ASIC: Retail Clients Post Net Loss of $150.8m from CFD Trading in 1 Week

The client loss occurred during the 16th until the 22nd of March 2020 from 12 Australian CFD providers.

From the 16th until March 22, 2020, retail clients from 12 Australian contracts for difference (CFD) providers which account for around 84 percent market share posted net losses of AU$234 million (US$150.8 million) from trading CFDs, a report from the Australian Securities and Investments Commission (ASIC) published today has shown.

In particular, the Australian regulator has published a report on retail investor trading during COVID-19 volatility, in which Australian CFD and securities brokers have seen a large uptick in new retail client accounts, trading volume, and as suggested by the regulator – client losses.

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As highlighted by ASIC, the client losses of $234 million net (or $428 million gross) are only based on 12 CFD providers, so the aggregate retail client losses across the industry for this single week may be higher.

“In fast-moving markets, prices can gap and losses can exceed the initial investment,” ASIC said in its report. “Many retail client accounts went into negative balance in the week commencing March 16. 5,448 retail client accounts of the 12 providers in the sample (or 2% of their retail client accounts that traded during that week) went into negative balance to the value of over -$4 million in aggregate. That is, they lost their initial investment and owed a further $4 million to the CFD providers. Some of the providers absorbed the losses themselves.”

In the report by ASIC, which examines the Australian CFD and securities market from February 24, 2020, until April 3, 2020 (focus period), the Aussie watchdog said that overall, the average retail investor was not proficient at predicting short-term market movements over the period.

CFD and securities trading soars in Australia

Although ASIC suggests that client losses have increased during this time, so has trading activity. For retail brokers, the average daily securities market turnover reached $3.3 billion during the focus period, up from $1.6 billion average for the prior six month period.

As pointed out by the regulator, there has also been a sharp uptick in the daily number of unique client identifiers, which are indicative of new client accounts, associated with retail brokers. This is appearing for the first time in ASIC’s trade surveillance data. 

During the focus period, an average of 4,675 new identifiers appeared per day, which made up a total of 140,241 identifiers ASIC had previously not observed. During the six months prior to the focus period, the authority observed 1,369 new identifiers per day and an average of 34,502 new identifiers appearing in a period of the same length. 

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ASIC witnesses dormant traders returning to active

Although there has been an uptick in new retail accounts within the Australian securities markets, ASIC also witnessed a large number of ‘dormant’ client identifiers from retail brokers. These dormant investors had not traded during the preceding six months but became active again during the focus period.

“A total of 142,022 ‘dormant’ retail broker client identifiers did not trade during the benchmark period, but recommenced trading during the focus period. In the focus period, these dormant identifiers accounted for 21.63% of all active accounts,” the report said.

Not only this, but for client identifiers that were active during the focus period, and the preceding six-month period, ASIC noted that there had been a “substantial decline” in the average time between trades by the same investor in a particular stock. 

This suggests that either retail investors were building up positions more frequently over time, or they were trying to profit from buying and selling around short-term price movements.

ASIC focuses on leverage

Within the report, the Australian authority also took a look at CFD leverage, saying that leverage magnified the risk for retail clients. This might cause many brokers within Australia to be concerned, as leverage restrictions are yet to be implemented, following the consultation paper being released in August of last year.

As Finance Magnates analyzed only yesterday, COVID-19 might cause ASIC to delay its product intervention measures, as it is expected to have a negative impact on the Australian tax base, and the regulator might want to make sure the country’s economy can withstand that. At the same time, this is not necessarily a concern for the regulator – as ensuring a fair market is its priority.

Sophie Gerber of Sophie Grace and TRAction Fintech
Sophie Gerber, a Director at Sophie Grace and TRAction Fintech

Speaking to Finance Magnates, Sophie Gerber, principal of legal firm Sophie Grace and the co-CEO of TRAction Fintech said yesterday: “I would be surprised if the product intervention order was released prior to more of the COVID-19 restrictions being lifted, however it is not outside the realm of possibility.” 

“An optimist would say that the order won’t be released until the economy has recovered and can withstand the losses that will be sustained to the Australian tax base from losing many of Australia’s largest brokers that make a substantial contribution, including to employment.  A pragmatist or a pessimist may say that regulators have no real concern for such things.”

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