In 2018, responding strategically to the rapidly shifting online trading landscape has become more critical than ever before. This is due to a raft of stringent regulatory requirements and increasingly restrictive advertising rules that have come into effect, sending tremors rumbling ominously across the industry.
The way brokers react to constantly evolving regulatory and advertising controls is likely to seal their long-term fate
What’s more, the crackdown on brokers’ activities has been gathering serious momentum since the beginning of the year, closing in on the online ‘contract for difference’ (CFD) trading industry from all sides. Internet behemoths such as Facebook, Google and Twitter, major European regulators like the Financial Conduct Authority and the Cyprus Securities and Exchange Commission, and the European Securities and Markets Authority (ESMA) are all tightening their grip on what brokers can and, more specifically, can’t do.
Given this backdrop, industry experts are now debating whether the domino effect of restrictions will take the industry down for good. Alternatively – and fortunately for forward-thinking brokers – this monumental shift could be creating a new and highly resilient breed of client-centric trading powerhouses.
Interestingly, there’s an evolutionary type of broker on the CFD trading scene that has an edge when it comes to facing such changes head on – namely, by fluidly pivoting its business model in response to restrictions. One such broker is 24option, which has shown incredible resilience and agility in reimagining its business model and taking change in its stride.
Indeed, 24option is leading by example, by continuing to leverage its proven ability to evolve and adapt to changing market needs. The question, however, now turns to other brokers, and whether they will follow the 24option example or falter, thereby missing the opportunity to take the lead in one of the most unsettling periods in the history of the industry.
Change, in any walk of life – including online trading services – is inevitable, and the way brokers react to constantly evolving regulatory and advertising controls is likely to seal their long-term fate. In the case of 24option, its commitment to staying one step ahead of changes in the regulatory environment is the secret to the company’s well-executed evolution, together with its strong and steady progress as it carves precise inroads into the well-established online CFD trading sector.
There is a saying we often use at 24option, which sums up the three different approaches to the market perfectly: “Pessimistic brokers battle the winds of change and prepare for the worst. Optimistic brokers expect the winds of change to start blowing in their direction. Realistic brokers adjust their sails and let the winds of change propel them onwards and upwards.”
One of the major regulatory changes of the year, thus far, has been the EU’s revamped Markets in Financial Instruments Directive, known as MiFID II, which came into full effect on January 3, 2018, along with the new Markets in Financial Instruments Regulation (MiFIR). MiFID II has been seven years in the making, having been conceived in 2011, and aims to increase transparency between all financial market participants, including brokers. The main areas addressed by MiFID II include product governance, best execution, transparency and reporting, among many others.
On March 27, 2018, an ESMA paper outlined measures designed to increase protection for retail investors in the EU, by prohibiting binary options and also restricting CFDs. Thanks to 24option’s strategic move into the CFD market, the company is already well prepared and ready to implement the measures laid out in the ESMA paper.
Specifically, ESMA has set out and agreed to five measures under Article 40 of MiFIR. The first is leverage: limits on leverage under the ESMA ruling will vary depending on the volatility of the underlying asset that a retail trader is opening a position on. At the top end, the maximum leverage available for major forex pairs will be 30:1, whereas minors, exotics, gold and major indices are limited to 20:1. Commodities and non-major indices attract leverage of up to 10:1, and leverage for the most volatile asset class – cryptocurrencies – is set at 2:1.
Margin is the second measure. When it comes to closing out CFD positions that retail clients have opened, ESMA aims to standardise the percentage of a margin required to trigger the close out. The third is negative balance, wherein ESMA aims to further limit clients’ losses by imposing the implementation of negative balance protection on a per-account basis. Fourth, we have incentives: the ESMA paper clearly states that there will be further restrictions on the incentives offered by CFD brokers to retail clients. Finally, ESMA requires brokers and others affected by these measures to display a new, standardised risk warning. The difference between the ESMA risk warning and others used to date is that providers of CFDs must state the actual percentage of losses incurred on their retail clients’ accounts.
When we received the ESMA consultation paper in January 2018, we got to work straight away. This meant that when the March 2018 paper was published, we were already well on our way to being compliant. We anticipate that the measures outlined will become officially binding very soon, and we are willing to implement the necessary changes across our entire operation. That’s what sets 24option apart: we look ahead, we see what’s coming, and we deal with both positive and negative change in a proactive, positive way.
As groundbreaking as ESMA and MiFID II are to the industry, they are not the only instruments of change in play during 2018. Indeed, March was a big month for brokers, with Google adding to the growing list of restrictions – this time on the products that can be promoted using Google AdWords and which countries’ brokers are entitled to target with their campaigns. Effective from June 2018, brokers are no longer permitted to run any ads related to cryptocurrencies or binary options. Brokers offering CFDs must also be certified by Google and licensed by the appropriate regulatory body in the countries they wish to target if they want to advertise trading on forex and other CFDs. The announcement from Google came hot on the heels of similar action taken by Facebook and Twitter regarding bans on the advertising of highly volatile products such as cryptocurrencies.
Know thy client
In such a fast-paced environment, where new or tighter restrictions often materialise overnight, expecting the unexpected comes with the territory. We ensure that the team at 24option is up to the challenge through a client-orientated approach. Essentially, as a business, our clients are the focal point of everything we do. When you’ve instilled such a client-centric outlook in your company’s culture, evolving services to meet your clients’ needs really does become second nature.
As a regulated broker, we want our clients to feel secure, and the recent measures that have been announced will bolster protection for them – which is a hugely positive thing. We are always looking ahead, and over the years we’ve developed a team of highly skilled professionals who are at the top of their respective fields – that means that when needed, we have the power to act quickly and decisively.
The importance of having the ability to catalyse change without any delays or hindrances cannot be overstated. This is an area where 24option seems to excel, as attested to by its timely entry into the world of CFD trading. When it comes to achieving seamless pivots in business models and strategy, agility is everything. We stay agile by getting to know our clients inside and out – what motivates them, what they love to trade, what scares them and what their goals are. By understanding our clients’ needs, we can intuitively sense when it’s time to pivot, and how they will react to changes that are outside our control, such as regulatory and advertising restrictions.
We want our clients to be part of our evolution and to stay with us for the long term. Whatever we do – whether it’s our four-year partnership with Juventus, our dedication to building and retaining the best team in the industry, or delivering the best possible support service to our clients – we take a long-term view. That is the key to our agility: we welcome any change that will take our clients’ trading experience to the next level.