OANDA chief executive Vatsa Narasimha is looking for mergers and acquisition opportunities in Australia as the online foreign exchange trading industry faces consolidation amid increasing regulatory pressures.
New York-based Mr Narasimha told The Australian that OANDA was looking to ramp up its Asia-Pacific presence and would have an appetite for investments, including potential deals in Australia, after its recent buyout by global private equity firm CVC Capital Partners.
“Australia, particularly on the trading business, is a mature market with a lot of sophisticated traders, and strategically it is a big growth market for us, but growth over the past three years has been purely organic,” he said.
“Over the next few years we expect to continue this organic growth, while also broadening our product base and investing in technology that provides better risk management tools for customers. We also want to invest more in marketing dollars.”
It comes amid increasing regulation of the industry, with Australia adopting client funds protections in April and Britain and Europe announcing plans to limit the kinds of products and the amount of leverage that can be offered to retail investors — moves that Australia is expected to follow.
The Australian Securities & Investments Commission last month called on participants in the retail foreign exchange industry to improve their practices after a review by ASIC found client losses in retail over-the-counter options “seemed high”. It found the percentage of unprofitable traders was up to 80 per cent for binary options, 72 per cent for CFDs (contracts for difference) and 63 per cent for margin FX.
“If you asked me for an educated guess, I would suspect Australia to follow the rest of the world,” Mr Narasimha. “But in terms of its effects on us, OANDA don’t offer binary options, so that doesn’t make a difference to us, but for those who offer binary options, part of their business is going away.
“When it comes to FX, we’ve always believed leverage is needed to trade this asset class because the movements are small, but we believe in responsible leverage. Typically, in all markets around the world, including Australia, we have among the lowest, if not the lowest, leveraged provider.”
He feels the retail FX industry in Australia is ripe for consolidation amid regulatory change.
“Definitely, and this has played out in other markets — as regulation increases and leverage comes down — certain business models can’t survive that,” Mr Narasimha said.
“Australia is a large market with a lot of sophisticated traders, but there are a lot of brokers and many smaller brokers.
“The client funds rule that took effect in April is going to already start to put some pressure on the industry. As that rule gets implemented, I’m sure that some brokers will feel the pressure, and when leverage restrictions start, that’s also going to change people’s business models.
“So as regulatory pressure increases I expect consolidation here, as we have seen elsewhere.”
With the backing of CVC, OANDA will have more capital to deploy.
“Additional capital, combined with consolidation, combined with the fact that OANDA has a technology platform that is scalable, we expect to be a player in this consolidation. It’s still early days because the CVC transaction hasn’t closed, but I’ll be looking to talk to other brokers in this market and see what we can do.”
It comes after Pepperstone shelved an IPO plan in early 2015 following the Swiss franc crisis. But Mr Narasimha expects Australia’s retail FX industry to stay strong relative to its population.
“The way I look at it, there’s a healthy appetite and a healthy market in place today,” he said.
“With more asset classes like cryptocurrencies coming in, there are new traders being introduced to the market. The other thing we need to consider is the macro-economic backdrop. If you look at volatility in currencies and other markets, 2014-2017 were low-volatility — interest rates and spreads around the world were compressed — but now as interest rates diverge and trade wars potentially start to escalate, there will be volatility and therefore trading opportunities in the market.
“So there’s going to be appetite for these products and I think what regulators around the world are looking to do is make sure they are protecting traders, without taking away their ability to trade.
“They don’t want to see another Swiss franc-type event expose vulnerabilities of clients of companies like MF Global, Sonray or BBY. So it’s giving that shock protection to the industry.”
JBL Price at posting:
1.3¢ Sentiment: Hold Disclosure: Held
