The Prime of Prime space serves a very import role for Retail Forex Brokers. By stepping in and offering liquidity they bridge the ever widening gap between Retail Forex Broker and Bank/ Prime Broker. Banks and liquidity providers are moving towards reducing risk over profits and some have even eliminated their prime broker offering altogether.
A prime of prime can offer a Retail Forex Broker a trading platform white label and liquidity at a fraction of the cost of a traditional prime brokerage account. One of the issues that now face many Prime of Prime is increased competition and an increased demand for narrower spreads. This may lead to the Prime of Prime assuming more risk from their clients as they look for greater returns.
The Dangers of a Fortress Prime
The case of Fortress Prime is very interesting and still yet unresolved. As a Prime of Prime would need to they established themselves as having an enormous amount of capital behind them. This would give their clients a sense of comfort and ease in opening their Prime of Prime account with them. Fortress Prime has stated that some of their key shareholders are from the ruling family in Abu Dhabi and that they have over $200 million in firm capital. The company had also claimed that is was regulated by the central bank but nothing on the website indicates any regulatory jurisdiction. It might have been that both the $200 million and the central bank were pending.
A Prime of Prime Can Assume Too Much Risk
The firm and its parent company have had its funds frozen and have been unable to return client funds for months now. Estimates are that the shortfall could be as large as $20 million. No one knows for sure what happened but it doesn’t take too much imagination to figure out that the company wanted in on the Prime of Prime space and that it would make bank on dumb retail order flow. This might be where many Prime of Primes might get themselves into trouble. This type of order flow isn’t what it was 5 years ago. Many Retail Forex Brokers might be themselves be segregating their order flow and taking some risk. Prime of prime brokers needs to understand and realize that the Retail Forex Broker will also be looking to maximize their profits and risk might play in the equation.
Trading Forex and Derivatives carries a high level of risk, including the risk of losing substantially more than your initial investment. Also, you do not own or have any rights to the underlying assets. The effect of leverage is that both gains and losses are magnified. You should only trade if you can afford to carry these risks. Trading Derivatives may not be suitable for all investors, so please ensure that you fully understand the risks involved, and seek independent advice if necessary.