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.
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 Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. Read this Term 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.
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 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 need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 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 need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term
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.
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.”
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.
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 Negative Balance In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. In its most basic form, a negative balance represents an account balance in which debits exceed credits. A negative balance indicates that the account holder owes money. A negative balance on a loan indicates that the loan has not been repaid in full, while a negative bank balance indicates that the account holder has overspent.In the retail brokerage space, this phenomenon occurs when a position’s losses in an account exceeds the available margin on hand from a given trader. When a trader places a trade that sharply goes against the chosen direction, an account can incur negative balance. Such exposure is traditionally very risky for brokers. While the foreign exchange market is the most liquid market in the world, unexpected economic, geopolitical or cataclysmic events can always cause a market disruption and consequently lack of liquidity.This has occurred during certain events, albeit limited, which have resulted in extraordinarily sharp movements over short timeframes such as the Swiss National Banking Crisis in early 2015.Negative balances are addressed in many jurisdictions globally and clients in the EU are protected from such risks. As a consequence, brokers are the ones which are exposed to the risks associated with covering the negative balance with a prime broker or a prime of prime. New Negative Balance Protections Look to Shield Market ParticipantsAs a countermeasure to the risk associated with negative balances on a wider scale, many brokers now have since adopted negative balance protections. These mechanisms are an automated adjustment of the account balance to zero in case it became negative after a stop out.Traders operating with a broker that offers negative balance protection often cannot lose more than deposited as this shields both the trader and broker from wider losses in times of crisis. Read this Term 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.
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 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 need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 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 need to rely on leverage to make financial trading viable. Generally, the higher the fluctuation of an instrument, the larger the potential leverage offered by brokers. The market which offers the most leverage is undoubtedly the foreign exchange market, since currency fluctuations are relatively tiny. Of course, traders can select their account leverage, which usually varies from 1:50 to 1:200 on most forex brokers, although many brokers now offer up to 1:500 leverage, meaning for every 1 unit of currency deposited by the trader, they can control up to 500 units of that same currency. For example, if a trader was to deposit $1000 into a forex broker offering 500:1 leverage, it would mean the trader could control up to five hundred times their initial outlay, i.e. half a million dollars. Likewise, if an investor using a 1:200 leveraged account, was trading with $2000, it means they would be actually controlling $400,000, i.e. borrowing an additional $398,000 from the broker. Assuming this investment rises to $402,000 and the trader closes their trade, it means they would have achieved a 100% ROI by pocketing $2000. With leverage, the potential for profit is clear to see. Likewise, it also gives rise to the possibility of losing a much greater amount of their capital, because, had the value of the asset turned against the trader, they could have lost their entire investment.FX Regulators Clamp Down on Leverage Offered by BrokersBack in multiple regulators including the United Kingdom’s Financial Conduct Authority (FCA) took material measures to protect retail clients trading rolling spot forex and contracts for difference (CFDs). The measures followed after years of discussion and the result of a study which showed the vast majority of retail brokerage clients were losing money. The regulations stipulated a leverage cap of 1:50 with newer clients being limited to 1:25 leverage. Read this Term
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.
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.”