OTC Derivatives vs ETPs: Which Is a Better Revenue Generator for CFDs Brokers?

Despite a tough financial year for some brokers, the demand for over-the-counter (OTC) derivatives and exchange-traded products remains strong, with contracts for differences (CFDs) and exchange-traded instruments driving significant growth in specific regions and segments. While some brokers, like XTB, are experiencing strong growth driven by CFDs and exchange-traded products, others, such as IG Group and Swissquote, have faced challenges, including declining revenues and reduced client activity.

Having analysed the financial results of some of the larger brokers (including IG Group, CMC, Plus500 and Interactive Brokers) over the last few months, Finance Magnates though looked at how OTC derivatives and exchange-traded products businesses compare in terms of revenue.

We contacted an extensive list of brokers for comment, most of which either failed to respond or declined to provide details of their OTC derivatives and exchange-traded products businesses beyond what was already publicly available.

Given that many of these brokers are not public companies, we were unable to access information for Trade Nation, Oanda, FxPro, Tradu, eToro, Pepperstone, AvaTrade, FXOpen and Alpari. For the remainder we analysed annual reports and income statements, some of which were more detailed than others.

"The Dynamic Growth in Revenues Generated by Stocks and ETPs"

Polish-based XTB was the most forthcoming. Filip Kaczmarzyk, head of trading and member of the management board explains that the platform’s revenues are dominated by CFDs, which accounted for more than 99% of revenues last year and just under 98% in the first half of 2024.

“However, it is important to note the dynamic growth in revenues generated by stocks and ETPs,” he says. “Data for the first half of this year shows that exchange-traded instruments generated nearly three times more revenues than in the corresponding period of 2023.”

Kaczmarzyk adds that XTB is confident that this part of the company’s revenues will continue to grow dynamically as its reach expands and on the back of a strategy to create an ‘all-in-one’ investment application.

On the question of how demand for these products differs across countries and customer segments, he observes that in the first half of 2024 revenue structure by geography was not much different from has been observed in previous years.

“Central and Eastern Europe - including Poland - clearly dominated,” says Kaczmarzyk. “However, it is worth noting another period of dynamic revenue growth in the MENA region, which increased by over two-thirds compared to the same period in the previous year.”

In 2023, XTB reported a 10% increase in revenue from PLN 1.45 billion (approximately $366 million) to PLN 1.59 million ($403 million). High transaction activity was expressed in an increase in CFD contracts concluded in lots of 16.5% compared the same period in 2022. Transaction volume in CFD instruments amounted to 7.4 million thousand lots from 6.4 million, although profitability per lot fell from PLN 227 ($57.6) to PLN 214 ($54.3).

CFDs as a percentage of overall revenue rose slightly from 46.4% to 47.8% on the back of high profitability of CFD instruments based on the US 100 index, the German DAX index (DE30) and the US 500 index. The second most profitable asset class was CFDs based on commodities.

Brazil Is a Growth Market

StoneX’s OTC derivatives business revenues rose by 11% to $232.2 million in the 12 months to 30 September 2023 with a 7% fall in rate per contract to $65.78 more than offset by a 20% increase in the number of contacts (most notably in agricultural and soft commodities) to just over 3.5 million, with the Brazilian market experiencing particularly strong growth.

The company makes brief reference to its ETF business in its annual report without providing any specifics on volumes or revenues. Its listed derivatives performed less well in the last financial year, with a 3% drop in revenues to $416.5 million as the number of contracts remained unchanged at just over 160 million but the rate per contract fell by 4% to $2.44.

A spokesperson for VT Markets explains that most of its products are OTC derivatives and exchange-traded products in the form of CFDs and says there has been no significant change in demand over the last few years.

When asked about local or regional variances in appetite for OTC derivatives and exchange-traded products, she adds that there are no obvious differences.

IG Saw a Revenue Decline

IG might be the largest provider of OTC derivatives by revenue globally but the last financial year was a tough one with revenue down 9% and the number of clients actively trading OTC products falling by 6% in the 12 months to 31 May.

eFX and CFDs accounted for 15% of Swissquote’s total revenue in 2023, although this dropped to 11% in the first half of this year. In terms of derivatives held for trading, Swissquote held a contract notional amount of CHF1.184 billion ($1.4 billion) for CFD derivatives along with CHF4.04 billion ($4.8 billion) of currency forwards and CHF71.7 million ($85 million) of currency options.

Higher options and futures volumes boosted Interactive Brokers’ commission revenue by 3% from the prior year to $1.36 billion in 2023. The firm’s Q1 2024 results showed a continuation of this trends with commission revenue 6% higher than in the same period last year as options activity remained strong.

Options and futures volumes were up 12% and 1% respectively in 2023 with more than one billion options (contracts).

CFD’s share of total income at Saxo Bank fell last year with clients reducing their average overnight exposures. Income from exchange-traded products (which is bundled with stocks and mutual funds) also fell as a percentage of overall products and services revenue.

In terms of future developments in the OTC derivatives and exchange-traded products space, CMC Markets’ financial year 2024 included the rollout of OTC options, with futures and exchange traded options set to be delivered in the first half of the current financial year.

Meanwhile, in its latest financial year Plus500 launched a new proprietary FX OTC trading platform tailored specifically for the Japanese retail market.