From the 21st to 23rd November, I attended the Finance Magnates conference in the Old Billingsgate Market. I also spoke on an excellent panel with David Belle, Janis Anastassiou and Richard Stoker with Ioannis Kantartzis moderating the topic of what CFD traders value the most and how they choose their brokers.  

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The event, spread over two days, was revealing in terms of how CFD brokers see their brand and what new opportunities there are for the market. Here are my thoughts on all. 

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Across the various talks and indeed with many of the exhibitors on the floor, the common theme centred around offering B2B customers a stable platform. The premise being that by providing deep market liquidity, reduced slippage and simplified platform risk management, the retail customer experience would be better. Just looking around the floor, you could see many exhibitors offering white label platforms, outsourced back office risk and liquidity solutions or generous Introducer Broker packages. It was evident that the larger firms sought to own as much of the back end functionality as possible with smaller to medium size firms willing to outsource as much of the end to end process. However, all parties seemed clear that the messaging was designed to attract new traders. More on this later but as a spoiler there is another way to counter churn and bring in a more stable revenue stream.  

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Other pain points I came across were related to onboarding efficiency, regulations with associated reporting obligations and the feasibility of being able to facilitate the trading of new assets or instruments.  

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None of these topics are new to the investment world but what struck me was there was little talk about improving the trading experience beyond simplifying the UX design or incorporating third party signal generating tools. 

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For example, a few firms admirably talked up improving customer education, but this seemed to be more about educating users on what the instruments were or generic articles on trading styles. Personally, I feel trading is a hard discipline to master and much of it revolves around leverage, position sizing, stop losses and a psychology of accepting that not every trade you enter is going to win.  

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The truth is that many retail traders lose their full deposit on CFD platforms. Instead, what would be beneficial to these customers is a platform which helped them trade like a professional trader. For example, if I deposit $10k and decide I want to punt it all on Dogecoin on a 50:1 leverage, it would be great if the platform stopped me and told me how much Dogecoin needs to move before I am wiped out, suggest a different position size to allocate and perhaps propose other uncorrelated trading ideas. In short, help me manage my risk better and get me thinking about risk adjusted returns. 

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As I mentioned on the panel, one of the greatest hedge funds, the Medallion Fund, has generated consistently high returns for many years but only has a win rate of just over 50%; a main reason why the fund succeeds is because it is disciplined over losses but let's its winners ride out to pay for those losses. Leverage, position sizing and stop losses are inherent in that process. 

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I also heard people use the terms retail investors and retail traders interchangeably. This to me is a contradiction because the two personas will have different styles across frequency of trades, duration of trades and instruments to trade. An investor generally buys and holds across a diversified set of asset classes over a long period of time; a trader looks for short term opportunities in both rising and falling markets on typically a narrower but more liquid set of instruments. To be fair, the FCA also makes this mistake, so the brokers are in good company.  

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In my opinion, the CFD broking platforms are built to target retail traders and they are missing a trick in not expanding to retail investors. The latter is arguably the bigger piece of the pie as you can capture the full life cycle value of an investor's much larger AUM, minimise the likelihood of frequent trading losses, save on large marketing budgets as churn reduces and retain longer term happier clients. One idea is to mimic the tools used by professional wealth managers and encourage the adoption of Portfolio Analytics as a self-guiding measure of risk and performance.  

Which brings up an interesting discussion point on our panel around how does a retail trader (or retail investor) go about choosing their CFD brokers? What makes each of these platforms different? We discussed this topic but across the event, the same themes came up around delivering a better platform experience to conceding that brokers saw better value in offering different assets or instruments to trade. However, when faced with the question of which broker should I use to trade EURUSD or buy an Apple stock, I would find it hard to differentiate between the platforms on their ability to provide me with anything unique beyond more leverage (sometimes not a good thing to be offered!), a cleaner interface and, in the light of FTX, the perception that my money is safe.  

At the end of the day, it comes down to what type of opportunity do these CFD broker platforms feel there is. Do they want to focus on retail traders? In which case, the opportunity is to focus on bringing down the large % of people who lose money on their platforms. Or do they want to build a retail investor business? In which case the opportunity is around the promotion of long term wealth building. Either way, it doesn't appear to me that many CFD brokers are capitalizing on either. 

Right now, the retail investor tends to use traditional platforms which have legacy technology and are run by organizations which have historically been slow to move. The CFD broking platform community has historically innovated ahead of them and if they want to differentiate themselves, they could enhance their profitability by embracing the opportunity with retail investors. After all, their current customer base maybe trading a small amount of X, Y or Z on their platform, but they are also blindly investing a larger A, B, C, D, E, F, G etc on other less sophisticated platforms. 

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