ESMA One Year In: Offshore, Equities and B2B

A year after ESMA put game-changing regulations in place, we look at how the retail trading industry has changed

Doesn’t time fly by? It’s already been twelve months since the European Securities and Markets Authority – a much-beloved financial regulator – introduced its product intervention measures on contracts-for-difference and binary options.

And after a year of repeatedly renewing those rules, which expired every three months, ESMA ceased applying them at the beginning of August.

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The regulator didn’t do that because it suddenly fell in love with CFD trading. It’s just that, at this point, there isn’t any need to apply the regulations anymore as national regulatory bodies across Europe have, for the most part, made them permanent.

There have been some exceptions to this. Poland has decided to give some retail traders access to leverage of 100:1. Cypriot authorities are planning something similar, though experienced traders will only be able to access 50:1 leverage under the local regulator’s prospective plan.

Aside from that, Romania and Slovenia appear to be the only two countries not to have adopted ESMA’s regulations.

Going offshore

Of course, no one really expected ESMA’s rules to die out. Prior to their being implemented, everyone in the trading industry was cognizant of the fact that these regulations would be here for the long-run.

As a result, many brokers began turning their attention to clients outside of Europe. More importantly, they acquired licenses around the globe that enabled them to keep supplying their traders with high leverage and welcome bonuses.

Vanuatu, the Marshall Islands, Mauritius, and Seychelles have all become favorites for brokers that want to keep operating under the same business model they had before.

“I think this has actually been really bad for traders in Europe,” said a senior executive at one major Cypriot broker, which also has an offshore entity. “Compliance costs mean it just isn’t worth putting the effort into onboarding them, so we are focusing on Asia.”

“The problem is that we actually do provide a good, honest service – we aren’t going to close your trade so you never win or steal your deposit. But now, on a superficial level, there isn’t much that distinguishes you from the scammers that are doing that.”

It may be the case that ESMA’s rules have muddied the waters when it comes to offshore brokers. Prior to their being implemented, there weren’t many legitimate companies that felt the need to open up a postbox office in a Vanuatu mud-hut. But for others, ESMA’s rules mean that ‘offshore’ is no longer a dirty word.

“In recent months, the regulatory winds have changed their course, forcing the big names operating under the sought-after ASIC, FCA and CySEC regulations to shift and diversify their courses of action,” said Tal Itzhak Ron, a managing partner at legal firm Tal Ron, Drihem & Co.

“Australian and European operators alike have started operating under less ‘mainstream’ regulations, such as Estonia, Vanuatu and the recent holy grail – the Bahamas, that better enable them to run their business. Demand has grown so much that our firm had to hire more professional staff in these jurisdictions.”

A change in plans

Aside from the move offshore, many brokers said that they were going to focus on doing more business with institutions and professional traders.

Plus500, for example, hoped that it would be able to reclassify 12 percent of its clients, who contributed 75 percent of the broker’s revenue, as professional. In doing so, they would have enabled those traders to bypass ESMA’s regulations.

In February of this year, almost twelve months after it made its reclassification plans public, the London Stock Exchange-listed broker had only been able to reclassify 44 percent of those clients as professional. IG Group, another publicly-listed retail trading firm, was even less successful, reporting in March that only 14 percent of clients that had applied for professional status had been accepted.

Other brokers have taken more drastic steps to reach higher-end clients. GVC-owned InterTrader has been most notable in this regard, having acquired Argon Financial, a derivatives broker that only caters to institutions and professional clients, towards the end of last year.

InterTrader CEO Shai Heffetz also told Finance Magnates in June that he wants his firm to “dominate the prime of prime space.” He’s not alone. Many brokers, including big players such as CMC and Saxo Bank, have been working hard on growing their prime brokerage and white label offerings.

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Gauging the success of these offerings is trickier. It’s also the case that ‘prime-of-prime’ is often used as a synonym for ‘liquidity provider’ when those two things are quite clearly not the same.

Still, speaking to Finance Magnates in July, Andre Shamne, head of product at Exness, said that he sees the number of market makers in Europe shrinking, with larger companies such as Exness providing liquidity and technology to a growing number of white label operators.

“I think what we will see is a blooming in the number of white label offerings,” noted the broker executive. “So there will be a small set of big players providing technology and liquidity and a much larger group of white labels who can target specific markets.”

Bring in the equities!

Aside from reclassifying clients or offering an institutional service, brokers have also started diversifying their set of products to keep clients trading.

The CEO of a major technology provider to brokers recently told Finance Magnates that 90 percent of the requests he receives from clients are related to adding equities trading to their service offering.

The need to expand product offerings has coincided neatly with a move, particularly amongst young people, towards commission-free stock trading.

“In general, the client segment has changed within the past year, as [retail traders] got more interested in stock markets,” said Konstantin Rashap, chief business development officer at retail broker RoboMarkets.

“In turn, we have to respond to these changes and rapidly improve our offers and services in these areas.”

Rashap’s firm has begun offering clients a real stocks trading service to cater to that demand. eToro also launched a widely-advertised commission-free stock trading service in May of this year and BUX, a Dutch retail broker, has said that it plans on launching a similar service in the near future.

Retail brokers may also be set to face some competition from market newcomers in this space. Challenger bank Revolut launched a stock trading service in early August and trading app Robinhood, having seen an astonishing degree of success in the US, obtained a license from the Financial Conduct Authority this Thursday.

Amongst retail brokers, however, Saxo Bank has probably been the most successful in diversifying its offering.

The Danish broker now allows users to access stocks, futures, options, mutual funds, and bonds. And after completing its acquisition of Dutch stockbroker BinckBank this week, the firm will be able to expand its warrant and options trading business in western Europe.

“We have always said that the problem is not with products per se but the amount of leverage offered and we continue to believe this,” said Andrew Edwards, the CEO of Saxo Capital Markets UK. “We have built a multi-asset business because we want to make sure that clients have the opportunity to invest in any stage of the macro cycle and hedge their positions accordingly.”

“The more clients invest across multiple asset classes, the more balanced their trading and investing portfolios, which in turn translates into lower risk for us and them, and a set of more sustainable and long-term clients.”

Not too bad…yet

All in all it’s been a slow year and, given the apocalyptic predictions of some brokers prior to their going live, ESMA’s regulations have not been too disastrous.

Having said that, they have certainly caused some major shifts in the retail trading industry. Low leverage and volatility, combined with a decreasing interest in currency trading, means some brokers are struggling to make money.

The move offshore is also unprecedented.

A huge number of brokers have, quietly or otherwise, acquired licenses in offshore jurisdictions while continuing to operate from more respectable locations, such as Cyprus, the UK, and Australia. Given that regulators in that last country look set to imitate ESMA in the next couple of years, don’t be surprised if the move offshore continues.

Ultimately there may be a split in the industry, with brokers that have a wide range of products and services being able to survive and the massive leverage, b-book only brokers all going offshore.

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