The Hedgeweek Interview: Offering an Alternative to Prime Broking: Tim Morris, Institutional Sales, IG Markets
London-based IG Markets is the broking subsidiary of IG Group. Tim Morris outlines IG Market's growing range of online trading services for emerging hedge fund managers.
HW: What is the background to the use of CFDs in the UK?
TM: CFDs have been around since the early 1990s. They were introduced as a way of standardising the various ways by which North American hedge funds shorted the UK and European markets. In those days there were restrictions on who could borrow stock -in the UK only market makers were allowed to borrow stock from money brokers. CFDs effectively allowed hedge funds to gain exposure without worrying about physical delivery of the underlying shares.
Its early use by institutions was fairly limited due to an uncertain tax situation. In the late nineties the product was further developed by specialist retail brokers, including the spread betting industry, which helped clarify the stamp duty situation. As a result it was the retail market that helped drive the development of the CFD business, leading prime brokers to offer CFDs as a standard part of their package.
HW: What is the background to the key products offered by IG markets?
TM: The IG group has 55,000 retail clients using its spread betting service. On the back of this the company has developed very good back office, trading and hedging systems, making it essentially a very large risk management operation.
IG Markets is a member of the London Stock Exchange, and is regulated by the Financial Services Authority. The Company operates around the clock to enable our many thousands of clients to trade shares, indices and currencies on margin.
Over the last couple of years we have realised that we can now capitalise on this expertise by offering products tailored to a wider audience in the hedge fund space of professional trading clients.
HW: What types of hedge funds are you targeting?
TM: At IG markets we are aiming at the smaller end of the hedge fund market, targeting new or emerging hedge fund managers.
We can offer these managers all the trading facilities that one would expect to get from the larger prime brokers in London. We can offer CFDs on all companies above a GBP 20 million market capitalisation, and in the US all companies above a USD 500 million market capitalisation. In Europe we can trade any stock in a major index.
HW: In essence, you are offering an alternative to conventional prime broking services?
TM: It depends what the fund is looking to achieve. A complaint I hear quite often is that prime brokers are very expensive, fixed in their ways and poor value to an emerging hedge fund manager.
At IG markets we are very flexible. Some funds that have opened brokerage accounts with us over the past year have avoided prime brokers: just opening CFD accounts with us and some of our CFD competitors.
We offer managers the ability to trade in exactly the style they would want to trade, whether it is shorting France Telecom against British Telecom on the statistical arbitrage strategy or whether they want to go long on the S&P and short on small caps, we can do all of it via our products.
We can also margin in a very flexible way in real time. This allows emerging hedge fund managers a real feel for the dynamics of running their own businesses and managing the money without all the baggage that goes with a prime broker.
HW: What sizes of hedge funds are trading via IG Markets?
TM: We have quite a variety ranging from USD 200,000-300,000 up to a fund that is USD 200 million in size that has a prime broker but uses us for certain trades, for example they might buy a convertible via their prime broker and put a hedge on by shorting the underlying stock via a CFD.
In our view there is a growing undercurrent arguing in favour of the unbundling of the prime brokerage offering. For small to medium sized funds, we can offer managers more cost-efficient market access as past of this unbundling process.
HW: What trends are you seeing in the market?
TM : We're seeing a greater demand for direct access products across multiple markets and as a result we have recently launched our L2 trading platform which helps funds that are looking for an alternative to or a compliment to their existing routes.
HW: What are the key features of your CFD offering?
TM: We offer CFDs on a full range of global markets from individual shares and stock indices to commodities and currencies.
We also offer Binary Options and FX CFDs, two products that are fairly unique to IG Markets.
We offer our clients competitive commission and margin rates across our entire product range.
HW: What new products have you launched recently?
TM: Our new L2 Dealer product offers hedge fund traders a degree of functionality which they can't get in too many other places. L2 has been developed by traders for traders.
L2 Dealer is an online trading tool that offers access to the major European and North American stock markets.
It is a direct access product - a hedge fund trader can enter the order book in London and participate in immediate market trading. Orders can be entered in the auction process you can tranche orders, and trade a variety of order types such as fill or kill, etc. The user can break down orders according to how the money is being managed: If the trader is operating 10 managed accounts a" profile" can be established which can automatically break down a block trade into its component parts saving the dealer the chore of booking out the individual tickets, you just click and trade. The system is linked into our back office so risk management functions are performed and the client receives an immediate confirmation - the whole process is automated.
It can be used from any location, - all a trader needs to do is open an account, sign our electronic trading agreements and download the software to begin trading.
HW: In essence, what is your offering to hedge funds?
TM: We provide an excellent back office facility and an excellent dealing and execution facility, therefore hedge funds can feel confident that they are receiving a first class service.
HW: The prime brokers conduct a fair amount of due diligence on their hedge fund clients, how do you compare in this regard?
TM: We have our own standards and our own vetting procedures but from our perspective, we don't have the same objectives that the prime brokers have. We simply want to provide market access to ensure that hedge funds can achieve their investment goals.
We are a broker, and how the hedge funds market themselves is entirely their responsibility - unlike a prime broker, we are not marketing the funds to our in-house clients.
HW: Finally, how do you see things developing in this market?
TM: The most interesting trend right now is that we are seeing one or two specialist CFD-type funds setting up which are hedge funds in everything apart from name. With lower minimum investment levels compared with conventional hedge funds, these can be offered to offshore IFAs, indicating the start of a retail hedge fund market.
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