Analysis: ESMA's 'Loss-Making' Numbers Are Misleading

Ponder on this Finance Magnates readers: sometimes when people trade with contracts-for-differences brokers, they lose money. Amazing, I know, but just how many people lose money?

According to Finance Magnates’ very own research, the average broker will see its clients lose money 76 percent of the time. In an age in which the unfastidious love to take a statistical disparity, not look into any of nuances involved and then draw an extremely simplistic conclusion, that’s not a good look.

But before we break out the tiki torches and start burning brokers’ offices down, let’s try to examine the statement a bit more closely. If we allow for any level of loss-making to count as a loss, then there is certain to be a wide divergence in how much people have lost.

Amongst our 76 percent of losing traders, there could be a huge number of people that lost one dollar and a small number that lost over ten thousand. Is it entirely reasonable for those people to be classed together? Methinks not.

ESMA ESMA European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t European Securities and Markets Authority (ESMA) is an independent Authority of the European Union that is responsible for the safety, security, and stability of the European Unions’ financial system and is charged with protecting the public. The European supervisory authority for the securities sector, ESMA was established on 1 January 2011. The European Securities and Markets Authority is an independent EU authority based in Paris. It aims to contribute to the effectiveness and stability of t Read this Term Rules, Ayondo Bants

None of this would be problematic but for the European Securities and Markets Authority’s latest regulation. Bane of every broker’s existence, these rules require that firms explicitly state how many of their traders lose money with them.

That leaves brokers with the problem we just looked at. They are forced to give a percentage that doesn’t capture the intricacies of a client’s life-cycle, trading activity or - most importantly - losses.

Thankfully, one broker has come up with a simple, yet effective, way of righting this wrong. Just below its requisite loss-making figures, Ayondo, a German broker, has written the following:

“70.1% of those clients that lost money lost less than GBP100 (or currency equivalent).”

Whoa! That changes things a bit.

Now, let’s lack all nuance and say that ALL of those people lost £100. For the average person in the UK, this would mean, in a 12-month period, losing less than one day’s wage.

Ayondo’s numbers also show that 50 percent of all its traders lose £100 or less in a given year. Exactly how much the remaining loss-making clients lose is unclear, and Ayondo probably isn’t going to tell us anytime soon.

Nonetheless, for the statistically challenged victim-creators, those numbers probably make for painful reading. When the person you want to protect is losing less than a day’s wage over the course of a year, it’s harder to argue that they require the cuddly embrace of regulatory prophylactics.

Could such numbers be used to appease the gods of ESMA and bring brokers back into their good books? To quote the Magic 8 Ball from Toy Story - “don’t count on it.”