we see in New Zealand today, there is opportunity for the future. As the risks are perceived to be less, education becomes more prevalent and markets become more accessible from New Zealand then more people can and will get involved.
It is the job of the brokers now to make our trading funds safe beyond doubt. This will make the tough times for the industry worthwhile and turn a bad patch into a huge positive for the future of derivatives trading.
Nick McDonald is a New Zealander teaching everyday people how to trade the worlds markets via his company Trade With Precision.
