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#1 19-02-2019 09:02:30

johnedward
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3 strategies that brokers are adopting to survive regulation

3 strategies that brokers are adopting to survive regulation


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Article by FinanceMagnates:

I am aware that the majority of us are tired of hearing about the ESMA and to borrow a broader term, “the new norm” for the retail trading industry in Europe. That being said, it's essential to keep in mind that different brokers chose different strategies to cope with the new regulations and as journalists, our task is to keep the industry informed.

After interviewing several industry executives and sharing views on the state of the market, a material differentiation between different market players comes to view. The goals of different brokers throughout the past 12 months have been broadly aligned with a single item: survival.

The drastic changes to the revenue model of retail brokers in the EU prompted them to look for ways to remain in business. While some anticipated that they won’t be able to compete in this new marketplace and have already closed shop, the ones that remain have been finally forced to become creative.

After a long-overdue consolidation phase, market players are coming up with new ideas on how to survive and in the following lines, we will take a look at the different strategies adopted by different brokers.

Regulatory arbitrage

For a long time, we have been aware that brokers across Europe are preparing to move some of their EU clients to foreign subsidiaries. This has been especially relevant for brokers who have a large customer base that is not necessarily composed of EU residents.

Such companies have adopted the legal tactic of on-boarding new clients from outside of the EU via an Australian subsidiary. For EU clients that explicitly want to trade with higher leverage and ask their broker if they can move to Australia, the answer has been a firm "yes".

As a European citizen, every client can register with the Australian subsidiary of his/her broker of choice provided that the decision is made at one’s own discretion.

The downside of this approach is that Australian authorities have been slow to issue new licenses for quite some time. It is also unknown for how long the attractiveness of the license in the land down under will last.

Leaving Australia aside, the same tactic can be applied to broker subsidiaries in popular destinations all across the Panama area. Jurisdictions such as The Bahamas, Vanuatu, Seychelles, Belize, and others have been home to retail forex for years.

There are two major problems for brokers choosing this direction – payment processing of cards can be extremely tricky and their brand's reputation at risk. This is why many companies started to approach the market in a different way: opening a new brand under the offshore subsidiary.   

Since late last year, I started observing a sharp increase in broker advertisements. In contrast to the traditional messages towards retail clients, however, Google Adwords was spamming me with professional-oriented messages.

From a simple-sounding “Become a professional trader” to the enticing “Professional High-Frequency Trader”, firms have found ways to go around the legal ban to advertise to retail clients.

There’s no harm in that, after all, we know that the eternal cat and mouse game between regulators and their subjects has been around since The Laurel & Hardy show.

Last week, however, the ESMA communicated a message that stated point blank that it is closely looking at brokers' advertising practices. The regulator also singled out the relocation of clients to other countries but was especially attentive to marketing.

Business (almost) as usual

The final group is comprised of brokers that are the market's biggest players. Being among those, they are also most-closely watched by regulators. So they chose to be very subtle when devising a strategy to survive in the new environment.

Many of them have subsidiaries located outside of Europe but don’t bother communicating this to clients in a direct way. Others have mentioned that they have offices across the globe, but have also been very careful in their messages.

Some chose to introduce new products and go beyond the usual forex and CFD trading. Others created innovative ways to retain and attract clients using buzzwords such as AI and big data. The common denominator for all has been the fact that they chose to avoid aggressive professional clients targeting and opening offshore subsidiaries.

This makes sense, especially for bigger companies that have a significant ad budget. They chose to wait out the storm and rely on the unfolding of the same scenario that already happened in Japan 9 years ago.

Retail traders in Japan are new limited to 25:1 leverage. This didn’t stop brokers from there to report the largest trading volumes in the world just 4 years later.

New regulations are here to stay and the market will always adapt regardless of the severity of the measures. What’s most important in the end is to have a healthy business model.

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