Looking back to the starting point, we’ve come a long way in understanding what it takes to build a brokerage house. Without question, if you remain consistent, committed to the finish, and realistic about your goals, your time and effort will finally pay off. You now have well-shaped products, reputable licenses, versatile payment services, and top-tier liquidity providers connecting you to exchanges, so all in one, your trading infrastructure is just about ready to welcome clients aboard. In the 4th article of the series, I will lay down the ground structure of your Marketing department, or at least how it’s supposed to look & function in different stages of your company’s evolution. Then we’ll talk about Governance, from the Board of Directors and shareholders to Compliance officers. You also need people talking about your products, so, apart from Marketing, you’ll have to build strong Sales teams and a well-oiled Back Office.  

Get the Marketing Machine Moving

                    Almost every business relies heavily on marketing to increase sales and recognition, so you’ll need to devote considerable time and effort to assembling your team. Strategies shift from an early stage to an advanced point, depending on the company’s progress bar. I thought of dividing your marketing needs into 3 phases: the early, mid-range, and high-level phase that coincides with the peak of your company’s growth process.  

Early Marketing

                Worldwide there are 4.9 billion internet users with purchasing power and specific consumer behavior. The main questions you need to ask yourself in this early stage are related to your target audience and communication channels. In a later stage, you’ll have to focus on a multi-channel approach, but, for the moment, the secret is to keep it lean and have minimum requirements from your marketing department.  

Basics to Start With

  Planning is one of the most significant tasks in the marketing department. It involves a marketing strategy to match your company’s objectives, identify customer personas, determine content initiatives, define KPIs, do competitive studies, and establish the budget. To bring in leads and start representing the company outward, you’ll first need a Digital Marketing Manager to distribute your budget between:

• PPC (Pay Per Click)/ media buying
• Automation
• Affiliation
• Front-end development
• Outsourced design & content

  I. With PPC (Pay Per Click), you pay when someone actually clicks or engages with your ads. For reporting, you begin with conversion data and move to traffic metrics. On the other hand, for media buying, you pay upfront for ad views and get reports for awareness metrics & reach. II. With automation, you’ll be using technology across multiple channels and actually make a difference if you absorb and touch base with the latest trends. Using as much automation as possible helps bring potential consumers closer to your sales pitch. After all, studies show a significant increase in lead numbers and conversions when using marketing automation software.                     III. On the affiliate side, make sure you have competitive payouts (do some research to see what others are paying), a robust tracking system that allows affiliates to check their performance, and fast & professional assistance for them. Taking care of affiliates guarantees your product receives the necessary exposure to efficiently attract new clients. IV. You’ll need at least 1 Front-End Developer, also known as a client-side developer, to produce HTML, CSS, and JavaScript for your website or Web Application. He’s at the crossroads of design and engineering, blending personas, pixels, and polish with the realm of logic and loops. V. As for Design & Content, you can outsource the services at this stage. Most agencies charge between $80 and $200 per hour for digital marketing. Just make sure your briefs are thorough enough and can generate content and creatives to match your projections.  

Mid-Range Marketing

                  Usually, it's not a matter of if but when your brokerage house hits the mid-range threshold. Most players in the market dwell in this juicy phase, where a lot of change is happening, and you start to get traction. You've just come out of the simmering stage and need to ramp up your marketing efforts for advanced brand recognition. You'll start focusing on how you rank in your client's preferences and your overall ratings, so here is a breakdown of what's next:  

Marketing Managers

 

• Apart from the early requirements, you now need Marketing Managers for each subdepartment or office you may have in different corners of the world. It's almost impossible to single-handedly coordinate everything, so having someone in charge of each division of your marketing machine is crucial. Your trusted CMO should oversee the entire activity, approve plans & strategies, and maintain a steady flow of communication.

 

PR, Internal & External Branding

 

• The most valuable asset your company has is the brand. Write that down. Then ask yourself what you can do to protect it and make it stand out at the same time. Use PR campaigns to build trust and stability, bring new launches into the spotlight, and manage your online reputation. In the end, this will only increase your client numbers and rank.

 

• Any marketing activity carried out under your brand name can be called branding to some extent. Make the most out of the Social Media platforms, do profile building, link building (SEO), reach out to as many influencers you can afford, put up some outdoor ads, go for radio advertising, and everything else that counts as an external branding effort.

 

• When it comes to internal branding, your focus should be on employee morale and company culture. When you finally have a well-thought-out internal brand, you'll find that your staff is more engaged and productive, so it's a win-win on both sides.

 

Conferences, Summits, Presentations, Sponsorships

 

• You'd be surprised to find out what an excellent conversion rate you can achieve by simply hosting some product-related presentations, such as the Coffee Trading workshops one of my marketing managers thought of. Meet with your clients, attend themed conferences, be active and visible, and leave them wanting more.

 

• Sponsorships work effectively when you're pushing for brand awareness. You can try attaching your name to a big sports game, as I did with Juventus F.C., one of football's G.O.A.T (Greatest Of All Time), or music festivals, art shows, business expos, you name it. Be prepared to spend considerable cash, from 20-30K for some influencers to millions of dollars for big names out there. Then harness sponsorships' power through personalized content, email marketing, and social media. As a result of your activation efforts, you get more leads that will eventually become paying customers.

 

Social Media & How to Diversify Further

 

• Although social media is mostly used for social networking, it has become a powerful tool for advertising a company's name and products online. With the power of social media, you can quickly reach many people while simultaneously reducing costs. At this point in history, I don't think it's complete bollocks to say Tik-Tok may supply the next president to God know what country, so don't underestimate the impact social media platforms could have on your business.

 

• When I say diversify further, I mean you should consider selling your technology to 3rd parties that may include White Labels, IBs, or any other partners interested in your offer. It goes without saying that you should have everything stable and tested, ready to be sold as a premium package of products & services. This time it's you who's selling, so tables do turn if you put your back into it.

 

High-Level Marketing

                  If you've reached this level, kudos to you! Few brokerages houses make it this far, so take time to breathe in the thin air, then start strategizing again. Everyone expects the world from you now, so reaching new heights gets trickier while free falling is a constant reminder.  

How to Look After Your Business When You're On Top

 

• I suggest you add B2B services at an institutional level, selling your products & services to other businesses and organizations. B2B is very different from B2C marketing, which is geared toward consumers. In B2B, you need to guarantee the highest level of security and compliance and spot-on solutions for your institutional clients.

                     

• At this point, you should be even more concerned with branding and pursuing global partnerships & ambassadors that could help you stabilize your market position in the long term. You can choose ambassadors from cinema, football, racing, tennis, UFC, and even extreme sports such as the wingsuit flying industry. The budget here is in the millions of dollars. Let's assume your Branding Manager has good negotiating skills. In this case, you might even be able to strike a deal for less than a million and use the ambassador's image for only 3-4 months, with limited posts and reach on their part.

 

• When your company name is on everyone's lips or at least talked about in your market segment, why not focus on Environmental, Social, and Governance ("ESG") factors? Your relationship with your customers can be well nurtured due to such a smart move. When your clients show interest in ESG, broker-dealers should consider these preferences part of the know-your-customer ("KYC") process and use them as a sidekick on the road to greatness.

 

Conclusion

  The business world is definitely not for everyone. However, considering that you are reading my 4th article on Building a Brokerage House, it shows that you've already embarked on this journey, or just gathering priceless information to give you an edge for when you're ready to start. I've tried to fit everything into a logical, step-by-step approach, similar to how I've managed to succeed in this field and many others. However, no matter how much you write and explain, nothing compares to each entrepreneur's real, on-the-spot experience. This article will be continued in a future post, in which we'll discuss Governance, Compliance, Back Office, and Sales in detail. Stay tuned, and always on top of things!

This is the third post in the Building a Brokerage House series. The first article sketched the business’s general layout, helping you define your services, product package, and target audience, while the second article put the intricate regulation side in perspective. I’m about to go deeper into the subject and reveal the next moves you need to make to see your business take off and adjust your strategies as you go along. Every broker-dealer is different, but calibrating technology to your business model follows the same pattern, so I’ll share a breakdown of costs, skills, technology & payment providers, connection to exchanges, and everything else I find useful for you to know.  

Internal vs. Outsourced Development

                  Between 2000-2005 trading was the prerogative of informed and institutional investors. However, with the growing internet and smartphone spike, technology has rewired the trading infrastructure, allowing retail clients to access the markets and use derivative instruments, increasing trading volumes and liquidity.                       Because everyone is now focusing on technology, your startup needs to constantly advance the backend & frontend and automate most of the processes, but first, you’ll have to choose between: 1. Internal Development 2. Outsourced Development 3. A mix between Internal and Outsourced

 

Internal Development

  Most of us dream of becoming the architects of our vision, but it’s paramount to understand that doing everything in-house may involve not only huge costs but teams of highly-skilled professionals. You may spend hundreds, if not millions of euros a year and gain an advantage of nanoseconds over your competitors.

Pros:

• You build everything from scratch and get total freedom over design, features, integration, and functionalities.
• You adjust along the way and save time by not waiting for outsourced developers to start working on your requests.
• You manage your own teams, which gives you a free hand in picking them out and leading them towards your goals.

 

Cons:

• The overall costs are massive and could cripple your business from the start.
• It’s not cheap to have Dev-Ops Engineers, considering they rank in the top five of all tech salaries, commanding an average pay of €106,000.
• It’s unrealistic to claim that the entire technology ecosystem can be developed internally, so you’ll have to reach deep into your pocket and pay for extra services and integrations as well.

 

Outsourced Development

  This approach may be sensible for a brokerage house just starting out. Paying for already-developed services, such as a Whitelabel, with rule-based automation can spare you the nuisance of doing everything yourself. You’ll be able to focus on improving the customer experience, create partnerships to sustain your cash flow needs, and strategize for better and faster ROIs.

Pros:

• The start-off is cheaper, ranging from €250,000 to €500,000, and it gives you extra space to funnel your funds into other areas of your business.
• You get a determined product package accompanied by a support network.
• Apart from the platform and features, they provide API for all your other integration processes.

 

Cons:

• Most of the 3rd party services you pay for are pre-built with little room for development or customization.
• You still have to make a lot of additional integrations and pay tens of thousands per month for hosting, technical support, maintenance & change requests, feed, liquidity, and Back Office.
• Depending on the business plan you acquire and the technology provider’s availability and priorities, all your development tickets will take time.
• You just rent the technology, you don’t own it, which means that every additional request will pile up as an extra cost for you.

 

A mix between Internal and Outsourced

  In my experience, paying for a Whitelabel and adding internal developments might be what you’re looking for at this point. You can buy the platform & features, brand them, negotiate as much as you can for extended permissions to customize, then proceed with the CRM, payments, and liquidity processors integrations yourself. Basically, you need a predefined structure that you can fashion to your necessities.  

Essential Integrations to Get the Ball Rolling

                    You now have a functional platform with various features. But there’s no business without clients, and you’re not going to have them unless you start receiving online payments.  

Choose the Best Payment Provider for Your Business

  If you want to smoothly run your customer payment process and set up your cash flow, online payments via payment gateways are the best way to go. You need a well-built system to handle sensitive information when charging clients’ debit/credit cards. The gateway transfers the transaction data and approves or declines the payment. This is when the payment processor comes in and acts as a mediator between the cardholder, merchant, acquiring bank, gateway, and issuing bank. It groups and manages all clients in one big merchant account, with almost the same rate and fee for all clients.    

Choose your PSP based on:

  1. Overall reputation: focus on longevity, quality, and level of support. 2. Service package: international coverage and multiple payment methods (debit cards, e-wallets, prepaid cards, mobile payments). 3. Technical requirements: API & iFrame connections. 4. Security protocols: the PSP must adhere to worldwide security standards, such as Payment Card Industry Data Security Standard (PCI DSS). 5. Account opening process: find out if it’s lengthy, time-consuming, or straightforward and less complicated. 6. Support services: a large number of payment rejection rates can lead to reduced profits. You’ll have to pay additional costs by 3–4.5% of direct debit payments for collections and warnings. Most PSPs can provide risk protection services to eliminate these additional charges. 7. Costs: PSPs usually have a one-time setup fee and a fixed monthly cost that could start as low as €475.

As a brokerage firm, you’ll also need to store customers’ funds in separate bank accounts, to ensure that they will never be misappropriated. Segregated accounts mean that the company cannot use the funds to conduct business operations. The money is secure in case the company goes bankrupt. Traders are more likely to trust brokers that offer segregated bank accounts, so it’s a win-win situation.  

Liquidity Providers & Connection to Exchanges

                  A liquid market translates into smoother transaction flows and competitive pricing, so liquidity provision is essential for effective trading. The main purpose of a liquidity provider is to ensure an uninterrupted flow between demand and supply and provide the best buy and sell prices. If you choose an Electronic Communications Network/Straight Through Processing (ECN/STP) network to execute your clients’ trades, make sure to connect to multiple Tier 1 liquidity providers to secure the best spreads and dealing rates. When brokers connect to the exchanges, they typically use the FIX Protocol (Financial Information eXchange.) Most trading systems have FIX API connections available.  

To find the best liquidity provider, you’ll have to analyze several factors:

  1. Overall package: should provide multi-asset liquidity, nominated account in different currencies, and access to the FIX protocol and historical data. 2. Market depth: a high number of buy and sell at each price suggests a higher market depth, indicating market liquidity. 3. Fast execution: with re-quotes or slippage. 4. Pricing: competitive spreads and low commissions. 5. Data feeds: stable & reliable with feeds reflecting real-time prices from various exchanges. 6. Regulation: for best practices, the liquidity provider should adhere to strict rules and comply with regulations the same way a broker does. 7. Reporting: automated and compliant reporting system: trades, FIX bridge, swaps & rollovers, order book access. 8. Software: FIX protocol and other APIs, MT5 bridge connections, FIX bridges.  

Cost Estimates and How Brokers Make Money

                  Apart from the core technology, there are additional costs for all integrations you need. You want extra features - you need to pay. You want constant developments - it adds up to your monthly bill. All service providers have various business plans you can choose from, and most of them leave room for negotiation, so write down your necessities and start searching for the ideal setup.  

I’ve rounded up some of the most important integrations you’ll have to make and the average costs of covering them.

                  As for profits, you need to understand that commissions on trades are now a relic of the past since Robinhood disruptively eliminated them. You can still apply deposits/ withdrawals, inactivity, and overnight fees. Like most players in the industry, you can choose the bid-ask spread as a key source of revenue.  

Conclusion

  Nothing is as easy as it seems, especially when you want to go the entrepreneurial way. Building a Brokerage House takes more than just basic knowledge about the financial markets. It requires a large capital and in-depth research, high technology with key people, a great deal of willpower on your part, negotiation skills, and a trained eye for innovation opportunities. Expect the worst, but aim for the best and be prepared for a lengthy process. Even so, the rewards will definitely outmatch the obstacles and difficulties along the way. There are still some important sides of the business you need to be aware of, but I’ll leave it for the following articles in the series.   You can follow me on Twitter  and  LinkedIn!

In the first article from my new series, 'How to build a brokerage house', I reviewed all the essentials you need to know if getting into this line of business. I believe that today's market is full of untapped opportunities due to a lack of know-how and proper management of the disruptive challenges invading the fintech world. A deeper understanding of these technologies will help you gain new insights in this competitive field, then find a niche where you can grow. My second article on this topic will cover the licensing part and how to regulate your business.

What is a brokerage license?

                  The brokerage license allows you to offer online trading services depending on the jurisdiction you choose and the regulatory entity covering the services you want to provide. So, once you've done your homework and feel ready to get started, you can think about the licensing and regulatory side of the business. Choosing the regulator helps you to: 1. Decide on the type of customers you are targeting 2. Have a clear idea of what services you can offer 3. Prepare the amount of capital you need 4. Establish the company's organizational chart Before I get into more details, I will discuss the pros and cons of having a brokerage license.

Pros and cons of a licensed broker

                 

Pros of brokerage license:

  Credibility and authority boost A regulated business gives customers the certainty that you comply with the law and are committed to ethical business practices. Additional exposure to financial support Generally, a brokerage license can provide a seamless flow of funds, which, in turn, contributes to business development. Motivates investors Authenticity and credibility are something you can't earn overnight. To gain such benefits, a company must work within the letter of the law and maintain compliance without the slightest deviation. Such commitments can even help the business benefit from significant investment from outsiders. Discourages unfair practices Virtually every business that holds a brokerage license has an obligation to avoid unethical business practices.  

Cons of brokerage license:

  Strict financial obligations Obtaining a brokerage license has certain costs, both to receive and maintain it over time. I will talk about this later in the article. Ongoing monitoring and verification If you become a licensed broker, you should expect frequent visits from the regulated authorities to ensure the smooth running of the financial markets locally, such as the ASF in Romania. Lack of flexibility in marketing activities A brokerage license can limit your creativity in how you promote your online trading products and services.  

How does the regulatory and licensing part work?

  The world's major financial markets are constantly under the scrutiny of regulators designated to ensure that their activities comply with legal requirements. For example, the Financial Industry Regulatory Authority (FINRA) is responsible for the smooth running of capital markets in the United States. At the same time, for Europe, we have the European Securities and Markets Authority (ESMA). Going even further, we have different regulators at the local level - BaFin in Germany, CNMV in Spain, CONSOB in Italy, and HCMC in Greece are just a few examples. Next, I will focus on the licensing side of the European market, as this is my forte in knowledge and expertise.

Brokerage Licensing in Europe - CySEC

                  The Cyprus Securities Exchange Commission, known as CySEC, is the regulatory body for the financial industry in Cyprus. Its mission is to ensure the protection of investors and the prosperous growth of the securities market. As soon as Cyprus became a member state of the European Union (2004), CySEC's regulations and operations overlapped with the European financial regulatory framework, offering Cyprus-registered companies access to all European markets. Most companies currently licensed under CySEC are STP brokers or Market Makers offering access to online trading of financial instruments via Contracts for Difference (CFDs). Others handle asset management or investment advice. STP brokers and Market Makers - what are the differences?

• STP brokers: they send all orders to the market
• Market Maker (MM) brokers: they provide bid and offer quotes for specific financial instruments, which can be viewed and traded by individual clients on the broker's online platforms; under their risk management mandates, the Market Maker brokers may hold some or all market risks arising from client orders.

 

How can you set up a CIF (Cyprus Investment Firm)?

                  According to the Legal Framework, a broker must set into place or outsource the following departments and functions to receive CySEC regulation and access to the rest of the European markets:

• A Cyprus-established firm with local offices
• It must have at least two executive and two non-executive directors
• Management consisting of 2 senior managers (CEO & COO/Managing Director)
• Trading room for receiving and transmitting customer orders and executing orders
• Portfolio management department (if applicable)
• Investment advisory department (if applicable) for providing personal recommendations to clients
• Back Office for opening new accounts and maintaining and updating client files
• Finance and Accounting Department for book-keeping and record-keeping of both CIF and client records
• Marketing and Customer Service departments
• IT department for the protection of the company's data, network, servers, and personal computers
• Risk Manager for identifying and assessing risks, plus designing and implementing risk strategies or procedures
• Compliance Officer responsible for the compliance of investment services and activities with the CIF's legal obligations
• Internal auditor to ensure that the operations manual is up to date with the provisions of both internal processes/procedures and external legal obligations
• Anti-Money Laundering Compliance Officer

The licensing process can take up to 6 months.   What are the minimum capital requirements? Depending on the investment services and the type of broker you choose, certain minimum capital requirements will apply. The levels are the following: 1. 50.000 € (without holding client funds) or 125.000 € (holding client funds) for STP brokers The services include reception and transmission of orders, execution of orders on behalf of clients, portfolio management, and investment advice (the last two require a special license). 2. 730.000 € for Market Makers In addition to the services rendered by STP brokers, Market Makers can also offer underwriting and placement of financial instruments on a firm commitment basis. Your clients will also benefit from the operation of the multilateral trading facility.  

What other types of brokerage licenses are there?

 

ASIC – Australia FCA Canada – Canada DFSA – UAE SFC – Hong Kong MAS – Singapore FCA UK – the UK I will elaborate more on UK licensing.  

UK brokerage license

  The regulations set by the FCA must be strictly followed by the licensor's customers and ensure long-term cooperation between the parties. Licenses for brokerage activities in the UK are issued to firms that fully comply with all UK legislation, have their own office in the UK, and have a certain amount of authorized capital. The main feature of the UK financial rules is the absence of clear restrictions on the amount available in the company's bank account: the applicant sets the required level himself, however, a form justifying the amount is added to the pile of documents. Confirmation of the account's funding level is often necessary together with the other papers. UK jurisdiction involves and requests the employment of UK residents in senior management positions. All other board representatives must have considerable financial management experience. The application form, branch information, and local bank accounts are essential for your request to be considered. Obtaining a brokerage license is impossible without registering a legal entity and opening an account. The brokerage license is issued after a thorough study of documents and tools for operating in the foreign exchange market. The main condition is an authorized capital of €125,000. Another mandatory requirement is the presence of at least 2 local directors (British citizens) in the company structure.

Other types of licenses - EMI and neobanking

                  EMI

• An EMI (Electronic Money Institution) license allows an e-money institution to operate. An EMI license can open many opportunities, such as expanding your business worldwide by opening IBAN, SWIFT, and SEPA accounts and offering your own payment cards.
• Early summer of 2018, the Romanian government took emergency measures in e-money regulation and EMI activities in the country.
• Here are some of the provisions that came into force:
• authorized capital of 350,000 euros;
• BNR (the National state bank) must approve the company’s management
• credit structures, legal entity-issuers, and postal service providers releasing e-money may be allowed to operate according to the rules of national and European regulators;
• a clear administrative system for organizing the issuing of electronic funds;
• the business can start within 12 months of receiving regulatory authorization (RNB);
• an audit once a year - with the report received and submitted to the RNB (acting as supervisory authority);
• evidence of reasonable management, a well-established e-money issuance process, a clear organizational structure, and developed risk control procedures;

  Neobanking Neobanks are 100% online banks that use digital channels to serve customers. Unlike traditional banks, neobanks do not have physical branches, and everything is done through digital services. Typically, a company can offer neobanking services in two ways:

• By obtaining an EMI license enabling digital payment services, including the creation of IBANs, as well as the release of e-money (BIN sponsorship - credit card) and managing it, allowing the end-user to keep funds in the account.
• Through a Payment Institution (PI) license, which supports a wide variety of payment services allowing transactions to be made by card, mobile app, transfer, or direct debit. PI also supports cash withdrawals, account deposits, foreign exchange transactions, and data processing.

 

Conclusion

                  Obtaining a brokerage license involves strict rules, significant capital requirements, and time to devote to the process. A brokerage firm can provide a good return on investment if you learn to play your cards right. Not everyone in this industry can launch a successful business. Hard & soft skills could be a plus, as well as generous investment capital and a high capacity to adapt to industry changes. I will talk about all these points and more in the next parts of the series, hoping it will help you set up an online trading company. You can follow me on Twitter and LinkedIn!  

In the past episodes of this Blockchain series, I talked in-depth about the technology that both myself and other fintech entrepreneurs are convinced will revolutionize the capital markets. I conclude this series by discussing some use cases for this technology at various stages of the project and the profound changes it is starting to make to the financial markets and macroeconomics. As we have already shown, cryptocurrencies such as Bitcoin and Automated Market Makers or smart contracts are already economic realities. It is also customary as such this because Blockchain is a technology that can be used wherever databases are required, in the financial world and beyond. It is easy to guess that many of the next unicorns (startups worth at least $1 Billion) will rise primarily from this technological sector. As proof of this, I will first list five initiatives from different stages of implementation, in various sectors: 1. Elections. The fact that Blockchain is a decentralized register, impossible to falsify and whose records have timestamps, eliminates, in principle, any possibility of fraud related to electronic voting while retaining all its advantages. This is what a startup from the U.S. state of Virginia, FollowMyVote, is already doing.                     2. Medical databases. Here, the utility of Blockchain consists in maintaining the confidentiality of personal data, but also its interoperable and decentralized characteristics help. A Denver-based company, Burstiq, focuses on smart contracts in this sector.                     3. COVID vaccination. We have already talked about monitoring stocks and ingredients from the food industry and the possibility of identifying the origins of a toxic element. The idea of using the technology in stocks of COVID protection equipment and vaccines is typical, and a group of researchers in Abu Dhabi and the United States has already developed a proposal that takes into account such a thing. The scandals related to the Russian Sputnik V vaccine, of which one variant was approved, and another delivered, would be impossible through such strict monitoring, not to mention the advantages of streamlining the distribution. 4. Copyright. The evidence of music broadcasts on the radio and in different spaces is hugely complicated. The artists are continuously complaining about their revenues disappearing into the void due to many broadcasts gone missing with or without intention. Blockchain is a registry available to anyone, automatically and without error. And here, the discussion leads to smart contracts, and this is handled by a New York company called Mediachain, which Spotify acquired in 2017.                     5. Money laundering. Even if Blockchain started its career with cryptocurrencies on the Dark Web, for various illicit payments, it could be used to certify the identity of individual financial operators, along with their biometric data. Ocular, a Los Angeles startup, creates a database that makes identity theft or forgery impossible while simplifying access to legitimate users' documents.                    

The capital markets revolution

When referring to online trading and financial markets, the Blockchain is in its element, and the diversity of concepts and approaches is almost infinite. From my point of view, the novelty brought by this technology on the capital markets refers to three fundamental mechanisms, all related to: 1. The tokenization of assets. Thanks to Blockchain, documents that prove ownership of some assets or even the assets themselves, whether it's art or wine, are replaced by non-counterfeit tokens (symbols). You have probably already figured out the advantages of this transformation: security, liquidity, convenience, transparency.                     2. Democratization of investments. Nowadays, small investors generally have access to promising companies only after making their initial listing on a stock exchange (when they tend to mature and produce a steady but low profit). Venture Capital firms involved in this tend to delay the listing time to reap higher yields (profit or return of investment) as possible. This barrier tends to be removed by converting securities (shares, unlisted shares) into the same tokens, which can be accessed through "unicorn funds". This is precisely the structure proposed by ADDX (previously iSTOX), a blockchain company in which the state of Singapore and its stock exchange are involved. Access to unlisted companies can be granted starting from $20,000, a relatively large amount for beginners but insignificant compared to the millions circulating in the area of investment funds. What I said at the beginning, that Blockchain would produce the next unicorns, is also verified, meaning that it will contribute to their financing, irrespective of the industry.                     3. Ease of financing. From the entrepreneur's point of view, the mechanism described above translates into money from several sources, available on more advantageous terms, faster and more on-time than now. Peer-to-peer lending platforms increasingly benefit from the input of Blockchain technology and are just a marginal example, as the lender will only expect interest. But an entrepreneur who seeks to co-opt mini-angel investors in the longer term will usually place on the market many tokens that can be accessed by those interested, who expect benefits like those of angel investors but proportional to the much smaller amounts. The process is called ICO (Initial Coin Offering) because the idea of cryptocurrency is applicable here, but not in the sense of "virtual money bag". But, as the name suggests, in a sense, close to IPO (Initial Public Offering), ownership of a part of a startup. Bureaucracy, late access, high access thresholds and all other barriers related to traditional finance are missing entirely.                     By granting access to the capital markets for many young, economically active investors from the Millennials segment, the Blockchain makes all this money productive, which would otherwise generate actual negative interest rates in bank accounts or simply be spent on entertainment. And the beneficiaries of the financing are exactly the entrepreneurs of the same age category, characterized by creativity and special business skills. I don't think that in 10 years, the global economy will be similar to the one we have today. The regulation and refinement of technologies that today may seem exotic or risky will lead to a world in which prosperity will be even more accessible to any informed and initiative-driven person, regardless of his starting capital. And this prosperity will impact the entire society.                     You can follow me on Twitter and LinkedIn!

We have talked about millennials repeatedly. In this article, I intend to talk more in-depth about their financial and investment behaviour to prove that the Blockchain Revolution is made not only by but also for this group of people. Millennials, also called Generation Y, refer to people born approximately between 1980 and 2000. These people have radically different characteristics from the generations before them - Baby Boomers and Generation X. Two of these characteristics are essential. First of all, they are technology-driven people, determined mainly by the widespread use of the Internet, starting from the '90s. The second is related to a historical event that led to profound changes in mentality: the subprime mortgage crisis in the United States, from 2007-2009. Many of us know that this crisis left many Americans homeless (and not only). I'm talking about those who have borrowed from banks beyond their ability to pay and were rendered unable to refinance their loans. The crisis spread, slowing the global economy and dramatically reducing the number of jobs available to those who wanted to start a career. I can attest to this because I am part of this generation. Even if no financial catastrophe occurred around me, I had a tough time during my first years, similar to all my contemporaries.                  

General characteristics

  The oldest Millennials were 27 when the sub-prime crisis boomed. When others usually start a career, many of them witnessed helplessly the financial crash of their parents and could not find a profitable occupation. The distrust of banks, Wall Street (also attested by the Occupy movement, which began in 2011) and the classical world of finance are just part of the mentality of a human contingent that was no longer willing to work 60 hours a week, paying the mortgage for a house that, after all, they did not need anymore. A typical Millennial has some essential characteristics: • Searches for - and finds - offline or online gadgets that can simplify his life, offer him alternatives, and help him keep in control over his own time. • We will not meet him at a bank's queue with payment orders; instead, he will use a mobile application for transactions.                     • He doesn't know or care why the cards are embossed, but he wants to be sure he can use them. • He can avoid scams and phishing schemes, carefully comparing and choosing the most relevant offers when making a purchase. • We will meet him less often as a couch potato, passively swallowing the brainwashing of TV programs for hours. Instead, we will see him more often on a video platform or music streaming application, where he can make his video or audio playlist. Similarly, he won't stick to a bank forever, as he will leave as soon as the application does not work or the fees and commissions get too high.

Financial behaviour

  All of the above portrays a very different financial behaviour - particularly an investment behaviour - from previous generations. Several other well-established features can define it: • The need for instant or quasi-instantaneous transactions, outside of "office hours". • Operations performed from home or anywhere, anytime, given that his work schedule is less rigorous than his parents. • Cross-platform facilities, because a Millennial will want to perform the same transactions on a laptop, mobile, but also on his office computer. • The ability to choose between two banks or stocks and between assets in geographically distant markets and different financial instruments are often sophisticated. • The permanent need to keep himself informed corresponds to the financial education and counselling facilities provided by fintech platforms. • Distrust in the classical economy and centralized financial markets, which can turn into an appetite for alternative currencies (crypto) or disruptive economic concepts, from crowdfunding to awareness of the value of personal data.                     • Intuitive understanding of Blockchain, a technology related to Bittorrent. Millennials grew up in the era of illegal music downloads. And even if they abandoned them once, Steve Jobs made it possible to stream audio for more than reasonable amounts. • Caution - or in other words, a lesser financial prowess compared to his parents, which translates into the desire to invest little, in the order of hundreds of dollars or euros, or to be able to acquire fractional shares. • A less cautious attitude towards the volatility of cryptocurrency assets, which is since once informed, Millennials are willing to take risks, if only to learn from losses. The time for retirement is still a long way off for them, and the idea of putting money under the mattress - or in a bank account - for old age, with low yields, isn't among their priorities. The last two features are contradictory only at first glance. Millennials are unwilling to invest much, but they are often willing to invest - much more diverse and challenging to understand, even risky asset classes. All these needs are met by today's fintech giants, from Robinhood to Revolut. Also, with our products, such as those offered by CAPEX.com, we can promptly integrate various innovations in the market. The success of fintech and cryptocurrencies is linked to what these markets and tools offer to the abovementioned consumer.                    

Millennials and Blockchain

  The technology I set out to explain in this series of articles, Blockchain, was the basis for many of the tools and platforms of these years. Several studies conducted in the past two years include several exciting pieces of information. Here are some of them: • Subjects between the ages of 18 and 34 familiar with Bitcoin are three times more numerous than those over 65 and twice more numerous than those between the ages of 50-64. • In the same age segment, 59% of those interviewed have a positive attitude towards the mentioned cryptocurrency. • 18% of subjects in the 18-34 age group are Bitcoin holders, in contrast to only 4% in the 45-54 and 55-46 segments and 1% in the 65+ segment.                     • 42% of those in the same segment, 18-34, say they could buy Bitcoin in the coming years, compared to only 25% in the 45-54 segment. • 76% of Millennials prefer investing in cryptocurrencies to investing in gold. • Referring to other investment opportunities also from the 18-34 age segment, 38% of respondents say they would invest in cryptocurrencies rather than government bonds, and 35% prefer stocks - higher percentages than other age groups. • 56% of young people between the ages of 18 and 34 and 57% of adults between the ages of 35 and 44 are convinced that there is widespread adoption of cryptocurrencies.                     On top of everything, the so-called COVID crisis turned out to be quite an opportunity for fintech. We also felt it on our skin because 2020 was an excellent year for us, as we managed to obtain new trading licenses and some consistent rounds of financing. The isolation created to a large extent by the pandemic has caused much of the investments to move online, as has shopping and business meetings, and we have been there to receive new customers. They used their available time to educate themselves financially and take the first steps in their career as investors. Finally, the downward trend has been reversed faster than in the 2007-2009 crisis due to the massive financial aid that developed economies or supranational courts such as the European Union have thrown into the market. After all, this money is in the pockets of each of us, especially of the economically mature generation, Millennials. And here are again – this is yet another incentive for investment. You can follow me on Twitter and LinkedIn!

In past episodes of this series of articles, I stated that the Blockchain technology would certainly expand its scope from cryptocurrencies themselves to other financial and capital markets. The most substantial evidence in this regard is the incredible rise of Automated Market Makers, starting from 2018. In the following lines, I would like to explain how this new market segment works.

Market makers and traditional trading

                      As the concept of Automated Market Makers is a modification of the traditional trading system, we will start with a definition of so-called non-automated market makers. Beginner investors find out fairly quickly that brokers (or trading companies) are not the only trading intermediaries. Market makers are the second link in the seller-buyer chain. They have two primary responsibilities: 1. Ensuring the market's liquidity, in other words providing the necessary asset volume needed to carry out extensive transactions. 2. Establishing the bid and ask price, with the difference being the spread. Market makers ensure that an investor (or, as a rule, the broker designated by him) can trade within these limits. The profit comes, predictably, especially from the difference between these prices and is shared with the brokers. It is easy to understand why traditional market makers must be massive financial institutions to assume such a status. Depending on the asset class/classes in which it operates, the role falls in the hands of several types of institutions: • Stock Exchanges: for shares and other similar assets. The role is mainly assumed by famous stock exchanges such as the New York Stock Exchange or the London Stock Exchange. • Banks: trading fiat currencies. • Specialized market makers: for example, these are used by exchanges like NASDAQ. Regarding the difference between market makers and brokers, Investopedia offers a relevant and easy-to-understand comparison: the former resembles wholesalers, while the latter has similar characteristics to retailers. I know from personal experience that some brokerage firms can turn into market makers over time, just as a delicatessen can launch its gourmet brands for distribution in other stores. However, I can confirm that the two businesses remain conceptually different when referring to department structure and functionalities.

What does the Blockchain bring new to the table?

                      Because I talked more in-depth about Blockchain in one of my previous articles, I will not insist on technical aspects. Through Automated Market Makers, I will only say that it makes the leap from the actual cryptocurrencies to the markets where these are traded, and this leap is currently taking place right before our eyes. This is one of the first manifestations of the ecosystem called by specialists DeFi (Decentralized Finance). In the market maker segment, the Blockchain breaks the monopoly of large financial institutions through automation. The walls, the offices, the employees and especially their massive liquidity are replaced by something that looks more like a software structure. In short, the term Automated Market Makers (AMM) defines: • A software architecture based on Blockchain, digitally connecting liquidity providers with brokers and trading companies. In turn, these will interact with investors, most likely through online platforms. • A mathematical formula that sets the maximum liquidity in a given area. • At the moment, Automated Market Makers make transactions between cryptocurrencies and fiat currencies or tokens (value symbols derived from them) possible. However, the technology applies to any asset transaction, and I do not doubt that it will be used in the future. • Very low commissions (these can even go to zero, but in this case software creators can no longer turn in a profit). Since 2018, Uniswap, Sushiswap, Curve, Balancer or Kyber Network have entered this new market. In the case of Uniswap, the AMM with the highest volume, the operating formula is straightforward: x * y = k, where x and y represent assets, and k stands for the total liquidity in a specific area. One of the working principles here is that the liquidity in the respective area does not change for the symmetry of the transactions. Other Automated Market Makers use more complicated mathematical devices. However, it is clear that the Blockchain brings clear advantages here, such as: • Very low costs for users, between 0.1% and 0.3% for large Automated Market Makers. • Secure, decentralized processes. • A competitive market, with clear benefits for customers, because anyone can create a segment / become a market maker, even if it does not automatically entice success for that market. For that market to function, the Automated Market Maker must attract so-called Liquidity Providers, who charge commissions because they provide the necessary volume of assets. This way, the so-called Liquidity Pools are created for each pair of assets. Formulas such as the one mentioned for Uniswap help adjust the price according to demand and supply. Automated Market Makers also have another significant advantage: the so-called smart contracts, created from computer codes. These contracts are impossible to break because they extend the software architecture represented by the market and the respective pools.

Precautions and the future

                      Automated Market Makers are an explosive market, but it is only at the beginning of its evolution. At the moment, it suffers from a series of inherent disadvantages, such as the possibility of error (even if it is not the market maker who makes them, but the user because the latter can cause errors when finalizing the aforementioned smart contracts). Also, because the markets created often touch on cryptocurrency trading, Automated Market Makers inherit their reliability. In other words, they will have problems when a new cryptocurrency also has functional issues. Specialists also noted the relatively limited number of functionalities currently available on this type of platform, compared to more mature areas of the fintech industry, which are in the process of accelerated diversification. Ultimately, the future of Automated Market Makers will be dictated by the general requirements of the fintech area. In my view, they are by no means limited to technology, but to the following things: • Transparency/trend towards financial and technological education. • Regulation and good practices. • Shallow entry threshold: in the case of AMM, investors and Liquidity Providers can enter the market with minimal amounts. In the latter case, the necessary amount can start from $50k, which is low compared to the financial strength of traditional market makers. • Usability/reliability/facilities from the user's point of view. Whatever the current shortcomings, I believe that Blockchain-based markets and tools will undoubtedly evolve in this direction, as is the case with the first such market, the cryptocurrencies market. The technology is far too valuable and versatile for such initiatives to stall, even if we might witness some bubbles and crashes. And that is precisely why I considered this introduction to be necessary. You can follow me on Twitter and LinkedIn!