An old joke from childhood asks the question:

“What do you get when you cross an elephant with a rhinoceros?”

The answer (“Eleph-ino” or, more directly, “Hell if I know!”) can be applied to the current state of the environment for retail trading of FX in Europe. Two types of trading – CFDs (Contract for Difference) and futures – have been blending for some time and the ultimate results of this combination are open to question. However, like both an elephant and a rhinoceros, the result is going to be big.

This issue was front and center at the recent iFX Expo International in Cyprus.  Brokers and traders there reported that a combination of factors is leading to a further blurring of the lines between the two types of trading and this is creating some unique requirements and challenges for all concerned.

The Negative and Positive Factors Affecting CFDs

CFDs have long been a significant factor in retail trading in Europe and elsewhere but that have been under pressure for some time. In addition to an outright ban on retail trading of CFDs in the U.S., ESMA has been tightening the regulatory regime around them for the past decade, with major restrictions added in 2018. Of late, Spain banned the promotion and distribution of CFDs to retail clients in 2023 while other regulators, including in the UK, Germany, France and Italy, have taken action to restrict retail access to CFDs or are closely monitoring the markets with further action possible in the near future. Further, access to CFD markets by “prop trading firms”¹ in the U.S. has been significantly reduced following actions by MetaQuote to restrict gray market licensing of FX market data to trading platforms.

All is not doom and gloom, however, as trader loyalty to CFD products remains high and new ways to utilize CFDs, primarily for institutions in energy markets and both retail and institutional in lightly-regulated crypto markets, are growing. Retail brokers and fintechs aren’t standing still either, with the former branching out by offering access to futures markets and the latter using their superior technology and marketing capabilities to build market share at the expense of legacy competitors. Finally, major exchanges like CME Group, Cboe Global Markets, and Eurex have exhibited an interest in growing their retails franchises and were out in force at iFX.

What It Will Take to Succeed in the “Eleph-ino” Future

Looking at the big picture, the changes and challenges for the CFD markets are driven in large part by regulation and innovation. Even as the regulatory landscape starts to tilt toward a lighter hand, the restrictions on retail trading are here to stay and the continued pressure of innovation is going to raise the level of competition between incumbents and fintechs. The melding of the futures and CFD markets will continue, making it critical that brokers offer integrated OTC and listed products on a robust technology platform that provides a seamless experience for users and integrated reporting and risk management capabilities for the broker/fintech. Data integration and handling is key…and that’s where BornTec can help.

Both the CFD and futures markets are huge – and elephant and rhino, as it were – and it pays to understand opportunities in both, getting to “I know” instead of “Eleph-ino”.

Andy Jennings is EMEA Director of BornTec, a technology solutions firm that provides data management and tools to support digital integration, operational resilience and surveillance, risk, compliance, and regulatory reporting functions in financial markets. Contact us to learn more.

¹The prop firms offer access to traders on a simulated basis and then make actual trades in the firm’s name with successful ideas, sharing a percentage of the profits with the trader, and thereby circumventing the U.S. retail ban.