The contracts for differences (CFD) trading market is a highly competitive market place and one which has historically received a bad reputation as a whole because of a few providers not acting responsibly. Whilst increased regulation in the sector is rightly forcing all operators to provide a baseline of protections for clients, it’s also important that providers take matters into their own hands, putting the customer first to ensure an ethical and responsible trading environment.
CFD trading allows retail investors to trade on the rise or fall of prices on shares, indices, commodities, cryptocurrencies and Forex. Essentially, it enables those with lesser upfront capital, the opportunity to trade in markets they would otherwise be unable to get involved in. Take cryptocurrencies as an example – unfortunately, many will be kicking themselves over not investing in the likes of Bitcoin, Ethereum and Litecoin, the most established crypto assets, before their cost skyrocketed. However, through CFD trading, individuals are able to speculate as to how these cryptocurrencies will either rise or fall, without being bound by a minimum amount of capital.
CFDs are able to offer this lesser upfront input through providing a higher amount of leverage than traditional trading. The leverage allows retail investors to put forward a portion of the amount they’d like to invest towards a financial asset, meaning they stand to make a larger profit from their initial outlay compared to traditional trading. However, on the flip side, investors also stand to make a larger loss.
As a result of this risk, we believe CFD providers have a responsibility to help retail investors manage their appetite for risk against their ability to handle any losses.
Earlier this year, the European Securities and Markets Authority (ESMA) released a statement on temporary product intervention measures placed on CFD trading – a raft of measures that are sensible towards making the CFD market a safer place, by improving consumer protection and driving out unethical players in the field.
The measures include a margin closeout rule of 50% of minimum initial required margin and a negative balance protection on a per account basis, to prevent users from losing more money than they invested. In addition, ESMA has mandated that advertising cannot include incentives targeting customers, and must feature a specific warning that includes the percentage of losses on a CFD provider’s retail investor accounts.
ESMA’s negative balance protection and margin closeout rule are central to protecting retail clients from the risks of sudden gaps developing in the positions that they take and the potential for significant loses and debt, and responsible providers are very much behind these measures. Furthermore, the restriction on incentives offered in advertising promotions is really good for client outcomes, as well as the requirement of including a risk warning – this is a financial product and people need to be clear-sighted about what CFD trading entails.
All of these measures – negative balance protection, margin closeout and marketing without bonus incentives should be part of any responsible CFD platform’s DNA, and we already comply with these measures.
Whilst these measures are broadly very sensible in achieving a safer CFD market for all consumers, we also strongly believe that the industry should be looking at what they can do and should offer options based on experience and also ensure that a high level of education is provided.
In order to help ensure retail investors do not over-expose themselves to risk, responsible providers can include mandatory questionnaires at the sign-up stage, designed to establish understanding of the risks and practicalities of CFD trading. Responsible CFD providers are increasingly developing platforms that offer users an experience in line with their ability to manage risk and offer less experienced users lower levels of leverage. This approach, though not mandated, could and should form part of the provision of a responsible trading environment.
We also strongly believe that education is a large part of this responsibility on CFD trading platforms and we are also seeing increased demand for more education from clients, who want to learn, study and participate in the markets. Financial literacy is extremely important for everyone today, whether they want to become a trader or not and education enables everyone to become more informed.
Providers looking to offer a responsible and ethical platform should be ensuring that their customers are educated, not only on CFD trading, but also on the markets they’re interested in and we encourage anyone considering retail investments to ensure they’re clued-up. Any providers that truly have the customer at the heart of their operations, will already be offering this ethical trading environment and will thrive under the latest regulations.
We recently launched Investmate – a free to download app that delivers an expansive range of introductory trading courses on financial instruments, derivatives and CFDs, as well as a course on understanding the risks of trading. It does this through educational content, including interactive courses, quizzes, and articles, aimed at teaching amateur traders about investment best-practices. The app suggests goals based on users’ trading experience and in addition, any financial terms that are referred to in the lessons are highlighted, giving users the opportunity to click through to a more detailed description of that term.
Through this material, we’re hoping to help beginners become more responsible, informed participants in the market, as well as provide them with the tools they need to trade rationally.