Public trading platforms have long been known for the rate at which they burn through clients.
Traditionally a large number of new traders try their hand at day trading every year, only to burn through their cash quickly, never returning again.
Not only is this bad news for the customer, it’s bad news for the platforms too as they then have to spend vast resources all over again to attract the next set of clients to replace the ones that have burnt through their stash of cash.
Within the ranks of these new recruits, there are always a handful of traders who actually know what they are doing – some work in the City, while others work outside out finance, but have developed a keen brain for spotting trends and anticipating market fluctuations.
It is this group of ‘high performing’ traders to whom Coalface Capital is hoping to appeal with its new reward-based trading business.
Founder and chief executive officer Declan McEvoy was previously head of European investor sales at Standard Chartered, an executive director at UBS Investment Bank and head of Leveraged Investor Sales (FX) at Citi.
Speaking to The TRADE at the launch of Coalface, he said that he wanted to build a trading business that appealed to “independent traders” whose skillset isn’t always recognised or who found it hard to break into the world of hedge funds.
He said: “It is a network for traders, built by traders. It can be very difficult to become a hedge fund manager – you have to have gone to the right school or worked at the right investment bank. It can be a tricky industry to get into in that sense.
“Coalface is interested in those people. If they are allowed to have an account, they should have an account. Of those who want to go it alone, people often pass the cap around for seed capital and that can lead to a lot of talent lost in the process.”
McEvoy said the business is aware of the reputation to burn through customers and is seeking to discourage that through the remuneration structure.
He explained: “One of the things I have observed in my own career is that people do tend to open accounts, go for a while and then lose their money. It is a function of over-leveraging and that’s something we are trying to discourage.
Coalface is hoping to attract what it describes as ‘high-performance’ traders through a reward system that pays traders based on their monthly performance. The company says it will return 80% of the revenue it receives from platforms by retaining active and consistent traders.
It believes that this customer group can generate additional income through performance and activity. Registered traders will be rewarded based on where they feature on a performance ranking league table.
Half of the incentive payment will be related to how large an account is and how actively that person is trading. The remainder is determined by where the trader ranks in the league table.
While the performance is weighted in favour of those who perform best, everybody who trades is remunerated, according to the statement.
McEvoy explained: “By utilising existing commercial infrastructure to reward traders, Coalface Capital addresses a need within the market for a mechanism to compensate successful traders for their activity.
“By paying traders, Coalface Capital reduces the ever-present temptation to over leverage that affects most traders. Coalface also helps trading platforms attract and retain high performing accounts.”
In October, the company announced that it had penned partnership agreements with ADS Securities London, CMC Markets, FXCM and FX Pro.”
McEvoy has high hopes for the business that extend beyond the current setup. He is hopeful that once the model establishes a track record of consistent returns among the top traders, that a large fund management group will employ the skills within a formalised fund structure.
He said: “Hopefully someone like BlackRock or State Street will partner up at some point in the future. If we have 20,000 traders and we use the talent and take the top three to four hundred, that is going to generate returns and lead to a very high sharpe ratio.
“We are effectively building a consortium of quant managers and techniques and we will have a self-replenishing set of fund managers. The decision-making lies with the investor after quant based analysis.”
Despite having a modest team of ten now, McEvoy is not limiting the expansion possibilities of the business.
He says: “We have to get enough traders buying into the idea. We are in the Kevin Costner field of dreams at the moment.”
He also hopes that asset managers’ move away from selling funds formed on one asset class in favour of outcome-orientated products may work in Coalface’s favour. The shift in consumer and consultant sentiment has not gone un-noticed by McEvoy since the credit crisis.
He says: “What are you buying when you talk to a fund manager? People have changed since 2006/2007. People have always been return-on-capital, but since then, they are not ‘return OF capital’. Things have changed.”