An even greater share of retail traders lost money with these highly leveraged derivative contracts during the Pandemic than before.
By Wolf Richter for WOLF STREET:
This type of highly leveraged Forex trading is illegal for retail traders in the US, but it’s perfectly legal in the UK, the EU, Australia, South Africa, and other jurisdictions. They’re called “Contracts for Difference,” or CFDs, and they’re designed for retail traders. The hope is that you make a lot of money quickly with little investment. The risks are huge. In theory, you could lose a lot more than your account value.
And most traders lose money. By “most” I mean between 60% and 80%, depending on the brokerage they’re trading with. We’ll get to the list of brokers in a moment. This is an astounding data set that gives fascinating insights into just how many retail traders who engage in highly leveraged foreign-exchange trades lose money.
What are CFDs and how are they different from futures?
A CFD (Contract for Difference) is a contract between the trader and the broker. The security, traded on online platforms, is calculated by the price change of the underlying asset – in our case, a currency pair – between trade entry and trade exit.
Unlike futures contracts, there is no expiration date and no time decay. A CFD trader never owns the underlying asset.
Forex CFDs are mostly unregulated. But there are some rules. The European Securities and Markets Authority (ESMA) limits leverage to 30:1 for major currency pairs and to 20:1 for non-major currency pairs. In South Africa, leverage can be much higher, and just to pick on one broker, FXTM offers up to 2,000:1 leverage, which seems nuts to a mere mortal like me.
Warren Buffett infamously said, “My partner Charlie says there is only three ways a smart person can go broke: liquor, ladies and leverage,” referring to Charlie Munger. “Now the truth is, the first two he just added because they started with L. It’s leverage.”
In other words, a CFD is a highly leveraged derivative contract designed for retail traders, where trading does not involve an exchange. Instead, the trading takes place over the counter between the trader and the broker or a market maker.
In the US, trading CFDs is illegal under CFTC and SEC rules, given that they’re a derivative product that is traded over the counter, and that they’re highly leveraged and come with high risks of large losses.
The UK’s Financial Conduct Authority (FCA) requires that brokers disclose on their homepage in the UK what percentage of their accounts in the UK lose money trading CFDs. And this is where the data of these money-losing traders comes in.
A guy whose firm ranks Forex brokers started manually collecting these rates every month from the 36 brokers in the UK that offer CFD trading. He calls the data series, “Traders that Lose Money.” And he sent me this data in a spreadsheet.
“Nobody else records this data each month,” he told me. He is Justin Grossbard, CEO of Compare Forex Brokers. He also pointed out a peculiarity of brokers’ disclosures on their websites.
While all brokers in the UK have to disclose every month the percentage of money-losing CFD retail accounts on their UK-homepages, they don’t have to disclose it on their homepages they show in other countries, such as what you get in the US or Australia.
For example, here is CFD broker Pepperstone, one of the 36 brokers on the list (#30). I just looked up the homepage you get in the UK (the “…-en-gb” at the end of the URL). Sure enough, it says in bold at the top of the page, as required by the FCA, that 78.6% of its retail investor accounts lose money when trading CFDs with Pepperstone:
But when you go to the homepage of Pepperstone that you get by default in the US, namely the Australia version of the homepage, there is no such disclosure. It just urges you to open an account:
So here is the list in alphabetical order of 36 CFD brokers in the UK, the percentage of their client accounts that lost money as reported in pre-Covid February, and in July, and the difference between the two months (right column) in percentage points. And an interesting tidbit: 25 of the 36 brokers reported in July that a larger, and in some cases a much larger, percentage of trading accounts lost money in that reporting month than in their February disclosure. And only five brokers reported fewer money-losing accounts. (data via Grossbard, on his UK Forex Broker List).
Traders that Lose Money |
||||
| UK Broker | Feb. | July | Point change | |
| 1 | Activtrades Plc | 69.0% | 75.7% | 6.7 |
| 2 | Admiral Markets UK Ltd | 76.0% | 79.0% | 3.0 |
| 3 | ADS Securities London Limited | 70.0% | 72.0% | 2.0 |
| 4 | AvaTrade | 71.0% | 71.0% | 0.0 |
| 5 | AxiTrader UK | 65.6% | 72.6% | 7.0 |
| 6 | City Credit Capital (UK) Ltd | 77.0% | 76.7% | -0.3 |
| 7 | City Index | 71.0% | 74.0% | 3.0 |
| 8 | CMC Markets UK plc | 70.5% | 79.0% | 8.5 |
| 9 | Delta Financial Markets Limited | 64.0% | 67.0% | 3.0 |
| 10 | Equiti Capital | 75.3% | 73.1% | -2.3 |
| 11 | eToro (UK) Ltd | 62.0% | 75.0% | 13.0 |
| 12 | ETX Capital | 75.1% | 76.0% | 0.9 |
| 13 | FOREX.com UK | 69.0% | 72.0% | 3.0 |
| 14 | FXCM Ltd | 69.7% | 73.1% | 3.4 |
| 15 | FXGiants | 71.0% | 71.6% | 0.6 |
| 16 | FXOpen UK | 60.0% | 60.0% | 0.0 |
| 17 | FxPro UK Limited | 70.3% | 75.5% | 5.3 |
| 18 | GKFX | 73.0% | 81.0% | 8.0 |
| 19 | Hantec Markets | 66.0% | 65.0% | -1.0 |
| 20 | HYCM Ltd | 67.0% | 71.0% | 4.0 |
| 21 | ICM Capital Limited | 71.3% | 78.4% | 7.0 |
| 22 | IG Markets Limited | 68.0% | 76.0% | 8.0 |
| 23 | Interactive Brokers (UK) Ltd | 60.5% | 64.0% | 3.5 |
| 24 | InterTrader Limited | 78.0% | 73.2% | -4.8 |
| 25 | Key To Markets Limited | 71.0% | 71.0% | 0.0 |
| 26 | LMAX Limited | 70.4% | 76.0% | 5.6 |
| 27 | London Capital Group (LCG) | 76.0% | 76.0% | 0.0 |
| 28 | OANDA Europe Limited | 73.5% | 73.5% | 0.0 |
| 29 | One Financial Markets | 68.0% | 71.0% | 3.0 |
| 30 | Pepperstone Limited | 73.6% | 78.6% | 5.0 |
| 31 | Plus500 UK | 76.4% | 80.5% | 4.1 |
| 32 | Swissquote Ltd | 77.0% | 79.0% | 2.0 |
| 33 | TeraFX UK | 78.0% | 76.7% | -1.3 |
| 34 | ThinkMarkets | 73.7% | 78.9% | 5.2 |
| 35 | Tickmill | 73.0% | 73.0% | 0.0 |
| 36 | XTB Limited | 77.0% | 80.0% | 3.0 |
We can only speculate why more traders would lose money during the Pandemic. Perhaps it was triggered by the currency gyrations that have taken place in those months that left them even more often than normal on the wrong side of the trade; or perhaps traders who were stuck at home with nothing else to do were trading constantly, giving more traders more opportunities to lose money, and so they took advantage of those opportunities.
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Be positive Wolf. There were 1.4 MILLION people vacationing in Spain from the UK last week before the latest quarantine order.
Tons of people must be winning.
#BestDepressionEva!!!
Which is half of the usual activity.
I cant tell if your comment is sarcastic or not but a 50% reduction in revenue source would spell disaster for just about any individual or company…
That assumes that the rates those tourists pay is the same, I doubt it. Revenue is likely much less than 50%
Having no border controls in the Euro Zone? I do not see any way that could backfire, no sir!
There are border controls between Ireland and rest of Euro-zone. And it backfires just as between the states in the USA
It was basically a comment about how the relaxed border controls helped to spread the Coronavirus.
Meanwhile – The EU has banned me as a European to buy US ETFs, index funds.
Logic?
I know, this sucks, and they are always looking out to protect retail investors, right. You can trade CFDs but no US ETFs, because you might get hurt. Goddamne EUSSR
But now you feel much safer as a consumer with MiFID II, isn’t it?
:)
Mean while the soil and landscaping companies destroyed all projections. Prices are going up next year I’m sorry.
A friend of mine has an account with a provider (mentioned in this article) in Australia and is making bets on share price movements using CFDs. (He is part of the 60-80%). Under prompting by him, I opened a demo account. (Their web site and tools are excellent from a technical point of view). After doing a notional trade, I managed to make a notional profit of almost $20 after about three hours of constantly watching the screen and adjusting the limits. That was a lot of work! I could just have easily (notionally) lost hundreds! It is frightening just how quickly the numbers can go against you! Thank you for this article. Forex might be bad, but CFDs on share price movements ain’t so wonderful either. The house always wins!
So these are nickel and dime accounts? What does it take to start? Give us an idea, what does a winning trade look like? Does one winner cover several losers? Where do you get your info? Are these straight currency spreads?
What is traded in Forex is the ratios of 2 currencies – currency pairs. The most intensively traded pair is EURUSD.
You don’t buy or sell individual currencies, like euros or dollars. You bet on the direction of their exchange rate.
For example, if you bought the EURUSD, you will win if the Euro rises against the Dollar. Wise versa, if you sold the EURUSD pair, you will profit when the Dollar exchange rate vs the Euro is growing.
You buy or sell lots: for example, a standard (full) lot is 100 000 dollars. There are also smaller lots – mini (10 000), micro (1 000) and nano (100).
You don’t need $100 K to trade – with leverage 100:1 you only need to have $1,000 on your account to buy or sell a standard lot.
Say, you bought a standard EURUSD lot and sometime later the exchange rate went up 0.5%. Because of the leverage, your profit on the standard lot would be $500.
The risk is defined by the leverage as well. If the Euro fell 0.5% vs the Dollar, your loss would be the same $500.
As long as you keep your position open, these losses would not materialize unless your paper loss increases until it triggers a margin call.
You have to use trading automation.
As the market is moving, you have to keep changing the auto stop-loss & take-profit limits you set otherwise you risk being closed out prematurely. (that provider’s platform has excellent automation BTW. I used to work on such things as a Bridge Financial Software Analyst). There are transient dips (or spikes) that might be considered to be mechanisms to induce haircuts: you have to avoid those. Day trading might be considered useful during a volatile market because “holding costs” make longer term CFD trading far less profitable. In a volatile market, you need your eyes glued to the intraday charts and the market depth continuously. This is a hell of a lot of work. Maybe some people are good at it, I can’t say that I am. It is an area best left to high frequency spaghetti algos playing with _other_people’s_money_.
This is what I was saying – you have to use automation.
Then you don’t need to keep changing anything. You just calculate the levels where you want to close and monitor them.
Same applies to staring at the screen – no need for that. Less stress, as well.
Please note ,when these companies moved to Gibraltar ,to avoid U.K.taxes,they were lured back by a big reduction in tax rates.That is why they relocated to the U.K.
99% of people playing a lottery lose their money. But that’s only the price of the ticket. The odds for CFD lotteries look somewhat better, but you can lose more then what you lay in.
It’s nothing more then a game of higher-lower. So it’s very easy. I think that’s why there are people playing this game.
In the Netherlands it is also compulsory to state the info in public advertising. And it says in small print: “more than 70% lose more than what they layed in” by the most polular broker with an app “Buxx-XL”.
While the authorities are very protective towards retail investors, i don’t understand these schemes are allowed.
As MichaelSWE says, a European can not buy US ETF’s index funds or other trackers, unless his portfolio amounts more then 250000 Euro’s. What is so more terrible about those than the CDF’s?
Simply put, these are a retail version of the Trillions of unlisted derivative contracts that the banks trade.
CFDs move basically like the underlying. If somebody loose money with the CFD he would loose money with the future too. It is him who looses money not the broker or the instrument is to blame.
A CFD is unlike a covered warrant or an option. Those are time sensitive and they do not move like the underlying and often it is the market maker who work against you, spreads can be huge. They are really risky and perfectly legal in the US as far as I know.
In general the most retail investors loose money when they trade. This was the case 20 years ago and should not have been changed. But it is fair when the brokers tell now in advance : Here my dear most of you guys are loosing money with that, do you want really do it ?
By the way Wolf, what about your short trade. Soon the 600 $ Covid compensation vanish and who will buy stocks then ? Will the FED provide liquidity again ? Good luck for your trade !
How come I can’t just open a pool fund for suckers where I promise to distribute 25% of the total to randomly picked participants while keeping the rest?!! This is absolutely no less than discrimination against my desire to get richer. Damn stupid laws. /sarc
Great article thanks
Isn’t it called a casino for a reason?
I bet a HFT just hoovers up a load of metadata on these positions at the other end, and on balance, takes just enough to keep the retail gamblers interested enough to keep coming back.
The programming for these gamblers (name in the UK for gambling machines in pubs etc) has been well rooted in human win/lose psychology for at least 25 years.
A good friend worked on these in his post university days and said how subversive the programming was to drain even the most well intentioned ‘smart’ gamblers.
CFD’s are nothing more than a bet. A bet with leverage.
Wouldn’t touch them with a ten foot pole.
Years ago when Citibank was in Japan you could open accounts in foreign currency and win or lose on currency movements that way. There was no leverage involved. No idea of what the spreads were like or the other terms and conditions.
I think Citibank sold their retail operations to a Japanese bank and don’t know if they offer them anymore.
Here in Oz, I think that only one big Oz bank offers a retail US dollar foreign currency account.
I know of one foreign bank that offers them, but their requirements and rules are cumbersome and not suited to the ordinary person.
Just like to point out a couple of things. Firstly, cfd’s (and spreadbets) are not just for forex. You can trade stocks, commodities, etf’s etc. etc.
There are additional costs such as wider spreads and cost of leverage for trades that last more than intra day. But on the plus side, in the UK presently, any gains on spreadbets are capital gains tax free for ordinary retail traders (presumably because they work out that losses could cost the government more in terms of offsetting against gains elsewhere). From a government perspective, they tax the companies as ‘gambling companies’ rather than investment companies or banks, which means higher tax revenue for them and this is passed on to traders….effectively these providers are acting as unpaid tax collectors for the government.
The other main benefit is the provision of guaranteed stops….yes, guaranteed stops, which is unbelievable isn’t it? If you trade something like a stock index, don’t take up too much leverage and use guaranteed stops to avoid catastrophic losses, one can make it work over time. And one is doing one’s bit for the inland revenue at the same time.
Re “unpaid tax collectors for the government.” – that’s the new Stupidity Tax, I take it?
Re “guaranteed stops” – no wonder they’re losing money, a stop-loss order is mathematically equivalent to giving away an option to the market-maker. Options always have value until they expire, and the customers are handing over free options on every trade. The gambling companies harvest that as free money and give the government a cut of the profits.
Wolf,
Wolf the brokers see our holdings or bets, no? Lol It’s like betting against the house in a casino and they know the cards you are holding. Long Bp, don’t think they cut and this thing rips. Tobacco too.
Great article about greed, ignorance, and a total lack of caution.
What gives about people willing to leverage so much? Do they not understand the consequences of risk and what it means to lose? Do they think it is all just easy fruit to pick and everyone else is stupid?
I just don’t get it. Mind you, I don’t skydive, either. Or, do debt in any way shape or form after we paid our mortgage off decades ago. Around here, and throughout many places in the World, there is a big increase in homelessness and addictions. I often find myself thinking how hard it is to climb back up onto the productive wagon after a stumble and fall. I grew up listening with rapt attention to my dad’s experiences as a teen during the Great Depression. My mom would never even talk about it (Depression) her childhood was so bare and without. Maybe that’s the difference. These investors have never lived through consequences. Blue ribbon youth become blue ribbon investors.
It does seem almost ‘Darwinian.’
It’s not Darwinian because the selection process is unnatural. It’s cannibalistic, predatory. Morally indistinguishable from slavery really.
A few years ago I was offered a job at Kodak. Kodak? Pffft yeah right dead company walking man!! I could have had tens of thousands of stock options which by now would be fully vested.
I’ll be in my room crying all day today…. :)
Why the Federal Gov’t would give Kodak something close to a billion dollars to manufacture virus vaccines/drugs is beyond me.
Is that a natural fit?
I feel like the Executive is being very careless with hundreds of millions because they are giving out trillions.
You’re right. We should let China do all of it.
Trading is nothing more than gambling.
Nonsensical statement clearly.
What do you buy in a grocery store that wasn’t traded at one point or another.
I think stock market trading was what was being referred to.
Distinction without a difference.
Everything, everything is trading. Every human action is a trade of time & energy for a desired result. Inaction is also a trade.
Every “investment decision” requires at least two trades – one by the buyer and one by the seller.
Every retail purchase requires many, many trades along the production chain.
Investing, per Benjamin Graham, is just a trade which “upon thorough analysis” offers “security of principal and reasonable rate of return”. In other words, stacking the odds.
Trading is only gambling if you aren’t careful to stack the odds as Graham indicated.
Apparently Kodak put their researchers in a room, turn the lights off and see what develops.
If they have a good image it will be fixed.
I successfully speculated in forex in the early ’80s with the knowledge, even then, that the success rate was about 30%, not far off Wolf’s stats. But, not often, and with a wary eye on Canada’s Minister of Finance, who liked to burn currency speculators. So not a lot has changed.
Not related to Forex, but anyone watching what happened to Kodak this morning.
EXPLODED from 2 to …. FIFTY and now it’s collapsing again. The market is filled with crazy people.
“We don’t care about blowing bubbles.” Fed Chair Powell.
I actually tried it in 2011 for two months .
I gambled (that is what it ended up being) with only US$11,000.
I was on the PC about 6 hours a day for those two months.
I ended up US$1,300 but that was just gambling the lot on the Euro against the GB pound and getting lucky.
What I noticed was that even though I netted US$1,300, I had paid out US$1,800 in fees to Pepperstone coincidentally.
It seemed crazy that they made a lot more than me that was risking my money and time for a software platform.
Been there done that. They’re legal in Canada too, and I just had to try. Fortunately I stopped after I was down just $2000, and have not touched them since. I traded mostly oil and platinum contracts. It became clear to me that A) The risk is enormous, and I’m lucky that I got out with only small losses, and B) you cannot beat the algos trading these things. They will pick off your stop, then take off in the other direction EVERY TIME, like a monkey stealing your lunch.
Absolutely. You have to use trading automation as well to stand a chance.
With regards to stops, if you use automation, you don’t need them at all since you can close whenever you want.
Putting in a stop-loss order is mathematically equivalent to giving away an option to the market-maker, whose interests are opposed to yours. And that option always has value.
I think what RR was referring to was a “stop hunt” that brokers are notorious for. Since they see the active stops in their system, it’s tempting. With automation, you don’t need to expose your stop and you can even profit from the surges that this hunting often results in.
Automation is not a panacea, the market manipulators now are able to sniff out statistically & analytically where your pain zone is, move the price down to trigger your implicit (“hidden but automated”) stop, and pick off your shares as they push the price back up. Watch enough charts and you’ll see all sorts of action that has nothing to do with the news and everything to do with statistical bear raids (downside) and short squeezes (upside).
That is exactly what I learned.
The brokers could see your positions and would move the market to wipe you out and then immediately go back to the position again.
Consider the bright side, if there are 60% to 80% losers, then surely there are 20% to 40% winners. (those winners will make up for the losers)
The disclaimer language could be reasonably changed here to say: 21.6% of retail account investors see gains in when trading spread bets and CFD when using this provider.
Then, you can modify the language further. After all, it can be reasoned there are retail investors who do not exclusively trade CFD; and given their overall trading, there might be more who are winners. So, the disclaimer language can be further modified: (making up a number here) 68% of retail account investors will see gains in their overall trading (beyond this provider), while trading spread bets and CFD when using this provider allows the opportunity to magnify gains.
Finally, we can make the language up in such away to show how investors trading and leveraging slight bits of risks can have better overall performance: (making up numbers again) 97% of investors who has a mix of investments from equity to real estate to bonds* can expect gains as trading spread bets and CFD when using this provider allows the opportunity to significantly magnify gains.
in tiny prints below: *not all through this provider.
Oh man, now I think I need to go take a shower after writing that.
The winner is mostly the house.
Fantastic, 20% to 40% winners + 1.
Getting better all the time. The house then takes that money and pump some of it into the economy, stimulating growth in other vital areas, like luxury brands, high end services, and that makes everything just a tiny bit better.
Silver lining just got a bit larger. We are apparently finding more winners all the time. :)
The computer or smartphone is the wrong interface to do these trades. Somebody needs to design an app that has an image of a slot machine, and when you pull the virtual handle, the wheels spin and pick a random trade, 100X leveraged, that is closed out in 30 seconds. You can pull the handle all day while markets are open, as long as you have money in your account. Your account can also be linked to your credit card. You heard it here first.
That’s actually a pretty good idea. Maybe limit it to $5 a pull like real slot machines. Why not?
The software must have a feature that when your bank account hits zero, the next losses are charged to your credit card with no limit. Smooth as glass!
What is the value of a can of Spam after 6,000 derivatives have been sub-valued to it?????? Do you get to “sniff” the lid????
There is a sucker born every second in this modern world…..a minute of auto-trades is an eternity now!
Probably no worse than the racetrack. If you know your currency, you can probably do well enough.
Not about foreign exchange, but John Authers of Bloomberg has an interesting article about how the retail investors have done better than many big institutions in the first half of the year, though he’s not saying it will last.
“Robin Hood Is Pillaging the Sheriffs of BlackRock”
Love the headline.
https://www.bloomberg.com/opinion/articles/2020-07-29/retail-investors-outperform-institutions-during-covid-crisis
I feel sorry for the guy who actually starts winning
at this game .They will call him a crook and haul his
ass off to jail.
Everything is going extremely well. The Fed has cured the flu by making the stocks go up, unemployment will be made zero by kicking everyone off benefits, free trillions via QE are going to right people, inflation practically doesn’t exist, and earnings will exceed expectations…one way or another. If all else fails, a backup plan has been laid by demonizing a plethora of nations ready for us to invade for kicks and giggles to get the economy rolling.
Can’t wait for the zany debate shytener show, if they ever happen.
Sigh!!, latest joke doing the rounds here in Oz.. ” What borders on stupidity?” Canada and Mexico.
What borders on stupidity. South Australia and New South Wales.
“unemployment will be made zero by kicking everyone off benefits”
That’s not how it works. That’s not how any of this works.
UE is a percent of people out of work and actively looking for work out of the labor force. Whether they get an extra $600 a week or not is irrelevant.
Trading foreign exchange because you are buying and selling goods cross currency is one thing. Trading against these people, while pretending to be helping them in their trades, as my friend Gerry did for 23 years, before his conscience got the better of him, is something totally different. All the other variations on the Forex theme are also just legalised theft. As 70% of CFD traders have found out. The socalled brokers will be trading against them, totally illegally, but with a lot more knowledge of what is going on.
I once read that 90% of retail currency (options?) traders’ accounts go to zero in one year; something like that.
I don’t think this will ever end because human nature is the root cause, which never changes.