Since the margin limits on leverage came into place in July 2018 many retail traders have been wondering if they should upgrade their spread betting or CFD account to professional status to get better margin rates and market access? Here we look at the advantages and disadvantages of becoming classified as a professional trader.
There is absolutely no doubt that excessive leverage on derivatives products for inexperienced investors and traders is a bad thing. Of course there is an argument that people should be allowed to do what they want. But the problem is that inexperienced investors simply do not understand the implications of the risk they are taking on when trading on margin.
You only have to think back to when the CHF cap was removed and wiped many retail traders out, leaving some in crippling debt from “relatively small” trades.
There has always been retail and professional status, although historically, there have not been many benefits to being an elective professional trader. With the new ESMA caps, the divergence is increasing.
What are retail traders?
Retail clients are normal people who want to speculate on the markets and have a good understanding of the risks involved and how leveraged trading works. The regulators ensure that normal people have their margin capped (so they cannot inadvertently get too much exposure to the market) and also have negative balance protection in place, which means you cannot lose more than the money in your account.
In our awards the best retail trading brokers have been:
- 2022: City Index – they pipped the crown due to their SMART Signals and Performance Analytics features
- 2021: IG
- 2020: IG
- 2019: IG
- 2018: IG
IG has consistently been ranked highest in our matrix of retail trading platforms which measure client satisfaction, market access, pricing, spreads and account options.
What are professional traders?
For clients that are more experienced, some brokers offer the option to apply for a “professional account”. Professional trading accounts offer greater leverage (so you can trade more with less), and in some cases, discounted fees. However, there are disadvantages to them as some do not come with negative balance protection. To qualify to trade with professional trading accounts, you will have to prove that you can answer yes to two of these questions:
- Has your trading averaged 10 significantly-sized leverage transactions per quarter over the last 4 quarters?
- Do you have a financial instrument portfolio, including cash deposits, exceeding €500,000?
- Have you worked in the financial sector in a professional position, requiring knowledge of derivatives trading, for at least a year?
In our awards the winner of the trading platform with the best professional trading account option has been:
- 2021: Saxo Markets
- 2020: IG
- 2019: Saxo Markets
- 2018: Saxo Markets
For more information on pro-trading read our guide to the best professional trading accounts.
For client’s of Spreadex, one of the original spread betting brokers, that has just launched CFDs. Spreadex told us:
If someone is potentially eligible we do alert the client of the benefits of being a professional client and the risks involved with a pop up, however there is nothing on our site.
In summary, the advantages to professional status with Spreadex are lower margin requirements (they will stay the same), credit limits and the ability to trade binary options.
The downsides, or benefits of retail client status would be that there is a no negative guarantee (trading certainty), higher margins might result in better client outcomes (due to the limits on leverage) and future changes by the regulator might not apply to professional clients.
All clients maintain the same level of client money protection, and someone can switch easily back from professional status to retail status.
Here’s a quick look at the advantages of being a professional trading with the leading broker IG.
Benefits of becoming an elective professional trader
- You’ll actually get a reduction in margin rates. For example, margin on the FTSE will decrease from 0.5% to 0.45%. If you remain retail, FTSE rates could be 5%, FX 3.3% and stocks 20%.
- You can still use collateral as margin. This means if you hold physical stocks you can use this as collateral (with a haircut) against your spread betting and CFD account.
- You can still trade Digital 100’s. Which are short-term trades that expire 0-100 on 5 minute to 1 month timescales.
Disadvantages of becoming an elective professional trader
- No-negative protection: You can lose more than the balance of your account. Of course, you can still use guaranteed stops to mitigate this risk.
- No leverage or product restrictions on CFDs/binaries: So you can basically trade what you want.
- Communication: Your broker will be able to use professional and more actionable language when they discuss the markets with you. Inexperienced traders may get confused and find the terminology complicated.
- Experience assumption: If you are a professional client, brokers will assume you know what you are doing so won’t explain things unless you ask.
- Best execution: For retail clients the major factor in best execution is price, for professional it tends to be speed and convenience.
The truth of the matter of course is that if anyone is trading derivatives they should be professional clients because derivatives are an exceptionally high risk product.
But, the reality is that traders want high risk, even if they don’t have the experience. So, in the regulated world we live in the regulators must ensure that brokers properly categorise their clients to provide risk-appropriate products.
For more information, you can look up the FCA’s criteria for an ‘elective professional client here.