European retail brokers are expected to target growth in institutional markets alongside expanding into listed derivatives if restrictions on contract for difference (CFD) markets continue to gain traction, a study by Acuiti in partnership with ION has found.
In 2023, Spain joined a growing list of European countries set to introduce new restrictions on instruments aimed at retail investors, which would ban the promotion of CFDs and restricting leverage on other instruments.
In response, none of the surveyed retail brokers either strongly or somewhat agreed with Spanish regulators’ intentions, while 69% strongly disagreed with them.
Looking at the impact these regulatory restrictions would have on listed markets in the EU and UK, just over half (51%) of responds believe there would be an increase in listed volumes, with 10% of that portion expecting a significant increase, while 41% expect a slight increase.
Meanwhile, only 14% of respondents expressed that there would be a decrease in listed volumes, while 34% expect no change.
The report found that should retail flow to listed markets increase, there would be significant benefits.
Proprietary trading firms which took part in the survey predict that significant flows into listed derivatives markets would improve liquidity, provide greater opportunities for institutional firms and increase revenues.
Of those surveyed, less than 10% predicted that the move would result in increased volatility in the market.
“This report suggests that restrictions on retail investment in bilateral products such as CFDs will boost engagement with listed derivatives markets. This will bring greater liquidity and more diverse flow to the markets in Europe,” Will Mitting, founder of Acuiti, told The TRADE.
“For incumbent institutional firms this provides an opportunity. As volumes in listed markets grow, institutional clients are likely to trade more while some institutional sell-side firms see opportunities in targeting retail investors if they trade listed derivatives.”
Mitting did, however, emphasise that the report also found that restrictions on retail flows to CFDs will result in retail focused brokers expanding their offerings to institutional investors, “which will increase competition for incumbent institutional sell-side firms”.
“These shifts are likely to cause significant disruptions and innovation in European institutional markets,” stressed Mitting.
Looking at how a ban could impact competition in institutional markets as retail brokers seek to replace retail revenues with institutional flows, no surveyed sell-side respondents expected a significant increase in competition, however, 53% stated that they expect a slight increase in competition, while the remainder (47%) expect no change.
Acuiti stated that this potentially reflects an under-appreciation of the challenge and ambitions of retail brokers found in the report, emphasising that while clearing firms are likely to see benefits from retail brokers moving into futures and options, execution-focused focused brokers will inevitably face grater competition.
“Increased retail participation in the listed derivatives space will only accelerate the sell-side demand for modern, scalable technology,” Francesco Margini, chief product officer for cleared derivatives at ION Markets, told The TRADE.
“This is essential for supporting large scale client onboarding and significantly increased transactional volumes across execution and clearing.”
The report highlighted that the growth of retail investing added depth and improved liquidity in US derivatives markets, attributing it as a key factor in the significant growth that US listed market have seen since 2019.
Retail brokers which have the advantage of being technology-led, will likely put them in good stead as they approach listed and institutional markets.
Despite the challenges that may arise due to regulatory restrictions for European retail brokers, Acuiti concluded that with challenges comes opportunities and the potential for reinvention for the affected parties.