LMAX is a Platform for Committed Traders Only

Yesterday I spoke with both Robin Osmond and Martyn Holman, CEO and COO respectively of LMAX, about the launch earlier this week of LMAX Trader and their future plans for both the LMAX multilateral trading facility and the LMAX Trader retail trading platform.

Amongst numerous other things I asked Robin what had tempted him away from the likes of HSBC and J.P. Morgan to a much smaller organization.  He told me that after 20 years in institutional investment banking he felt he needed the challenge of "moving outside my comfort zone".  LMAX was "smaller and more entrepreneurial" than the businesses he was used to, and he relished the "extra risk" involved in his new job. He had also been very impressed by the "commitment and deep pockets" of the LMAX shareholders.

I mentioned that apart from Betfair's IPO, a couple of large U.S. forex brokers were currently also in "IPO mode", and enquired how LMAX's business model differed from theirs.  Robin told me LMAX's aim was to deliver to the retail trader a single exchange platform that supported a wide range of asset classes, not just FX.  LMAX Trader currently supported around 50 instruments with a range of foreign exchange pairs, equity indices, commodities and interest rates. Over time additional instruments would be added to those existing classes, and the range of asset types would also increase. Naturally enough I asked for examples, and Martyn told me that European equity CFDs were next on the list. They were currently undergoing "regulatory review", and he expected they would become available in the first half of 2011. This would be followed eventually by ETFs and options. I wondered about US equities, and Martyn told me that they were a possibility also, but that some additional "regulatory issues" would need to be addressed before that could happen.

I then asked about LMAX's suggestion that their new platform would allow retail traders to "make their own market". My initial reading of their terms of trading suggested that things weren't quite that simple.  Martyn told me that the wording in those terms was a "legal construction" needed because an MTF cannot have retail members.  LMAX's technology ensured that a retail user of LMAX Trader effectively enters their order directly into the exchange, where it would be a "committed order", but legally this has to be interpreted as an order entered by LMAX Trader with a “back-to back” order of exactly the same terms with the retail client. Orders entered by any member of the exchange, including liquidity providers are committed, and can be dealt on without any additional "last looks". Martyn assured me that LMAX's "exchange" model is subtly different from the apparently similar "ECN" model espoused by some forex brokers in that there is no "internal crossing" of orders before they reach the public order book. LMAX never "runs risk against it's clients". The exchange provides a totally neutral venue, offering complete "visibility and transparency".

We then discussed possible additional avenues for LMAX further into the future. As a UK citizen myself I enquired about any potential changes to LMAX's Tradefair spread betting operation. Robin told me there were no plans to change from the current LCG white label, and the tax peculiarities of a single jurisdiction did not justify the effort potentially involved in making spread betting available via LMAX Trader. Geographical expansion will start in Germany, although of course LMAX's FSA authorization brings with it a MiFID passport throughout Europe. That will be followed by Australasia and Asia.

I then asked what seems to me to be the $64,000 question.  Did Robin or Martyn foresee a time when LMAX Trader might be available to United States residents?  I was told that "the U.S. is not on the roadmap right now", and that "forex is the only possibility at the moment".  Whilst transparent trading on a neutral venue seems to be just the thing U.S regulators are hoping to see over on that side of the Atlantic, for the foreseeable future the LMAX Trader application form will continue to proclaim:

Please note we are unable to accept applications from US residents.