Following more than 20 years in the banking world at institutions such as BBVA, Lloyds, Rabobank and UBS, CMC Markets’ newly installed Head of FX Distribution and Liquidity Management Sam Horowitz has something of a unique perspective on the world of liquidity, and Retail FX and CFD brokers.

We thought that this would be a good opportunity to catch up with Sam, now a couple of months into his new role, and see how he is approaching liquidity internally at CMC and for its many B2B clients. Here is what he had to say.

FNG: Hi Sam, and thanks for joining us today. Please let us know a little more about what you do as Head of FX Distribution and Liquidity Management (that’s quite a title!) at CMC Markets.

Sam: Hi, and thanks for having me, and yes, the title is maybe a bit long winded.

My role here at CMC Markets Connect is positioned within the sales team, collaborating closely with the relationship managers to really understand client liquidity needs and expectations in order to deliver the exact solution to fulfil these requirements. I work to configure our liquidity provision offering so that we strike the balance between achieving good commercial results and internalization for our risk books and distributing a liquidity product that is what our clients need to serve their own, often disparate trading aims and requirements.

FNG: How is CMC Markets approaching the whole area of liquidity provision?

Sam: In short, in a fashion more akin to that of a larger scale internaliser (be it a bank or a nonbank LP) than that which would be  expected of an organization of our size and reach, and coming with the less traditional background that CMC is able to bring to the wholesale markets.

We are a principal market maker, risk principal to our flow, and an internaliser to the highest extent possible where we can achieve that consistent with our risk management ethos and prudent inventory and capital limits. Structure of for example our quant, development and data science teams would be very recognizable to someone who walked in having occupied a similar seat at a larger wholesale institution.

FNG: With 25 years of trading experience at leading banks, how do you perceive the world of Retail FX and CFD brokers – especially when it comes to risk and liquidity management? What do they do well, and not so well? And where does your solution fit in?

Sam: I think (and we are probably not telling readers anything here that they might not have been able to surmise for themselves) that the retail FX / CFD world exists on a huge spectrum (in the same way as the bank world does) in terms of all aspects of what the business looks like – size, maturity of technology, propensity to assume genuine market risk, etc.

CMC Markets sits very much at the higher end of that spectrum, along with a small handful of peer firms. We are technologically agile and savvy, well capitalized and a true risk principal (and therefore committed liquidity manager) for our clients and our liquidity partners and trading relationships. We literally have a ton of ‘skin in the game’ and as such are not actually a broker at all. And that, in a nutshell, is a big part of our USP. Liquidity provision that is genuine and bases itself in large part on an interesting and uncorrelated pool of existing inventory that is slightly removed from what others can offer.

In terms of what we see from other firms (positive and negative) – without personally knowing the ins and outs of every clients’ business model, in general terms, I see the better run firms in this space have thoroughly embraced technology and automation in a way that works for them, and the best of them have built capital light, profitable businesses.

On the less positive side, a consistent theme we see is that the agency (or low hold-time matched principal) model tends to reward a somewhat slash and burn approach to liquidity partnerships that is easy to introduce into a business and relatively hard to mitigate once it is culturally entrenched. This is partly due, as I referred to earlier, to a lack of ‘skin in the game’ in risk terms, technology terms etc, and partly because traditionally the barriers to entry for a more analytical approach to this task was prohibitively complex and data intensive. But this trend, in light of new tools being made available and democratized all the time, is only going to go one way over the coming years. In short, we ALL have a role to play as liquidity managers.

FNG: Multi asset trading seems to have truly arrived for the “Retail FX” sector, with many brokers doing more volume in stock or index CFDs (or commodities, or crypto…) than in FX. How does that challenge brokers’ traditional approach to liquidity and risk management? And again, how does your solution help address that?

Sam: Well our Spreadbet and CFD offerings have been truly multi asset for a very long time, and we are now building out equivalent product suites in the wholesale cash space to complement these existing business units. As to how this trend challenges existing approaches to liquidity and risk management, that really depends on the individual firms, and often on whether that multi asset capability is built from the ground up or developed slightly more piecemeal.

At CMC, while we have various routes to market to mitigate our multi asset inventory, we have a pretty solid central risk engine to allow us to measure and manage those exposures. If you can see and understand the nature of the risk you are carrying on your books, simply, flexibly and wholistically, you can make timely decisions about how to go about doing that.

FNG: What do you see as the major challenges to FX and CFD brokers in the near term? How are you preparing?

Sam: For businesses like ourselves that are a principal to the risk transfer they facilitate, the challenges are principally around the shifting technology landscape that serves our clients and the ways in which they want to interact with us and our liquidity. The drift is towards ever increasing levels of client sophistication in the trading stack and we need to constantly evaluate whether we are facing those clients, and managing the risk transfer we facilitate in the optimal manner.

For those firms that serve more as a risk conduit, I personally feel that the same secular technology trends exert pressure more directly in the commercials surrounding the flow. Upstream LPs are quicker to identify problems with, or changes in the nature of the flow they face, spreads available to end user clients face gradual but constant erosion (pandemic volatility notwithstanding) and downstream clients are able to change providers ore quickly than ever before. So any revenue model needs to be constantly tuned and assessed to ensure that P+L isn’t allowed to simply drift lower over time as a result of benign neglect.

FNG: What else can we expect to hear from your group, and from CMC, in the coming months?

Sam: It’s an exciting time at CMC Markets, both within the institutional (Connect) silo and across the wider firm. In addition to advances we are making in wholesale cash FX, we have ongoing initiatives delivering a Global equity investment platform and an institutional grade OMS product. Additionally next year we see opportunities to expand into areas such as institutional cash FI and frontier FX markets, as well as likely broadening our capabilities in markets such as crypto, ESG and considerations around development of a suite of other relevant products.

The structure here is very much that of a mature fintech, inasmuch as the processes are data driven and people here are generally very comfortable with technology as a core tool for business. While ‘move fast and break things’ is, I feel, a pretty cliched phrase these days, the somewhat toned down ‘move pretty fast and don’t break too many things’ probably sums us up. We intend to deliver an awful lot in the next 12-18 months so watch this space.