Before beginning today’s piece, I’d like to make a few notes.
One is that last week’s piece contained a couple of lines that were misleading. I gave the impression that IS Prime (ISP) were only taking ThinkMarkets to court because they’d moved index swaps trading to Hong Kong, and ThinkMarkets had stopped trading with them afterwards.
Apparently this is not the case. ISP believe ThinkMarkets did not adhere to their exclusivity agreement for trading in FX and index swaps from the start of the contract and after the move to Hong Kong – a three year period. That has been changed in the article itself but I also wanted to note it here so people are aware of it.
A major problem with media outlets today (hence the growth in things like Substack) is publishing things that are false or misleading, and then doubling down on it when it’s pointed out (eg. this by the FT’s economics editor, who then refused to admit he’d got anything wrong). So if you see something that is either of those two things in the future then please get in touch and I’ll put a correction/edit like this at the top of the following week’s post. Keep in mind that not having the same opinion as you is not the same thing as being false or misleading.
Next, Sargis Manukyan, who is head of broker solutions at Match-Trade, has been very unwell and now has expensive hospital bills that he is finding it hard to cover. He is collecting donations for this and you can donate here. The page is in Polish but you can use your browser to translate it easily. Sargis jan, we hope you get better.
Finally, it’s been a little over 100 days since I started writing CFDs Weekly. Putting the more marketing minded side of my brain to use, and considering this is basically just for fun, I’ve been very surprised at how much traction it’s got. The average post has just under 350 individual viewers, although that number is higher when factoring out two of the first posts, which is good going for a niche sector.
I’ve also been pleasantly surprised by some of the feedback from various people in the industry I’ve got – thanks to everyone that’s got in touch. If you do have ideas for posts or any comments, just message me.
And now we can get on to this week’s article.
FTX is going to Cyprus
A perennial topic in the FX/CFD world is whether or not to add new products. A few years ago, for instance, the question of whether or not to add single stock CFDs seemed to be a big one.
Along with adding real equities or crypto, that seems to still be a topic of discussion today. The simple answer basically seems to be, if people want to trade a given product, then you should add them, assuming the costs of doing so aren’t too high. Ultimately doing so is likely to make you money at some point down the line.
Less discussed is the potential for companies outside of the industry to add CFDs as products. Many aeons ago, senior execs at IG Group were supposedly bricking themselves that one of the major gambling companies would do this and wipe the floor with them, something that ultimately didn’t happen.
What we may be seeing today though, is a mix of firms that offer crypto or equities, who are then moving into the derivatives trading space. Robinhood arguably pioneered this in the US, by marketing itself primarily as an equities broker before switching to making options its primary means of making money.
But the company that has been making a lot more headway in this regard is crypto exchange FTX. Launched by dork-cum-ponzi-operator Sam Bankman-Fried in 2019, the exchange has been a pioneer in offering crypto derivatives and leveraged trading on digital assets. It has also managed to raise somewhere in the region of $2bn along the way and was purportedly (I am very sceptical of this number) on track to make $800m in profit last year.
In March, the company said that its US entity would be launching stock trading in the near future. Bankman-Fried then took a nearly 8% stake in Robinhood last month. Maybe he just ‘likes the stock’ but it seems plausible that some sort of acquisition could be in the works there further down the line.
What interested me more was seeing the company’s expansion into Cyprus. FTX acquired a CySEC licence in March and has since hired a small group of executives, almost all of whom previously worked for CFD providers.
There was naturally lots of hype around the firm offering its crypto services in Europe. Looking at FTX’s registration with CySEC though, it seems the exchange operator also has the ability to offer CFDs to clients.
CFDs are not part of some bundled regulatory approval, you have to ask specifically to be able to deal in them. That being the case, it seems plausible that FTX will start offering them – why get the regulatory ability to do so, unless you were going to use it?
The only reason I think they may hold back, at least for now, is that the products they offer already are so similar to them that there may be no point. If you look at their Spot+ product or some of their other leveraged derivatives, they effectively mimic FX/CFD products but you don’t have to adhere to the relevant regulatory restrictions on them.
FTX actually acknowledges this and states that they adhere to those regulations, even though they don’t have to. Their EU client agreement states:
even though the products offered do not qualify as CFDs, this Policy complies with Directive DI87-09 for the restriction on the Marketing, Distribution or Sale of Contracts for Differences (CFDs) to Retail Clients, which has been issued by CySEC on 27 September 2019 (hereinafter referred to as the “National Product Intervention Measures”) on a voluntary basis for retail clients.
One area where I note they haven’t done this is with the cigarette pack style risk warning, showing the percentage of clients shown that lost money. This is probably because they haven’t been in business long enough in Europe to generate that percentage, but there is a requirement to put some other boilerplate text instead, which they haven’t done.
Ultimately we’ll have to see what happens but if FTX does go down the CFD route it will be interesting to see what impact it has on the market. They seem to have so much money (or they did before the ponzi scheme cryptocurrency market crash) that they’d probably be able to outmuscle quite a lot of players through marketing spend.
The other lesson I take from them is that crypto is weirdly good for PR and branding. Looking at the FTX website to write this, I was amazed at how the products on offer are far ‘worse’, in terms of their complexity and risks posed to clients, than what the average CFD broker offers. And yet the perception the public seems to have of them is that they’re some sort of amazing, high tech firm, which is obviously a good trait to have if you want to attract clients.
Coming in from a slightly different angle to FTX are equities brokers. Like Robinhood in the US, German broker Trade Republic started offering ‘commission free’ stocks to clients but has since migrated into offering different derivatives and crypto. A couple of other newer companies may do something similar, although it’s early days and thus hard to tell what their plans are.
One is Lightyear, which is another commission free stockbroker, regulated in the UK and Estonia, that was set up by some of the people from Transferwise. The company has been active for about a year now and, unless they start offering derivatives or some set of fee-based accounts, they are not going to make money.
What makes me somewhat suspicious, and I admit this is tenuous, is an FAQ page on their website. One question deals with day trading and how to go about it. Another concerns their future plans:
Again, this may be nothing but they could have also just said ‘no’.
Another commission-free broker that has set up recently is Shares. Like Lightyear, it’s regulated in the UK and has only recently launched its product. It’s also shamelessly unoriginal, having ripped much of its design and aesthetic from my former employer and eToro, and all of its PR messaging is basically recycled material taken from other companies.
Despite this, it has managed to rack up a lot of signups and launch an app in a relatively short period of time. But again, it’s hard to see how they’re going to make money and they’ve been pretty quiet about how they plan on doing so.
And during my normal browsing through the Cypriot company archives, I also noticed that they’ve set up a company on that sunny island in the Eastern Med. Admittedly, this could be nothing. But again, you have to wonder if that means they’ll be looking to add CFDs further down the line.
If one or both of these companies does end up adding OTC derivatives, they’ll have played quite a neat trick. You onboard thousands, or tens of thousands of people, as a stockbroker, then add CFDs and start trying to get people to move over to them. Smart – assuming they do it.
