Yet Stumm also included several unique features that tempted clients to borrow and trade quickly. Customers could start by depositing as little as $1, and Oanda charged them interest on levered trades that was calculated by the second. That meant that the borrowing cost was very tiny at first, but started climbing steadily right after a client took a position, encouraging them to get out fast.
Oanda launched its platform, called fxTrade, for users anywhere in the world in March, 2001. It was an immediate hit. Over the next four years, its volume grew to 250,000 trades a day, and Oanda’s workforce expanded to 50 employees.
But even in those early years, Stumm was behaving unusually for a CEO. His obsession with technical correctness helped drive the company forward, yet it also intimidated and alienated many of the firm’s staffers. For the most part, they considered him brilliant, and tried to shrug it off if he blew up at them.
There was also a great deal of uncertainty about regulation, which Stumm hadn’t factored into the business model or the trading system. To be fair, retail online currency trading was a new frontier in the early 2000s, and it wasn’t clear in Canada or the United States what rules should apply to it, or even which agencies should regulate it. In 2003, Stumm phoned Katten Muchin Zavis Rosenman, a Chicago law firm renowned for its expertise in regulation of futures and options trading, to ask for advice.
He reached a senior partner, who was astonished at what Oanda was doing. “You’re serious? You’re already operating?” Stumm recalls the partner asking. “You have to shut the thing down immediately, apply for a licence and start again.” But Stumm simply refused. “There was no way we were going to stop the business,” he says. That attitude unnerved the senior partner, who didn’t want to risk his reputation with the National Futures Association, the U.S. self-regulatory organization for futures and options contracts on commodities and currencies, by taking on the case. So he passed the file on to a junior partner, who convinced the association that Oanda had made an honest mistake by not registering with it.
Stumm also intrigued many potential investors with Oanda’s product, but worried them with his management style. Danny Rimer, a principal with the London-based venture capital firm Index Ventures, started taking a close look at Oanda in 2005. He is also Swiss, and now an Oanda director, yet back then he had trouble persuading his colleagues at Index Ventures to overlook Stumm’s quirks.
But Oanda’s expanding revenues and Stumm’s technological wizardry were too promising to pass up, so Index Ventures invested $17 million in September, 2005. Oanda had just introduced its cleverest trading innovation to date: a patented process called BoxOption. It allowed a trader to draw a box of any size or shape ahead of the trend line on the day’s chart of a currency’s value. If the actual line went into the box, there was a payoff on whatever deposit the client put up. The smaller the boxes, and the further they were drawn ahead of the live trend line, the bigger the potential payoff.
Those payoffs to clients were slightly less than Oanda could get by hedging its positions with a wholesale bank that would provide the same range of possible outcomes contained in the box. That meant that Oanda had virtually no risk. But the firm discontinued BoxOption last year, after Stumm left the firm.
Despite Oanda’s growth, and the risk controls that Stumm built into the trading platform, he just couldn’t stop worrying. And his anxieties multiplied as the firm continued to expand.
One of his constant fears was that unsophisticated traders using a lot of leverage might somehow blow up the system, even with the stop-loss mechanism and other restraints. At one point shortly after fxTrade debuted, a Dutch client deposited $3 million and wanted to trade it at 50-to-1 leverage. That would have allowed him to place orders totalling up to $150 million. Oanda had very little capital of its own in case of emergency, so Stumm sent the money back. Indeed, Stumm was worried even if a client put in an order for more than $100,000. So he installed a function that automatically sold off any trade that exceeded that limit to a large bank, sometimes at a small loss, if necessary. When the client reversed the order, Oanda reversed its order with the bank. Stumm also wanted to ensure that the firm’s total exposure to euros, U.S. dollars or any other single currency didn’t get too large during the day. The solution to that was to automatically batch together client positions in that currency and flatten them out—sell them to a bank at the market rate at that moment.
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