This Wednesday, the German Federal Financial Supervisory Authority (BaFin) released a lengthy statement explaining why investors should not be complaining about brokerage pricing practices.
In effect, the document published by the German regulator provides a brief explanation of slippage and why it occurs.
Before going into that explanation, BaFin first discussed a couple of the financial instruments that are popular amongst retail investors in Germany. Thus, the reader of the German regulator’s newest document also gets a neat summary of what a turbo warrant is.
Having outlined the structure of those instruments, BaFin then went on to discuss how exchanges and market makers operate with regard to pricing.
Significantly, the regulator pointed out that, as most of our readers will be aware, brokers are not legally obligated to maintain a set price for an instrument.
BaFin mocks complaints
Why is this significant? Well, because it shows that many traders in the retail world completely lack very basic knowledge about the nature of financial markets and trading.
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The fact that BaFin felt compelled to publish this document, with a sub-heading that almost mocks allegations of fraud against market makers, indicates that many people are complaining about slippage.
Now, clearly, if there are poor execution practices taking place, that is something to be concerned about.
But the document published by BaFin doesn’t indicate that this is the case. Instead, it seems that people are complaining that prices are changing in the market and they aren’t necessarily getting the price that they were quoted.
With a churn-and-burn model, less scrupulous brokers may be able to milk such people for some quick cash. In the long run, however, having them as clients is negative.
People that don’t understand what they are doing are going to lose all of their cash and then, because they believe they have been screwed over, complain to regulators about it. Get enough people complaining and you get more regulation.
So, Finance Magnates reader, leave the chumps to the side and focus on people that know what they’re doing. That will mean longer client life-cycles, fewer complaints and – in the long run – a smoother and more profitable business.