What is going on with the current state of the Retail CFD Broking industry and regulation?

The CFD industry has taken a bit of a battering over the last few years. In some cases rightly so, in some, rather unjustly.

The regulators have done a pretty good job of tightening up the rules on introducing clients from unscrupulous affiliates. Mainly on the back of lifestyle scams on Instagram.

Also, negative balance protection is clearly a good thing for inexperienced traders.

However, there are things that may seem a little unjust like margin capping. The criteria a retail trader needs to fulfill in terms of trading experience and net worth have pushed a lot of traders offshore to unregulated brokers. Slightly making the caps futile in the regulators’ efforts to protect consumers.

The regulators also did quite well to ban binary options as little oiks in Cypriot call centres fleeced the gullible and greedy out of their life savings.

But, one could argue that this was actually the regulator’s fault to being with.

Binary options have been around for decades and on the face of it are a simplified version of traditional options, which are at best very hard to comprehend, but do offer a limited risk way to speculate on the financial markets. If the regulators had pulled their finger out and regulated binary options instead of dillydallying saying it was the gambling commissions remit, the whole mess could have been avoided all together…

When I was at Man Financial, they bought one of the first binary options platforms for use by its mainly professional client base. But then this was back in the day when even IG offered sports spread betting on the weekend. IG in the US still operates Nadex, an on exchange binary options platform. But the Americans have a good grasp of what options are because they can’t trade CFDs. Plus it’s on exchange and Nadex is subject to U.S. regulatory oversight by the CFTC.

The current state of the Retail CFD Broking industry and regulation is always discussed anecdotally.

There are the big players, then everyone else. There is always talk of consolidation, but then as highlighted by the TigerWit CEO Tim Hughes, when we interviewed him, everyone has the same client base anyway, so there is really no point in one broker buying another, because they will already have a fairly significant client crossover.

Tim suggested that most traders have on average 2.3 accounts, so it’s the same 100,000 active traders (or so) in the UK propping everyone up by switching sporadically between accounts.

Where to look if you want to know what’s going on in the Retail CFD Broking industry

There are a few great industry websites that cover what’s going on with online trading:

  • financefeeds – a fantastic site by Andrew Saks-McLeod – humorous and insightful news coverage of the online trading industry
  • financemagnates & leaprate – both are very commercial industry rags – good coverage of who’s working where and who’s being fined by the FCA. But there is a rather, cough cough, “broad” selection of brokers being promoted.
  • Our CEO Interviews – plus you can ask other people at the top of the industry

Here’s what Simon Denham, Chief Risk Officer at TigerWit has to say on the current state of the retail CFD broking industry and regulation

Whilst most of the comment from our sector is focused on oil, indices or economic data etc, there is generally very little in the way of navel gazing. Even when the retail Spread Bettors/CFD providers were flying, it would always be odd to read any comment about them.

But now the foot is very much in the bear camp, as the ‘responsible’ providers struggle to keep expectations buoyant in the face of the recent regulatory strait-jacket that has mullered revenues. The well-known players (IG, Plus 500 and CMC) are all at recent lows, indeed CMC is at an all time nadir, as investors fight shy of the sector.

Coupled to this is the simple fact that, with nearly all the favourite markets sitting in range bound conditions, the outlook for Q1 returns would probably not have been looking particularly optimistic, even in the best of times. But now, with retail client’s activities being heavily restricted, the daily revenues will probably be doubly impacted.

Of course, the various CFD/FX platforms can ‘encourage’ clients to open accounts with their non-European units but, whilst this might seem a reasonable reaction, it adds another layer to opening accounts and removes most of the protection that clients enjoy under the European regulatory framework. Spread Betting providers are in an even deeper hole as the product is only really recognised, from a tax-free level, in the UK so the reduction in leverage is really hurting.

Of course, no one loves their bookmaker, but the recent actions of the regulators do seem remarkably counter-productive. Yes, overall client losses have fallen in the last 6 months or so where the UK/Euro companies are concerned, but the data carefully collected by the FCA misses one glaring fact: clients are now far more likely to sign up with dubious operators from the less onerous parts of the globe where leverage is still available and these revenues are being neither reported or regulated (nor taxed!).

Simon Denham has over twenty years of industry experience in the retail broking industry. In 2003 he founded and was CEO of Capital Spreads (part of London Capital Group) and most recently founded Mercor Index which was acquired by TigerWit in 2018. His insights and comments on global financial markets regularly appear in national press across print, online and broadcast.

One thing I do disagree with Simon on though is that I do love my bookmaker. I don’t bet often and overall lose money, but I do it because I enjoy it (which is why people trade). So when I do I use Spreadex. Always have done, always will (at least since IG sold their sports book to them anyway). When I’m at the races I like to bet on the winning distances between 1st and 2nd place (so I’m, always cheering for the winner to win by the most). Whenever I get a tip from someone who claims to know what they are talking about, I short the horse on an 0-50 index. Mainly because, horse tips are even more useless than stock tips. As with trading, it’s how you manage execution and your portfolio that matters, not so much what you buy and sell. Read the Art of Execution, you’ll see what I mean.

IG, CMC & Plus 500 share prices over the last year…

To top it all off, IG posted Q3 numbers this morning and got knocked 7% at the open. Here’s how the biggest listed CFD brokers have performed over the last year…

 

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