Three Key Strategies Brokers Adopted to Survive EU Regulations
- Six months after ESMA, the retail trading industry in the EU adopted three distinct survival strategies
I am aware that the majority of industry’s participants are by now fed up with talking about ESMA and to borrow a broader term, “the new normal” for the retail trading industry in Europe. That said, it is essential to keep in mind that different brokers chose different strategies to cope with the new regulations and as journalists, our task is to keep the industry informed.
After interviewing several industry executives and sharing views on the state of the market, a material differentiation between different market players comes to view. The goals of different brokers throughout the past year have been broadly aligned with a single point in mind: survival.
The drastic changes to the revenue model of retail brokers in the EU prompted them to look for ways to remain in business. While some anticipated that they won’t be able to compete in this new marketplace and exited early, the ones that remain have been finally forced to become creative.
After a long-overdue consolidation phase, market players are fresh with new ideas on how to survive and in the following lines, we will take a look at the different strategies adopted by different brokers.
Regulatory Arbitrage
For a long time, we have been aware that brokers across Europe are preparing to move some of their EU clients to non-EU subsidiaries. This has been especially relevant for brokers who have a large customer base that is not necessarily composed of EU residents.
Such companies have adopted the legal tactic of on-boarding new clients from outside of the EU via an Australian subsidiary. For EU clients that explicitly want to trade with higher Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term and ask their broker if they can move to Australia, the answer has been affirmative.
As an EU citizen, every client can register with the Australian subsidiary of his/her broker of choice provided that the decision is made at one’s own discretion.
The downside of this approach is that Australian authorities have been passing on providing new licenses for quite some time. It is also unknown for how long the attractiveness of the license in the land down under will last.
Leaving Australia aside, the same tactic can be applied to broker subsidiaries in popular destinations all across the Panama Papers. Jurisdictions such as The Bahamas, Vanuatu, Seychelles, Belize, and others have been home to retail Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term for years.
There are two major problems for brokers choosing this direction - payment processing of cards can be very very difficult and risking the reputation of their brand. This is why many companies started to approach the market in a different way: opening a new brand under the offshore subsidiary.
Aggressive Professional Clients Ads
Since a couple of months ago, I started observing a sharp increase in broker advertisements. In contrast to the traditional messages towards retail clients, however, Google Adwords was spamming me with professional-oriented messages.
From a simple-sounding “Become a professional trader” to the appetizing “Professional High-Frequency Trader”, firms have found ways to go around the legal ban to advertise to retail clients.
There’s no harm in that, after all, we know that the eternal cat and mouse game between regulators and their subjects has been around since The Flintstones.
Last week, however, the ESMA communicated a message that stated point blank that it is closely looking at the advertising practices of brokers. The regulator also singled out relocation of clients to other jurisdictions but was particularly attentive to marketing.
Business (Almost) as Usual
The final group is comprised of brokers that are the biggest players in the market. Being among those, they are also most-closely watched by regulators. So they chose to be very subtle when devising a strategy to survive in the new environment.
Many of them have subsidiaries located outside of the EU but don’t bother communicating this to clients in a direct way. Others have mentioned that they have offices across the globe, but have also been very careful in their messages.
Some chose to introduce new products and go beyond traditional forex and CFDs trading. Others created innovative ways to retain and attract clients using buzzwords such as AI and big data. The common denominator for all has been the fact that they chose to avoid aggressive professional clients targeting and opening offshore subsidiaries.
This makes sense, especially for larger companies who have a significant amount of reserves. They chose to wait out the storm and rely on the unfolding of the same scenario that already happened in Japan 10 years ago.
Retail traders in the land of the rising sun got limited to a 25:1 leverage. This didn’t stop brokers from the country to report the largest trading volumes in the world only 5 years later.
New regulations are here to stay and the market will always adapt regardless of the severity of the measures. What’s most important in the end is to have a sustainable business model.
I am aware that the majority of industry’s participants are by now fed up with talking about ESMA and to borrow a broader term, “the new normal” for the retail trading industry in Europe. That said, it is essential to keep in mind that different brokers chose different strategies to cope with the new regulations and as journalists, our task is to keep the industry informed.
After interviewing several industry executives and sharing views on the state of the market, a material differentiation between different market players comes to view. The goals of different brokers throughout the past year have been broadly aligned with a single point in mind: survival.
The drastic changes to the revenue model of retail brokers in the EU prompted them to look for ways to remain in business. While some anticipated that they won’t be able to compete in this new marketplace and exited early, the ones that remain have been finally forced to become creative.
After a long-overdue consolidation phase, market players are fresh with new ideas on how to survive and in the following lines, we will take a look at the different strategies adopted by different brokers.
Regulatory Arbitrage
For a long time, we have been aware that brokers across Europe are preparing to move some of their EU clients to non-EU subsidiaries. This has been especially relevant for brokers who have a large customer base that is not necessarily composed of EU residents.
Such companies have adopted the legal tactic of on-boarding new clients from outside of the EU via an Australian subsidiary. For EU clients that explicitly want to trade with higher Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term and ask their broker if they can move to Australia, the answer has been affirmative.
As an EU citizen, every client can register with the Australian subsidiary of his/her broker of choice provided that the decision is made at one’s own discretion.
The downside of this approach is that Australian authorities have been passing on providing new licenses for quite some time. It is also unknown for how long the attractiveness of the license in the land down under will last.
Leaving Australia aside, the same tactic can be applied to broker subsidiaries in popular destinations all across the Panama Papers. Jurisdictions such as The Bahamas, Vanuatu, Seychelles, Belize, and others have been home to retail Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term for years.
There are two major problems for brokers choosing this direction - payment processing of cards can be very very difficult and risking the reputation of their brand. This is why many companies started to approach the market in a different way: opening a new brand under the offshore subsidiary.
Aggressive Professional Clients Ads
Since a couple of months ago, I started observing a sharp increase in broker advertisements. In contrast to the traditional messages towards retail clients, however, Google Adwords was spamming me with professional-oriented messages.
From a simple-sounding “Become a professional trader” to the appetizing “Professional High-Frequency Trader”, firms have found ways to go around the legal ban to advertise to retail clients.
There’s no harm in that, after all, we know that the eternal cat and mouse game between regulators and their subjects has been around since The Flintstones.
Last week, however, the ESMA communicated a message that stated point blank that it is closely looking at the advertising practices of brokers. The regulator also singled out relocation of clients to other jurisdictions but was particularly attentive to marketing.
Business (Almost) as Usual
The final group is comprised of brokers that are the biggest players in the market. Being among those, they are also most-closely watched by regulators. So they chose to be very subtle when devising a strategy to survive in the new environment.
Many of them have subsidiaries located outside of the EU but don’t bother communicating this to clients in a direct way. Others have mentioned that they have offices across the globe, but have also been very careful in their messages.
Some chose to introduce new products and go beyond traditional forex and CFDs trading. Others created innovative ways to retain and attract clients using buzzwords such as AI and big data. The common denominator for all has been the fact that they chose to avoid aggressive professional clients targeting and opening offshore subsidiaries.
This makes sense, especially for larger companies who have a significant amount of reserves. They chose to wait out the storm and rely on the unfolding of the same scenario that already happened in Japan 10 years ago.
Retail traders in the land of the rising sun got limited to a 25:1 leverage. This didn’t stop brokers from the country to report the largest trading volumes in the world only 5 years later.
New regulations are here to stay and the market will always adapt regardless of the severity of the measures. What’s most important in the end is to have a sustainable business model.