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Sometimes over the course of a week, a bunch of things happen that make coming up with an idea for this Monday morning post much simpler. Last week was one of those weeks.
Firstly, I had lunch with one broker executive who expressed a common refrain I’ve heard since starting this publication – CFDs are cooked in the UK and Europe and so the alternative is to offer exchange-traded derivatives.
Next the CME put out a release about a bunch of new micro futures contracts on agricultural products.
This got me thinking about the hardcore Spanish restrictions on CFDs which were put in place last year.
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Readers probably don’t need reminding but those regulations mean you are completely prohibited from marketing CFDs to customers. In theory, you can’t even have them on your website homepage. The only way they can be offered is if a customer specifically requests them.
The Spanish regulator said in the document it put out about the marketing ban that it was weighing up doing the same for futures and options. But it hasn’t done that yet.
After that conversation with the broker executive, I figured I’d check in on AvaFutures. This is AvaTrade’s futures broking product, which went live in the spring of last year.
According to SimilarWeb, where is the AvaFutures website getting the largest proportion (~40%) of its traffic from?
Spain.
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Looking at Google data, the entity that AvaTrade uses to advertise has run about 70 adverts targeting Spain since the start of the year. The below gives you some sense of what product they are promoting…
Getting traffic is obviously one thing, whether it’s converting is another. AvaTrade is a private company so it’s difficult to evaluate how successful these campaigns are or will be.
Nonetheless, it’s a sign of how brokers are thinking about what they can do in the event of bans or extreme restrictions on their favoured product.
The other thing that happened was a report on the broker industry in 2024 from BrokerChooser, who – by the by – will be speaking at FinMark Summit at the end of April.
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The first recommendation that BrokerChooser makes in that report is to push more on futures and options in 2025. This was also one of their key pieces of guidance for last year.
The report also notes that retail demand for futures and options rose last year more than any other asset class, with the exception of crypto.
For ETD fans all of this sounds positive. However, even if ETDs seem like the natural next step for brokers, it does not seem like smooth sailing.
There are a few reasons for that, which are worth breaking down individually
Competition internally
Although CFDs may be facing restrictions in Spain, they are not banned yet. I do not think the UK or Poland will ban them. Spread bets in the UK are beneficial tax wise for the government as you can’t claim back any tax on capital losses, plus you have several companies listed on the LSE that make the majority of their revenue from them + CFDs. Poland will not kill a local success story (XTB), which is also – in my view – why they still permit higher leverage.
Cyprus could also put pressure to stop a ban, although it has less political clout to do so, purely because it is a small country and the larger EU countries seem to enjoy bullying smaller member states.
Unless there is a ban, like the one in Spain, this basically means that brokers can keep opting for CFDs, which are always going to be a bigger revenue generator for them.
At the same time, if you are having to market multiple products, rather than just one, you tend to lose focus. Plus in the order of priorities, the product that makes you more money is likely to come out on top. As a consequence, brokers are not being incentivised to build a great ETDs product (yet). Spain is the exception.
Simplicity and culture
The next hurdle brokers offering ETDs face is making the product simple and easy to understand.
The ‘positive’ of CFDs and spread bets is that they are fairly intuitive and easy to get. I ‘buy’ if I think it’s going up, I sell if I think it’s going down.
Futures and options are not like this. For example, if you are buying options on a stock, you have multiple expiries (and thus multiple products to trade) and four different trades that you can make.
Robinhood has made this easier to understand and it looks like Investa in the UK is trying to achieve something similar. The Plus500 futures product is also a good example of how you can make these more complicated products easier to understand.
Another facet of this is the fact that people are now used to trading on leverage with CFDs and spread bets. In contrast, people in the US have – apart from FX – no ability to trade these products. There is a much bigger culture of options and futures trading as a consequence.
Overall, this means that brokers have to sell ETDs to customers who are used to something different and where the product they are used to is, by its nature, easier for the average person to understand.
Trading costs
Another facet of this is fees. If you are trading CFDs, most of the fees are easy to understand. You may have commissions per lot but, a lot of the time, most of your costs are baked into the spread. The result is you don’t think about them that much (even if you should!)
In contrast, if you open an account with an options broker, you immediately get given a whole spiel about what fees you are going to have to pay. You can’t keep a demo account (or similar) open with tastytrade, for example, because they just shut you off due to exchange data fees.
The result is that CFDs can be a lower cost product. Moreover, even if the costs are higher, you don’t really ‘feel’ them in the same way that you do when trading ETDs because they are in the spread.
The point is that fees for options and futures just feel a lot more obtrusive than they do for CFDs and spread bets.
No one wants to open an app, hoping to punt on Tesla or the S&P, and instead get a Magna Carta-length essay about the intricacies of third-party exchange data licensing. If you want to see a simple example of this then just compare the fees page for tastytrade with the fees for IG’s CFD product.
Finally, the contract specs mean that CFDs and spread bets still offer a simpler route to access certain markets. This is changing though, with more micro / nano contracts being introduced by the exchanges.
Europe is toast
The final point is that you could easily just ask the question – who cares about Europe?
We looked before at the CFD industry in Cyprus and how, apart from eToro, none of the largest brokers there really do any business in Europe anymore. It’s all in emerging markets.
Alternatively, there are loads of people who now just go to Mauritius and do everything offshore. So you can keep doing CFDs and it makes no difference.
Lots to do
All in all, this means that companies that want to offer ETDs still have a lot to do. CFD bans can push brokers who want to stay compliant and do business in Europe towards them.
However, ETDs need to be made simpler and easier to access. Another possibility would be to figure out a way around restrictions on payment for order flow, which would make these products bigger revenue generators for brokers and incentivise them to offer them.
An ongoing problem will be the fact that restricting access to offshore firms is so hard to achieve today. To use an analogy, if you banned casinos 50 years ago, you would have to run some Tony Soprano-esque, clandestine operation for punters.
Today the internet means that an offshore broker is in someone’s pocket and accessible within about 10 seconds, depending on finger dexterity and phone addiction levels.
So futures may indeed be the future, but there is still lots to do before it can happen.
