Regulators in the UK and Europe, and really anyone who makes laws or rules in those places that in some way influence my life, tend to make me feel the same way Captain Howard does about Will Smith and Martin Lawrence in Bad Boys II.
To paraphrase the captain, every time I see them, it’s like they wake up in the morning, look at each other and start asking – ‘how can we ruin David’s life today? Let’s make some more rules that will slowly kill the industry he makes a living from.”
I imagine this must be a feeling that is felt even more acutely by many readers of this newsletter and we have seen it come into play over the last month with the German regulator BaFin, who have proposed putting restrictions on access to turbos.
For those unfamiliar with them, turbos are kind of like listed CFDs, where the leverage in the contract is baked in via something akin to a stop loss. If the value of the contract goes below that level then the trader loses all of the money they put down.
The restrictions that BaFin is proposing are very similar to those imposed on CFDs as well. Providers will have to issue risk warnings with client loss stats, make sure clients can pass an appropriateness test, and bans any kind of incentive to trade.
Interestingly, the regulator will not restrict leverage on the products, even though it can be much higher than what you get on CFDs in Europe today. Turbo leverage is based on how close the contract price is to the stop out level. So if a contract costs £100 and has a stop out level of £80, you could almost double your leverage by buying if the contract fell to £90. Even now IG advertises potential leverage of over 100:1 on knock out and barrier contracts.
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In 2021, the Dutch regulator did put leverage restrictions on turbos and the result is that market makers cannot execute orders on whatever side of the trade has breached the cap.
BaFin’s decision itself was interesting for a couple of reasons. Firstly, a lot of people seem to believe that listed derivatives are a panacea to the ‘heat’ that CFDs are facing. In reality, the stats BaFin published show exactly the same loss statistics for turbos, which are listed, and we are seeing the same movement of travel, in terms of restricting products if client losses are perceived as being too high.
Now imagine a future where CFDs are banned. Everyone switches to options and futures. The same loss statistics inevitably appear. The regulator decides to restrict those too. Is that really hard to imagine?
The loss-based logic is also clearly outlined in a lengthy document BaFin published about its restrictions on turbos…
“By participating in the capital markets, the typical retail investor primarily pursues the purpose of capital accumulation. This process is fundamentally a savings or investment transaction. Financial instruments with which investors achieve, on average, a negative investment performance are fundamentally incompatible with this and are considered to be a threat to investor protection…. the economic interest of intermediaries, issuers, and providers in the unrestricted marketing, distribution, and sale of Turbo Certificates to retail investors domiciled in Germany is deemed less worthy of protection than the public interest in collective investor protection.”
I don’t want to lecture the Germans with some half-baked Humian philosophy but the first claim to me is so indicative of how European regulators think about risk today, going way beyond this industry. Of course anyone who buys a financial product wants to make or preserve capital, but there is no reason that ought to happen.
Moreover, the conflation of one person buying an S&P tracker in their pension fund and someone else dropping £1k on a bitcoin turbo is insane. The idea that the latter in some way ‘deserves’ to make money, which is implicit in what BaFin says, or that it’s ‘fundamentally a savings or investment transaction’ makes no sense.
Unfortunately, it is what it is and they aren’t going to change. European regulators seem unwilling to deal with the fact that people want to take on higher risk.
Killing your own success story or not?
The other part of this that I find interesting is that it is the second step that BaFin has taken that, from the outside, looks like it could damage one of Germany’s big start up success stories from the last decade.
Trade Republic is not a company we’ve looked at here much and that’s a shame because, for all the negativity about how things suck in the continent, they are an awesome company.
In under a decade they’ve hit more than €100bn in AUM. As reported on TradeInformer recently, they were profitable in 2023 and seem to have grown more in 2024. The product is great and it is clear from speaking to people, like XTB CEO Omar Arnaout, that they are a business many companies in our industry look at.
However, the basic model they operate under is very similar to Robinhood. Firstly, they make money from payment for order flow and then they also switch clients over into derivatives products, where they presumably make more money. Indeed, in their report on turbos, BaFin notes that brokers offering the contracts can get a fixed rate of €3.50 to €13.40 or a percentage value of the trade (0.25% for example) from market makers.
Over in the US, there has been almost no push back on this model. In Europe there is. For some reason PFOF is something that seems to cause conspiratorially-minded, gremlin-like retail investors, the type you see putting free giveaways into an overused plastic bag at an AGM event, to absolutely lose their mind. This is despite the fact that it has almost no impact on outcomes and they would also complain if you replaced the revenues derived from the practice with dealing fees.
Rather than just going ‘yea, we’re not going to listen to you weirdo, it’s not that big a deal’, EU regulators decided to ban it and BaFin went along with that. Clearly this is not a positive for Trade Republic.
On the other hand, BaFin has given an extension on the practice until mid-2026. And since the ban was announced, German broker Scalable Capital has launched its own venue (with an affiliated market maker) and exchange operator and market maker Tradegate made a retail investing app. So maybe Trade Republic can use a work around like this too? But then you just wonder what the point is – why not just allow PFOF?!
Then you have the turbos restrictions. Although they are annoying and the logic behind them doesn’t make sense to me, you could argue there is some kind of Straussian reading of this, where actually they say one thing to the masses to justify their decision and make it seem harsh but there is an underhand meaning for ‘those in the know’.
The key point for me is that the leverage is still there and, as the Dutch example shows, they could have banned that if they wanted to. They didn’t. And as ESMA and cigarette packs have shown, risk warnings don’t achieve much. People trade anyway.
So maybe BaFin is conscious of the need to be somewhat supportive of local businesses and I don’t need to feel like Captain Howard talking to Will Smith. And anyway, doesn’t it always work out in the end in cop movies?
