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CoalFace Capital aims to build ETF on top-ranked independent traders

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CoalFace Capital is a new trade capture platform which aims to incentivise global independent traders for their performance. 

Partnering with four brokerage firms – ADS Securities London, CMC Markets, FXPro and FXCM – CoalFace collects daily trade data its clients, which it then uses to rank traders based on their month to month risk-adjusted returns. 

“The idea is loosely based on Freakonomics where you try and determine the outcome that you want and then work backwards to work out what the optimal arrangement would be in terms of incentives to receive that outcome. That’s what we are offering, from a trading perspective, with CoalFace Capital,” explains founder Declan McEvoy.

In return for their data, CoalFace rebates 80 per cent of its introductory commission to traders based upon trading volume and risk-adjusted returns. The higher their ranking, the more traders will be compensated. Put simply, those who trade the most and succeed, are rewarded the most. 

“In our view, there are plenty of great traders making great returns but don’t get the opportunity to showcase their expertise (and get rewarded for it). We know people who have started their own funds but it’s very difficult to build traction in AUM and get to where you really want to. With all the regulation, breakeven AUM keeps rising,” says McEvoy.

CoalFace offers a viable alternative to independent traders without the burden of getting regulated and setting up a fund. If they are successful, CoalFace traders have the potential to earn good rewards and make independent trading a full-time occupation.

“Being able to harness the performance of lots of traders around the world – that is essentially what we are doing with CoalFace,” adds McEvoy.

Every trader that signs up with CoalFace must agree to their trading data being passed from one of the four brokerages to the CoalFace team. They will receive a daily data file from CMC Markets, for example, and plug that data into the system to rank each trader. The more traders, and the more strategies they employ, that join CoalFace, the more data points it will have to work with.

“At the end of the month, each trader will see where they are ranked. We skew the pool of capital towards the most successful traders, but everybody gets paid something,” confirms McEvoy.

Further down line, Phase 2 of CoalFace’s expansion will involve tracking the performance of the top 3 or 4 per cent traders in the database – which McEvoy says will ideally have around 10,000 users – and, using a machine learning proprietary algorithm, an index will be created. On the back of this index, which will be constantly updated, an ETF will be offered to non-trading investors; although this is still some way down the line. 

“We want to encourage as many types of traders as possible to join the CoalFace platform because the more people we have in the dataset, the more data points we will have available for our algorithm when we eventually come to tracking the top 300 or so traders. 

“We are not interested in what traders are doing, we are only interested in the outcomes. Think of it like Uber, the e-hailing company. The traders are the taxi drivers, and when we move into phase two and launch the ETF, investors will be the passengers,” explains McEvoy.

CoalFace is a good example of a disruptive player using financial technology to democratise financial trading. If all goes well, and they do indeed launch an FCA-regulated ETF product, it will be unique; an opportunity for investors to gain exposure not to some traditional portfolio management team in a blue chip fund house, but to the very best independent global trading talent. That’s an exciting proposition and serves to illustrate how quickly financial markets are evolving.

“This is a system that will allow, and encourage global independent traders to pit their wits against one another. Our depth on the platform should hopefully work to our advantage when constructing the ETF,” says McEvoy, adding that the team would need to do robust shock scenarios and rigorous test-driving before the ETF ever went to market. 

“The CoalFace model encourages traders to trade in a sensible way. If you have a trading account with EUR20K at the start of the year, and end the year with EUR40K, not only will you have doubled your money, you will also have received EURXX from us on top. Hopefully this will encourage traders to focus on generating stable, consistent returns and not take unnecessary risks. 

“Even though we’ve only been up and running a couple of weeks we hope to have 1,000 users on CoalFace by the end of 2015,” concludes McEvoy.

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