Analysis

No One Left to Churn and Burn

Regulations and growing public cynicism mean many brokers are using unsustainable business models

Facing off against John McClane in the best Christmas movie of all time – Die Hard – Hans Gruber cites an apocryphal story that Alexander the Great wept when he saw the breadth of his kingdom. Why? Because, as the story goes, there was nowhere left to conquer.

In Cyprus today, Alexander’s portly, less gallant, and more slippery descendants might be starting to feel the same way. That’s because the retail trading industry is increasingly under pressure to find new people to start trading in its derivatives products.

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Regulatory changes also mean that brokers are choosing to set up entities or fake offices in some of the most far-flung corners of the earth. Visit the website of a UK or Cyprus-regulated broker from an IP address outside of the European Union, and it is not uncommon to be whisked away to a separate site allegedly operating out of Vanuatu, the Marshall Islands, or St Vincent and the Grenadines.

And as Finance Magnates found this week, even if you do end up on a broker’s European website, most of them have no qualms about redirecting you to their offshore entity so that you can keep trading with leverage of more than 30:1.

The brokers wept for there were no more dummies to b-book

Across the globe, the industry has gained a fairly atrocious reputation. At least anecdotally, this author has come across people from Europe, Africa, East Asia, South America and Australia who immediately assume that anyone involved in the ‘forex’ industry is simply a scammer.

This perception has grown so much that, in many countries, companies in the industry are starting to hide the fact that they are involved in retail trading when advertising for certain jobs.

It’s not at all surprising then, to see brokers setting up feel-good workshops in sub-Saharan backwaters and encouraging the locals to trade at a million to one leverage with their Tuvalu bucket shop. These are amongst the few people left on earth that don’t realize they are about to get ripped off.

It’s truly breathtaking to see the lengths that some brokers are going to in order to attract new clients. Like Indiana Jones, they hop from desert to jungle, finding long lost tribes who haven’t yet heard of margin trading and attempting to convince them to trade with their MT4 white label.

“It sounds weird to say but it’s like the bad actors in the industry are actually running out of dumb people to squeeze money from,” a chief financial officer at one large broker told Finance Magnates.

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“The world is a big place so I’m sure there are still a lot of people left to take money from. But ultimately brokers are going to need to start building better business models. Our clients usually stay with us for more than two years. That’s because, even if they lose money in the end, we treat them properly. We don’t just extract all of their money in a few days and then move on to the next victim.”

Why bother?

Some brokers are unlikely to even attempt a change in business operations. The MT4 white-label, b-book everything business model has become so ubiquitous and profitable that these firms are probably unable and unwilling to make any changes to their operations.

But given that growing numbers of people know about the industry and don’t want anything to do with it is this really sustainable in the long run?

The answer is, “probably not.” And given that regulations – even in Prince Philip-worshipping Vanuatu – are making life harder for brokers, it seems that a mix of legal restrictions and growing public awareness will make running such a business increasingly difficult in the years ahead.

Less money now, more in the long run

Of course, the solution to this is to remain in a more respected jurisdiction and actually make an effort to adhere to regulations. This is something that, again, a large number of brokers are just not doing.

“I think there is going to be a reckoning in the next couple of years,” said a senior executive at one large broker.

“You look at Pillar III disclosures put out by most brokers and they are a joke. I would say 60 to 80 percent of them are not bothering to do the most basic regulatory reports properly and, if they were, I think they would have to shut down.”

Yes, running an EU-regulated business, with all of its marketing restrictions and leverage caps, is hard. But in the long run, it’s more likely to create a healthy retail trading industry, complete with loyal clients and respected firms.

Unfortunately, this may take some time to happen. In the meantime, don’t be surprised if you see a tea-cozy wearing broker executive trying to sell binary options to the Taliban.

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