The Daily Telegraph calls time on Spread Betting and CFDs

Darren Sinden

Questor acknowledges that it has openly tipped the shares of CMC Markets in the past, but also that the shares have risen by 269% since then and that selling after such a run would be “prudent”

One of the UK’s leading broadsheet newspapers has told its readers that its time to sell shares in IG Group and CMC Markets.

The Daily Telegraph’s Questor column gives the advice because it believes that the good times are over for margin traders.

The influential city and markets column highlights the sharp price rises in the shares of the two companies and the contribution that margin trading on CFDs and Spread Bets has made and continues to make to profitability.

However, Questor believes that regulation will be tightened further and that retail traders may be prevented from trading in these products. Regulators in the UK, Europe and Australia have already clamped down on the levels of margin or gearing that retail clients can be offered. More recently the UK FCA prohibited UK private clients from trading on any kind of cryptocurrency derivative contracts.

Questor doesn’t think that a ban will be imminent and the authors certainly don’t expect the FCA or other regulators to move the goals posts while we are still in the pandemic.

However, the column was adamant that change was coming saying that: “This column predicts that these leveraged products (CFDs and Spread Bets) will be banned as far as ordinary savers are concerned within the next few years”

Looking at CMC Markets the Telegraph article highlights that 97% of the firm’s revenues are derived from margin trading and that the UK market contributes around 30% of that. Questor acknowledges that it has openly tipped the shares of CMC Markets in the past, but also that the shares have risen by 269% since then and that selling after such a run would be “prudent”.

CMC Markets shares are trading down by -2.57% on the day at the time of writing.

Are Questors concerns justified?

There is no doubt that the FCA is concerned about the ability of retail traders to understand and manage risk in even the most simplistic investment products, and that it believes that in many instances retail clients need protecting from themselves.

However, the regulatory changes that were introduced in conjunction with ESMA almost three years ago greatly reduced gearing and prevented retail clients from incurring negatives balances. That meant they could no longer lose more money than they had on their account, which was always on the regulator’s bugbears about margin trading.

What’s more CFD and Spread Betting providers must prominently display the win-loss ratios that their clients achieve when trading these products through them, and highlight the risky nature of geared products and the fact that they are not suitable for all investors.

The Questor column made the point that FCA has categorised some investment trusts as complex products, therefore labelling them as unsuitable for the average investor and yet has made no such distinction for margin trading.

Here the article has a point and it wouldn’t be beyond the bounds of possibility to see margin trading products categorised as complex investments in the same way that options are.

That wouldn’t prevent retail clients from trading in them completely. However, it would raise questions around suitability and experience and put the onus on the customer to demonstrate that they had sufficient understanding to be allowed to trade them.

Regulators would presumably also ask margin trading firms to prove that they had tested those claims and recorded the results.

As to the contribution that retail traders make to the profitability of margin trading firms it is clearly significant and perhaps more so over the last year or. However, when ESMA moved to restrict leverage levels for retail traders in margin trading, brokers were incentivised to attract and secure professional traders.

These traders tend to be smaller in number but larger in terms of account size and more active than there retail counterparts. In their 2020 annual report, CMC Markets said that professional CFD clients accounted for 54% of all ESMA region CFD net trading revenue and that one of its priorities for 2021 was to try and grow the revenues generated by these type of clients in the UK.

On hearing that his obituary had been published Mark Twain is said to have remarked that: “rumours of my death have been greatly exaggerated” and whilst further change may be coming to margin trading products it’s premature to say that this would signal the end of retail clients participation in it.

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