Ahhh ESMA, the bane of every broker’s existence. The European Securities and Markets Authority – as they prefer to be known – has formulated a group of regulations, restricting trading in contracts-for-differences and banning binary options, that should be familiar to everybody in the industry by now.
Although the most memorable part of those regulations was concerned with leveraged trading restrictions, they also prohibited a number of other activities.
For instance, the European regulator will be banning any welcome bonuses or other incentives that encourage clients, prospective or existing, to trade CFDs or to trade larger volumes of CFDs.
This will be problematic for many firms who often rely on such bonuses as a means of attracting clients. One broker, however, may have found a novel way around the regulations.
Darwinex, a UK broker and asset manager, previously offered traders rebates on commission fees. The larger the commission a trader paid, the larger the rebate they received.
This, of course, will no longer be allowed. ESMA’s rules, which come into effect in August, would bracket this system under the aforementioned section of the regulation, prohibiting incentives to make larger trades in CFDs.
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Did Darwinex cower in fear or twiddle its thumbs at the thought of having to scrap its rebate system? Not a bit of it. This Thursday, the firm announced that it has developed a system that will allow traders to continue to reduce the costs of their trading activities.
Keeping the pros
The system tests clients trading abilities and gives them a ‘Darwinex Score’ (‘D-Score’). Traders will then receive a discount on their commissions that is dependent on their D-Score. For instance, if a trader receives a D-Score of above 60, they will receive a 40 percent discount on their commission fees.
The test is not new but it is the first time that it will be tied to providing discounts to traders. Previously, the system was simply used to gauge how effective a trading strategy was.
To a degree, this is still the case, only now an individual’s trading ability will mean determine what discount they receive on their commissions. This also means that it does not encourage traders to trade higher volumes, as the prior system arguably did. This means that, at least for now, it is in line with ESMA’s edicts.
From the perspective of yours truly, the system appears to be predicated on the idea that better traders will also trade more. After all, it is difficult to think of an industry where an individual is given a discount for buying (or trading) less.
At any rate, the D-Score system appears to be a neat way to ensure experienced clients can maintain a high-volume trading strategy. It’s even hard to see how ESMA could be opposed to the system.
After all, the less-informed traders they are seeking to protect are not going to be able to get a high D-Score. That means no discount, and no incentive to trade in more CFDs. Sorted.