Analysis

Lower Volumes and Offshore Brokers Competition: Q1 Sneak Peek

The shockingly low volatility on the FX market is hindering volumes, but some brokers report client growth

The first quarter of 2019 is proving to be more challenging for brokers than some expected. The industry is facing a difficult time on a multitude of levels and the first signs of the hardships have emerged over the past couple of weeks as two major brokers downgraded their outlooks. 

The first brokerage to lower its guidance was Plus500, a move that was followed by CMC Markets only a week later. Shares of both companies are trading at significantly lower levels over the period, with the stock of Plus500 dropping back to levels unseen since December 2017, while CMC Markets is trading at all-time lows.

While volatility challenges are nothing new, the decreased leverage for EU retail clients is particularly impactful when the market is moving sideways. Regardless of whether the brokerage is operating via a market making or an STP model, trading activity is significantly lower in ranging markets.

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Abysmal Volatility

While 2019 started with a bang for FX volatility as the Japanese yen flash crash resonated around a multitude of pairs, the subsequent weeks have proven to be uneventful. Even a dire Brexit hiatus didn’t manage to ignite either side of the GBP trade and the ever-increasing grip of politics over the markets seems to be leading to a standstill for now.

The final quarter of 2018 was driven by massive stock market volatility and on multiple occasions caused Plus500 to upgrade its outlook. At the time, smaller brokers shared with Finance Magnates that the massive moves seen in the final quarter of last year have boosted revenues significantly.

Fast-forward to today and we are seeing the EUR/USD pair trading within a 250 pip range since the beginning of 2019. While stock market volatility is nowhere to be seen in the first months of the year, a slow grind higher is returning the US stock market closer to the all-time highs marked last year.

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“We have definitely seen a decrease in trading volumes this year. Also, the uncertainty with Brexit is not helping brokers, but we believe things will change in the second quarter. January and February have been tough months but things have improved in the past couple of weeks and we started on-boarding the same number of clients we were on-boarding before the Christmas holidays,” the CEO of one FCA-regulated broker company shared.

Big is Not Always Better

Since we started covering the industry’s ESMA-centred challenges last year, one thing has become clear. Big brokers have an advantage in terms of having the capital base to spend more on client acquisition. One aspect of this trade, however, is the lack of flexibility of these companies.

Nobody is allowed to advertise offshore subsidiaries to EU clients, yet somehow retail customers are aware of the loophole left in the ESMA regulations. They can still trade with high leverage if they open an account offshore. This appealing prospect has been confirmed by multiple industry-insiders.

A senior executive at a CySEC regulated broker which chose to continue doing business in the EU without regulatory arbitrage said: “The majority of smaller firms are doing business offshore already. Our volumes are slightly lower – about 15-20% down year-on-year. That said, in terms of revenues January was a new record for us.”

Despite the payments challenges for these firms, brokers from jurisdictions outside of the EU are flourishing. The ESMA has never made clear how it will be monitoring for advertisements of high-leverage products from brokers outside of the EU. To the detriment of the regulatory effort of the pan-European supranational regulator, the effectiveness of any such measures (if there are any) appears to be muted.

Ongoing Brexit Conundrum

While the uncertainty around Brexit still hasn’t dissipated, the FCA-regulated brokers who rely heavily on EU clients are still worried about the future. While a no-deal Brexit doesn’t look likely at present, another extension is well on its way.

The UK’s “kick the can down the road” game is entering its last act (again) and while low volatility is a traditional temporary challenge for brokers, the regulatory uncertainty is starting to fell way too permanent.

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