At OptionsDesk we believe in transparency in everything we do. We prepared the following in response to the FCA’s requirement to set out the threshold conditions for the launch of our new brand. We hope you find it interesting.
1: The assumptions underlying the firm’s business model and justification for it:
The assumptions are:
- Options provide an effective way to hedge against adverse market moves, earn income and take tactical positions with given time horizons.
- Options have been adopted widely by retail investors in other countries, most notably the USA, China, India and Brazil, and global volumes have grown significantly.
- However, the use of options in the UK is limited. This is primarily because many independent futures & options brokers have closed or been acquired by larger firms where retail customers trading options are deemed unprofitable because of the higher duty of care.
The justification is:
- Options are leveraged derivatives, and the risks and rewards should be properly understood.
- OptionsDesk is primarily a resource centre that will allow it to educate and service retail clients at scale.
- It only offers access to exchange traded securities and derivatives. Its fees are fully transparent, with no spread widening nor payment for order flow.
- It is a full service principal brokerage with direct client access to its broking desk, client services and operations teams during opening hours.
- It is planned to re-classify ourselves as an agency brokerage in order to more accurately reflect the current scope of our business.
2: The rationale for the business the firm proposes to do or continues to do, its competitive advantage, viability and the longer-term profitability of the business:
- Before trading options, clients should have a clear understanding of the risks and rewards.
- In order to provide this on a cost-effective basis at scale whilst retaining full human access, it is necessary to develop online tools and resources which are easily accessible and understood.
- Whilst we do not give advice on the price or quantity of what to buy or sell, we do seek to understand our clients’ objectives and help them consider which exchange traded instrument or combination of these instruments may be most appropriate for their stated objective.
- A comprehensive online resource centre for anyone wanting to understand how to harness the power of options, including instrument definitions and their risk/reward profiles in plain English.
- An interactive Strategy Explorer that allows users to run what-if investment scenarios.
- Clear and transparent costs with no hidden fees.
- Direct human access to the broking desk and client services during office hours.
- Client confidentiality is assured. We do not share client information with any external party for commercial gain.
- AMT Futures Ltd is a FCA regulated entity with a paid up share capital of £1 million, well in excess of its regulatory capital requirement.
- Its business model is low risk – it is a principal broker trading only exchange-traded products. It does not extend credit or make markets.
- It has been consistently profitable for all but one of its more than thirty year history.
Longer Term Profitability:
- OptionsDesk is undertaking full front-to-back business process reengineering including transformation of its entire technology stack. This will allow it to access and service a much greater number of retail clients, as well as enable it to provide outsourced services to wealth managers, private and family offices and other financial institutions that Tier 1-3 banks no longer service.
3: The needs of and risks to consumers:
- After more than a decade of accommodative monetary policy the interest rate cycle has bottomed, inflation is increasing, and volatility is likely to increase. Options are ideal instruments for clients wishing to hedge against this increased risk and to profit from it.
- Retail investors and smaller financial institutions need access to the same tools and service levels as the largest banks and asset managers; but this sector is currently not catered for as it is deemed unprofitable from a commission-only agency business model.
- Much of the UK’s retail investments are in long-only instruments, with portfolio positioning focused long-only asset allocation and sector rotation.
- Options allow clients to hedge themselves against and profit from any market environment – bullish, bearish, low or high volatility.
- Granting options can provide valuable additional income provided that the risks are clearly understood and managed.
- Clients can use options to hedge multiple exposures in different asset classes including equities, interest rates and commodities.
- The main risk in exchange traded options is the unlimited risk of selling options without cover from holding the underlying deliverable securities. The same is true of buying and selling exchange traded futures contracts.
- These risks can be mitigated by clearly understanding the risk/reward profile of each trade, following a disciplined investment process with stop-losses as appropriate, and choosing a broker that takes the time to understand its clients’ investment objectives and provide guidance on possible ways to express their market views.
4: The expectations of stakeholders, for example, shareholders and regulators:
- Ensuring our clients have access to the tools and information necessary to make informed decisions.
- Providing best-in-class client service front-to-back.
- Increased profitability and return on equity through effective and appropriate client acquisition, automation of manual processes, and diversification into multiple asset classes and client sectors including under-serviced financial institutions.
- Full compliance with all applicable laws and regulations.
- Focus on appropriateness and suitability.
- Transparency of costs for the services provided.
- OptionsDesk will not sell data to 3rd
- Complaints handling procedures.
5: The products and services being offered and product strategy:
- Full service execution and clearing of futures, options and cash equities on an agency brokerage basis.
- Coverage of equities, fixed income, commodities and other regulated exchange traded instruments, with primary focus on UK and US markets.
- Focus on UK and Swiss clients, with full access to our broking desk and client services during office hours.
6: The governance and controls of the firm and of any member of its group (if appropriate):
- Quarterly board meetings.
- Trading Management Meetings on months when no board meeting (attended by board members).
- Monthly committee meetings
- Governance, Compliance and Oversight
- Technology & Operations
- Finance & Risk
- Mandatory compliance training
- Regular team meetings
- Mid and end year appraisals for all staff including executive directors.Fully transparent and easily accessible policies & procedures.
7: The growth strategy and any risks arising from it:
- Continued development of our digital product including online account opening, online chat, interactive strategy explorer, educational resources, news, blogs and vlogs.
- Planned migration to OptionsDesk app.
- Individual retail, sophisticated and high net worth client acquisition through digital (web and social media) and traditional media/marketing channels.
- Partnership with/service provision to smaller financial institutions and asset/wealth managers.
Geographic growth is likely to come from Asia and the Middle East before Europe and the USA.Risks:
- Delay to technology roadmap.
- Strains on our broking and client service teams if growth too rapid.
- Ensuring appropriateness.
- Increased volume of complaints as our client numbers grow.
8: Any diversification strategies:
- Expansion of desk coverage through dedicated fixed income and commodity specialists.
- Potential move into advisory brokerage and wealth and asset management.
9: The impact of the external macroeconomic and business environment:
- Changes in inflation, interest rates and FX cross rates will impact underlying markets, but because OptionsDesk covers all major asset classes, and its clients can trade bullish and bearish strategies equally simply, there will be little impact to the business from changes in the macroeconomic environment.
- Volatility is an important component of an option’s price, so high levels of volatility have a positive impact on AMTF’s performance.
- Brexit continues to have a negative impact because we no longer have passported rights to service EU clients and are too small to set up a European subsidiary.
- Although OptionsDesk has demonstrated its ability to function remotely, we look forward to a normalisation of the business environment. We find that working in our office greatly increases cooperation, and is essential as we undertake our full front-to-back business process re-engineering.
- We also find that in-person meetings with our stakeholders, be they clients, staff or third-party relationships such as software vendors and other suppliers, is much more effective than video or conference calls.