Even without ESMA’s final margin recommendations, the UK and European online trading industry is preparing for big changes and acting early… so what can we expect and what are the options?
The European Securities and Markets Authority (ESMA) let us know last year that it is planning to try and severely reduce the amount of margin that online brokers are able to offer their clients. Their initial view was to try and set a leverage cap on FX Spreadbetting and CFD’s with a final recommendation coming in the next few months of this year. The likes of the biggest online brokers such as IG offer 200 times margin on an Index for example and have done so for some time and as I am writing this I have just received a very timely email from IG asking for client input into a potential group of margin increases. This will be from 0.5% to 5% on instruments such as Major Indices, 3.33% on Major Currency pairs and 20% on Equities with many other online brokers sure to be following suit. This raises a host of questions for both the impact on the trading industry and perhaps more so, its clients.
Client: So how does this affect me?
Well to start with every good trader should know exactly what their risks and rewards are before placing a trade. So taking a very basic example if you trade £5 a point on the Dow at 25000 with current margin levels of 0.5% you would need £625 initial margin, so a 10 point positive move in this situation equates to a £50 pound profit. If margin on this product increases to 5% then 25000 x 5% x 5 equals £6250 so that is what you will potentially need in future for the same size trade (an increase in required margin of 1000%). So if you only wanted to risk the usual £625 then you would not be able to trade this position any longer as the lowest margin would be for £1 per point at a margin of £1250 and the profit on the same 10 point move would then be £10. Therefore in this situation the client has to actually risk more in order to trade at all and makes only 20% of the profit he is used to, asking the question of whether the brokers will have to offer “mini” indices for spreadbetting and CFD’s. Now of course its all relative and this is obviously not what ESMA intends but is an interesting side effect of their intention to protect clients.
Online Broker: What does it mean for us?
Well the above is just one of many different examples but it ultimately means that the clients will have to either change their current risk and reward expectations and will potentially need more funds to trade so this is likely to affect the number of trades and the size of the trades that they place. This in turn could mean online brokers will see a reduction in revenue and a potential drop in the number of clients willing or able to trade after these changes.
Client: What are the options?
Overall it is always a great thing to have reduced risk as clients will be forced to place smaller trades with the funds they have available and perhaps it will mean a reduction in losses but it remains to be seen if it is that easy to change a traders or more accurately a humans mentality, as many a losing trader may lay testament to, but its certainly a start so…
One solution to this is to trade with an online broker who is not bound by these restrictions and one such broker that has been making waves recently is Tradeview. Tradeview, who have grown significantly over the past 2 years, offer a number of alternative trading platforms such as the well regarded MT4, and will be a go to choice for those in the UK and Europe who were comfortable with their margin the way it was. Their spreads are equally comparable if not better than any of their current market competitors especially where cryptocurrencies are concerned and with a current offer of a reduced minimum fund entry running until the end of this month its certainly worth taking a look.