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My ESMA response to 8X to 10X margin increases coming soon

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Hi, incase you don't know new rules will mean IG will have to increase margin rates - shares have already experienced this and all other products will be affected. I took the time to respond to the ESMA proposals and I think most traders should seriously look into this and put their 2 pence in. Below I have included most of my response and solution to this which I sent to the ESMA. You should have an email from IG CEO titled ESMA, read it carefully and think about how this will affect you:

 

"In my opinion the biggest problem with margin trading is the lack of understanding, and the focus on gains, and not covering risk and what is the downside. This is the same in any form of gambling/trading.


I truly enjoy the intellectual challenge of trying to become a consistent trader, starting small and rolling out to larger size as and when appropriate. I think your decision will have a devastating effect on small accounts, who are sensible and not leveraging to the hilt. There are a few high profile cases of people who have only themselves to blame, with small amount to spreadbet companies too.


My solution is simple, 100% effective without the need to kill the game to the small players like I think your proposals will do. All spreadbets/trades should have a automatic & free guarunteed stop. This should be without penalty of extra margin or spread.
So if you wanted to put £5/point on Euro/Usd, with 15 point guraunteed stop - the absolute maximum a client can lose is £75(also the amount of margin that should be put up too) - this is a feature to help people who can't help themselves, as well as the risk averse like me. There can be no more you can lose more than you have in your account, no more I can't get out of a trade, no more slippage & no more headlines.


This is a simple but effective solution, I do understand what you are trying to do but think this is overkill to the extreme. There are things to be worked out, how large a guarunteed stop for daytrades/ swing/longterm. If a client moves the guarunteed stop maybe a pop up explaining the dangers and how it is their responsibility if they do this, or simply ALL stops are guarunteed which would be my choice, and ALL trades must have a stop before being placed.


I have thought about this quite a bit since seeing a youtube vid on the effects of your proposals. I hope you see the logic in my simple solution - IG index had this as an option last year but stopped it for some reason. Now a guarunteed stop requires more margin than a non guarunteed stop?????? How is that any help to anyone and encourages riskier trading - I complained about this with others on their forum pages.


I hope you can put this to the powers that be - there is no downside if this is enforced for the clients, I think it is a positive for you/IG and the industry as well as me - who will be up at 6.30am to load my charts safe in the knowledge nothing bad can happen today"

 

I sent this this morning and urge all to take 5 minutes to respond in anyway you see fit............

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Good thread.

I'd like to suggest that anyone who was considering doing nothing about this actually respond to the IG email.
I know it's unlikely, but if the overall response is big enough there's a tiny chance our views will actually be considered before they are rejected, instead of our compliance being automatically assumed.

 

If you don't put up a fight, you've already lost.

 

Here's a draft of what I'll likely be posting.

**********************************
ESMA Leverage Proposals.

Whilst I can see and understand what ESMA wishes to achieve, it is my view that the proposals as they currently stand will not have the intended effect.

 

The intention is to prevent retail clients from losing money by raising the margin requirements, reducing the amount of leverage available and thus reduce the maximum potential loss incurred on any individual trade.

 

However, it is my contention that people do not lose money principally because of the amount of money involved, rather that people lose money by making the wrong investment decision or simply through bad trading.

 

Under the current system a client may place 10 trades simultaneously and lose money on all 10. Under the new proposals - with higher margin requirements -  the same client could perhaps instead make 10 trades, one after the other, and still lose money on all 10. By making the same bad decisions.
All that the proposals will do is increase the timeframe for the client to make 10 losing trades. The same amount of money will be lost overall. Perhaps even more money will be lost, as the increased timeframe will allow the client more opportunity to add additional monies to their account.

 

To improve trading and decision making, in addition to offering demo-accounts, IG Index offer many webpages, videos and live webcasts to enable traders to educate themselves. This is to be applauded and encouraged.
Is it the intention of ESMA to restrict professional trading activities solely to those who work for investment banks etc? If 'Joe the Plumber' is not allowed to trade, Joe will never become a successful trader.

 

Nor is the distinction between retail and professional trader particularly helpful.
To gain classification as 'professional' IG stipulate that 2 of the following 3 conditions be met:
1) a minimum number of trades;
2) a minimum net worth;
3) holding professional qualifications.
When Joe The Plumber first becomes interested in trading he will obviously have no experience and fail point 1). He is unlikely to be worth over 500,000 Euro and will fail point 2). Joe is even less likely to hold professional investing qualifications and will fail point 3).
Given that Joe will almost automatically fail all 3 points, how is raising the barrier to entry going to assist Joe in becomming a better trader (and perhaps attain 'professional' status, or at least pass point 2)?

 

Additionally, surely it is up to the client to decide how to spend their own money, and how much money the client wishes to spend? Many people spreadbet for entertainment purposes and not wealth creation.


The ESMA proposals will severely restrict Joe's freedoms of choice and serve only to inhibit his wealth-creating abilities. Or possibly even persuade Joe to conduct his activities in other jurisdictions.

 

Many people consider spreadbetting to be another form of entertainment and/or gambling, however running a spreadbetting account as an alternative to a traditional stockbroking account need not be a gamble.
In the interests of fairness, these proposals should be extended to include other areas that are a pure gamble, ie sports betting, casinos, lotteries, bingo etc.
Whatever next - a statement of net worth to be provided before purchasing a lottery-ticket perhaps?

 

In my view, the goals of ESMA would be better directed if their attentions were focussed more towards other jurisdictions where existing regulatory standards are lax and open to abuse by platform providers. Perhaps ESMA could even assist a prosecution occasionally. I am of course thinking of places such as Cypress, Malta etc.
I would not be surprised to learn that more people lose more money through outright fraud than from making their own poor investment decisions.

*******************************************************************

This is of course really more about bureaucrats being seen to be doing something rather than actually doing anything effective.

It's much easier for them if they can dream up some more regulations for other people to adhere to instead of doing what they, the bureaucrats, already have the power to do.

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Interesting thread, I broadly agree with the measures been proposed by ESMA. I think it has brought into focus one of the problems within the retail trading community, that its a game and you don't want to loose. Trading requires proper planning and a professional approach and a lot of hours of research and following market movements, not to mention the emotional capital required. Trading should not be treated as gambling, yes there is an element of uncertainty thus excitement it can be addictive and we all know there is risk, with the allure of big winnings so its easy to see why it attracts the wrong individuals.

 

I beleive that the intented measures put forward by ESMA are reasonable with regards to the following:

  1. The margin close out rule.
  2. Negative balance protection.
  3. Restriction to incentivastion of trading.
  4. Standard risk warning.
  5. Prohibition of BO's.
As a retail client I agree that certain levels of protection are needed to limit clients exposure to very risky products such as BO's,
and incentives to trade such as cash bonuses on account opening. These measure's alone should help reduce the amount of loss that retail clients experience. I certainly welcome more transparency on the risks of certain products such as CFD's and Spread betting products and believe clients will have a much improved understanding of the risks involved.
 
However I don't welcome the draconian margin restrictions being proposed and believe they go to far, yes margin should be capped to stop clients from dangerous levels of leverage such as offered by some offshore brokers, I mean 1000:1 is clearly dangerous and must be banned. I do support margins being capped at say no more than 100:1 with more volatile assets somewhere between 50:1 and 25:1 at these levels retail clients will not be priced out of the market, and bring them more into line with the futures markets, after all good regulation should be about providing protection but also support clients and encourage sensible trading practice.
 
With regards IG's professional status their hands are tied by the regulators, I for one would welcome the introduction of a semi professional status being introduced where by you have to pass certain exams to show your understanding of investing and trading practices and the risks involved, and how you manage risk. This would allow you to be classed as a semi professional who can trade their own monies but no one else's at more favourable terms.   
 
I would like to think that some common ground can be found between providers and ESMA but will have to wait and see.
 

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I dont understand how they think about leverage?

 

a new trader should have less leverage than a trader with maybe 5 year experience in my opinion

 

and if you could use higher leverage then you can have multiple positions open at the same time in different things and lower the risk

 

like long dax and short eurusd and so on at the same time

 

now with this new rules you maybe can only have one position open at the same time

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Guys,

 

  • When ESMA speak about investor risk, they are talking about the risk of many small losses (as well as risk of ruin / blow up)
  • The biggest reason for many small losses is high leverage. High leverage forces investors to place stops close to the market, as they cannot afford the market to move many ticks before their risk management kicks in. Who wins when stops get hit? Not the retail investor.
  • For anyone trading more than the minimum bet size, they can simply scale down their sizing to continue trading. For example, if DAX margins increase 10x and you were betting £10, now you bet £1. Individual wins and losses are smaller, so return on equity is lower (for those making a profit), but your ability to make a profit has not changed.
  • If you are trading the minimum bet size and cannot handle the increased margin, then I think ESMA have a point and you should question whether these are the right instruments for you.

 

  • If we have to choose, reduced leverage is better than guaranteed stops for retail investors .
    • There is no free lunch - the only way IG can implement guaranteed stops across the board is to increase spreads across the board. i.e. transaction costs go up for everyone go up. 
    • Transaction costs are the biggest drag on long terms performance. The spreads (how IG makes money) are already very high compared to what one pays with direct market access to a futures exchange. For example, oil has a spread of 3c typically on IG, I have never seen Globex trade at more than a 1c spread. Transaction cost = 2c x bet size!!

I am very sure that, for me personally, the route to maximum profitability is a) having a system that has an edge in my chosen markets, and b) a trading platform with the lowest possible transaction costs. Leverage levels not the biggest issue, imo.

 

Regards,

Ian

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Hi Ian, I agree in principle with most of what you say. Not 100% convinced on small losses - depends on the strategy and their is always a cost of business/trading. I think cut your losses quickly and let your runners win is almost one of the ten commandments depending on your style.

 

People need to lose in order to work out how to be consistent and this can be a lengthy process. In my opinion the biggest issue is over leverage - I personally know people who have much more money than me a make a complete hash of things - the bigger the money the bigger the fool sometimes.

 

You do sound convinced that once the ESMA put in place their proposals that there will not be any other cost of business?? I don't predict the future but agree their will be no free lunch, I think(maybe wrongly) that guarunteed stops will be the cheapest way. All the new accounts IG won't get & old smaller accounts who will close & the large drop off in the amount of trades IG will transact will do what - drive up the transactions costs, increased spreads/slippage - exactly what you are saying!?!

 

So costs go up either way, so I believe leverage levels are VERY important and the impact could very well affect you more than you think(or maybe not). I think most know futures markets are what they are, and spreadbettors are what they are. The increased spread is because you don't pay exchange fees/transaction costs, and to give IG their slice of the pie for providing the service.

 

The overleverage part I agree 100% with you, but I am not as convinced that this will be as rosy a picture as you are painting with your other observations.

 

All the best in your trading

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Hi Chris,

 

Thanks for your thoughts on the matter. 

 

Losses are certainly a cost of doing business, but the small losses issue was a very real finding in the original ESMA analysis. Many spread betters put their stops so close to the market that they will frequently get stopped out by a move that is nothing more than market noise. Part of this is poor trading strategy, but I think a greater part is due to an attempt to risk manage overly leveraged instruments.

 

I think you are absolutely right that we have a very real risk of the ESMA changes impacting the IG business model in a negative way, and this could cause our costs to go up as a pool of accounts is forced to leave the market. But I think IG will be fighting that battle, in their own interests, so we should focus our comments on what would be the best outcome for account holders.

 

What I will say is on the spread bet business model is that I am not interested in my having low costs due to the industry having bad practises elsewhere which make them outsize profits from less knowledgeable account holders. e.g. I will support the closing of binary option products in favour of my paying higher costs, because I do not believe these products have a positive expectation for any account holder.

 

On guaranteed stops, I am afraid I do not understand your logic. How do guaranteed stops help either the margin requirement or trader profitability? The only time the "guarantee" part of the stop comes into play is if the market gaps significantly, which is a rare event. Sure if there is a big gap, it is going to hurt some folk badly (just as players in the "real" markets would hurt), but it is also a super infrequent event, even for those that with positions that have long hold times.

 

As IG are effectively taking the other side of a trade whenever they offer a guaranteed stop, these stops will force IG to widen spreads in order to build up an insurance pot to deal with the scenario where they are hit by a tail risk event. So we will all pay that cost, when our individual strategies might mean that it's virtually impossible we'd be at risk of such a market event. And in cases where our strategy is at risk, it is almost certainly better for the account holder to be building up their own insurance pot than just giving that money to someone else to keep forever. What am I missing?

 

My point re: costs is that spread bets are already way, way more expensive compared to the futures market. Going back to my oil example:

  • I trade oil on Globex via Interactive Brokers. One contract on Globex is currently equivalent to about a $10 spread bet . My costs on that transaction is a 1c market spread, plus about $4 in roundtrip transaction costs. Total cost $14. .
  • A $10 bet on oil at IG (who have some of the tightest spreads around) will have a 3c spread: so 1c * $10 for the market spread, plus 2c * $10  = $20 transaction cost to IG. Total cost $30. 
  • I have used $ through out for simplicity, but the costs are even higher if you translate the bet point spread using £
  • What I will say is that I think for bet sizes less than a futures contract, the spread bet cost model is actually okay as a $4 roundtrip on a $1 bet would obviously be horrendous, which would be the case if transaction costs were fixed / split out of the spread as per futures

I think you misunderstood a little the intent of my message if you feel I am suggesting the picture will be rosy. I agree with IG that this could be a very big issue for the industry. The purpose of my message was to encourage account holders to think about what is important to them, rather than simply following IG's lead and saying "leverage is coming down to far" without a clear reason.

 

To be honest, I think most of the comments in this thread are shouting "keep leverage high" without explaining how it benefits their trading. I fully understand how high leverage keeps the spread bet firm's profits high (to be clear, I want the firms to be profitable and offer a great service), but it's not obvious to me why very high leverage is beneficial for account holders.

 

Regards,

Ian 

 

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Regarding the ESMA proposals, there are 2 considerations which must be addressed:

  1. Is it the function of a regulator to take action to limit investor’s/speculator’s losses?
  2. Even if the answer to 1. is affirmative, are the ESMA proposals reasonable?

 

  1. In my opinion, it is not the function of a regulator to be concerned with speculator’s losses, provided there is no accusation of fraud by the counterparty, in this case IG Index. Ideally IG Index should post on its website some educational material to make clients aware of the risks involved, but even this should not be compulsory. People must be considered to be adults who must take responsibility for their actions, including the responsibility to educate themselves before investing their money. Should the Government take action to limit the losses which may be incurred by gambling on poker or horses? Should online poker sites be forced to explain on their website how to calculate the odds of winning?

 2, If ESMA disagrees with the opinion above, and considers it is its responsibility to limit potential losses, are the ESMA proposals reasonable? In  my opinion, if ESMA introduces automatic close-out and negative balance protection, this in itself would be adequate, and there would be no need to limit leverage.  And even if ESMA insists on limiting leverage, the limits proposed are draconian. They will not only reduce trading but will kill it, both because many people will not be able to afford the deposit required, which may be 10x the current deposit, but also because such a large deposit will alter the risk/reward ratio to such an extent as to make trading not cost effective. For example, to sell a DAX option to receive a premium of £500 will require an initial deposit of £6600 instead of the current £660, plus further deposits if the position goes against you !!

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Hi straddle,

 

You're welcome to get into an opinionated debate with the regulator about what their role should encompass. I think that decision was already made in the distant past, so it is of little interest to me.

 

I am also very concerned about the impact of reduced leverage on the future of the industry and reflected that in my comments. 

 

I am sorry, your DAX example is flawed in many ways:

  • Your assertion that reducing leverage will negatively impact the risk/reward ratio of a trade is simply incorrect. Risk/reward ratio is determined by where stop and profit levels are set and the likelihood of being right. A trade with a positive expectation remains profitable independent of leverage. 
  • Return on capital will decrease (I guess the point you were trying to make). Whereas before you would have seen a 75% return on capital (500/660), you will now see a 7.5% return on capital. But your losses are similarly amplified.
  • Your comments on extra deposits being required along with extra margin are misleading at best. When you sell an option you establish a notional position equal to bet size * contract value. That notional value is the same value irrespective of leverage / the amount of margin required. With higher margins / low leverage you are much, much less likely to require extra deposits as your initial margin covers a much larger move in the instrument.

Regards,

Ian

 

 

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Hi Ian

You write "Whereas before you would have seen a 75% return on capital (500/660), you will now see a 7.5% return on capital. If you have places with a higher rate of return than that, then you should switch to those, but in my mind that's still a phenomenal return."

My point is that a 7.5% return is far from guaranteed, and in fact there is a high chance of loss.  Selling options is considered a high risk strategy, which in my opinion is not warranted for the sake of a  maximum 7.5 % return and the chance of a loss many times that.

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straddle wrote:

Hi Ian

You write "
Whereas before you would have seen a 75% return on capital (500/660), you will now see a 7.5% return on capital. If you have places with a higher rate of return than that, then you should switch to those, but in my mind that's still a phenomenal return."

My point is that a 7.5% return is far from guaranteed, and in fact there is a high chance of loss.  Selling options is considered a high risk strategy, which in my opinion is not warranted for the sake of a  maximum 7.5 % return and the chance of a loss many times that.

 

Sorry, I edited my post later, so the comment you referenced changed underneath you a bit, but to respond to your point:

 

I really, really think you misunderstand the difference between the expectation of a trade versus the impact of leverage on a trade.

 

Where you can make a return on capital of 75% due to high leverage, you can just as easily make a loss of 75% of capital, Leverage impacts the size of both your wins and losses.

 

With a 7.5% return on capital due to lower leverage, your likely losses would be reduced to a similar order of magnitude as your wins.

 

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Hi Ian,

 

the guarunteed stop is just way to stop overexposure, stop the court cases which happened and the adverse headlines of people not getting out of positions and losing incredible amounts - like the EURCHF losing 40% in a day, brokers went out of business, individuals losing fortunes etc. Nothing to do with profitabilty but a safety net, in my opinion this type of event was the catalyst for the ESMA, not small stops.

 

I have zero interest in singing fron IG's hymm sheet, if you took the time to look at my history you would see this( I would not reccommend this for your sanity's sake!!). But I do agree with them on this - why? Because I see the costs of business going up one way or another due to this. It could be real bad which is why I am looking for the ESMA to look at other things to mitigate this - its probably all in vain and they won't give a hoot about stops or anyones opinion bar their own - so be it.

 

Ian with regard why is high leverage beneficial for account holders, if your profitable its you best friend, if you lose its your worst enemy - I have agreed with you but only when people take stupid overleverged trades on illiquid markets, or in front of NFP type events that go south and they bet north. If you are sensible you have nothing to fear about leverage.

 

Oil is traditionally poorly spread within the spreadbet industry so no surprises there -  up to everyone to investigate ways to reduce thier costs of business whether with a futures broker or to other spread firms.

 

I would rather not have this conversation at all and be left well alone, but the games afoot and I think it is everyones responsiblity to respond as they see fit. You can't please everyone whatever happens so you might as well do what is best for you and your family.

 

All the best......

 

 

 

 

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Hi all, i think that increasing margins by such a large amount is crazy, meaning that you

will have will end up with all your eggs in one basket, instead of 8 or 10  diversified baskets

which would be a more sensible approach.

to limit the amount of your pot in any particular position would be a better a idea, especially

for new traders.  

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Limiting the leverage to the 30: 1-5: 1 range means that customers will have to risk more capital to occupy the same positions as before. This will therefore increase, not reduce the risk of losing funds.
The principle of calculating the deposit for a single transaction, and not for the entire deposit, will make many profitable investment strategies (including taking a position in the zone) impossible to apply, and the investment will turn into pure gambling.

In contrast, I positively assess ESMA's proposal to provide clients with protection against a negative balance that actually protects investors from a loss greater than the deposit paid. Similarly, I positively assess the proposal to introduce risk warnings, limit bonuses and prohibit offering binary options to customers, whose short duration makes them gambling, not an investment.

I assess that the implementation of the proposed regulations in an unchanged form throughout Europe will result in an outflow of investors to brokers located outside the EU, thus depriving them completely of legal protection and radically increasing the risk of losing the entire capital.

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Andrex

"In contrast, I positively assess ESMA's proposal to provide clients with protection against a negative balance that actually protects investors from a loss greater than the deposit paid"

Yes, but if margin deposit is increased 10x, it means the loss will be 10x before the deposit is lost and  negative balance protection applies.

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submission to ESMA:

Even if ESMA insists on limiting leverage, the limits proposed are draconian. Several EU regulatory bodies have proposed leverage limits in the last year, and none are as severe as the ESMA proposals. The FCA has proposed limits of 25x for inexperienced traders and 50x for experienced traders. In Cyprus Cysec has instituted 50x and 100x leverage limits respectively. A review by BaFin in Germany has insisted on negative balance protection but has instituted NO limits on leverage.

     The leverage limits proposed by ESMA will not only reduce trading but will kill it, both because many people will not be able to afford the margin deposit required, which may be 10x the current deposit, but also because such a large deposit will alter the risk/reward ratio to such an extent as to make trading not cost effective. Further, if margin deposit is increased 10x, it means the loss will be 10x before the deposit is lost and negative balance protection applies. On the other hand, if automatic margin close-out and negative balance protection are instituted, then this is adequate protection and there is no need for severe restriction on leverage.  

 

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Over 3,000 email replies now, not one in favour. The vast majority saying they would immediately stop trading.

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Hi all. This has been posted elsewhere on Community, but I just wanted to post here as well so those who have commented in this thread get a notification as well. You may also be interested in the following Parliament’s Treasury Committee where they quiz the head of FCA on ESMA CFD intervention. It's only a few minutes, but you want to watch from about 15.33.

 

In case you haven't seen, the #ReplytoESMA site here ( https://replytoesma.trading/ ) received an astounding 14605 responses, so a big thank you to everyone who wanted to have their voices heard. 

 

2018-02-09 11_06_00-Leverage restrictions - Reply to ESMA.png

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Great Thread!

 

To get to the long and the short of it (pun intended :) When as is most likely the ESMA ruling comes in the vast majority seem to be saying they will stop trading altogether.

 

Does anybody know of trustworthy firms and have plans to trade in another jurisdiction outside of the EU/ESMA?

 

I imagine most of us here who would describe ourselves as home traders do not have the 500,000 euro on deposit with IG or other firms as is required for upgrade to professional trader status to keep the current margins so what ideas do you all have please or will you just pack it in? Which is a great shame for all of us.

Thanks

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,

 

Good question. 

 

In my opinion the small traders will not be able to afford the margin requirements. Therefore these clients will simply no longer be able to trade using IG. 

 

For me personally, spread betting using IG's platform is only a very small part of my overall investment and trading portfolio. I use it to mainly use spread betting as way to use leverage to maximise my profits on Commodities and Cryptocurrencies both long and short. There are other ways to gain exposure to leverage on commodities. It is not the same but for example for Commodities one can trade ETF Securities products. They offer x1, x2, x3 and on commodities and equities both long and short. They even offer x5 leverage on USD, EUR and GBP currency pair trades both long and short.

 

For Cryptocurrencies, XBT Provider are excellent two. I use them for my long positions on Bitcoin and Ether. They are ETN's so Exchange Traded Notes. I cannot understand why the US is messing around with ETF's and regulation when a country like Sweden has offered this tracker fund of sorts on Bitcoin and Ether for a while now. 

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IG has offices in other parts of the world eg Australia. Would it be possible/beneficial to transfer the account?

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Thanks for the detailed reply.

 

Yes, it's not looking good for small traders at all.

 

The only option seems to be finding a safe & reputable trading platform outside of the EU.

 

Thanks again

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You may want to look at Canada, Gibraltar and Switzerland. I have not done any research but am merely just suggesting off the cuff. 

 

These countries seem to have embraced Blockchain and Cryptocurrencies.

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Thanks for the pointer.

 

I had forgotten about Gibraltar, there are a lot of financial companies registered there.

 

I will have a good look around.

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Just in case anybody is interested I have had a reply from forex.com who are based in the USA.

 

Unfortunately, ESMA rules apply to UK clients! 

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