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Since the ESMA restrictions on leverage are due to come into place in July for retail traders, should you upgrade your spread betting or CFD account to professional status to maintain your current margin rates?
We look at the advantages and disadvantages of becoming a professional client.
There is absolutely no doubt that excessive leverage on derivatives products for inexperienced investors and traders is a bad thing. Of course there is an argument that people should be allowed to do what they want. But the problem is that inexperienced investors simply do not understand the implications of the risk they are taking on when trading on margin.
You only have to think back to when the CHF cap was removed and wiped many retail traders out, leaving some in crippling debt from “relatively small” trades.
There has always been retail and professional status, although historically, there have not been many benefits to being an elective professional trader. With the new ESMA caps, the divergence is increasing.
Spread betting and CFD brokers like ETX Capital are allowing traders who meet two of the follwing requirements to upgrade online to professional status:
- Over €500k of liquid assets excluding your house of residence if you own it
- Relevant experience in financial services
- Traded at least 10 times in each of the last 4 quarters
If you upgrade to professional status funds will also continue to be segregated and will remain FSCS protected.
For client’s of Spreadex, one of the original spread betting brokers, that has just launched CFDs. Spreadex told us:
If someone is potentially eligible we do alert the client of the benefits of being a professional client and the risks involved with a pop up, however there is nothing on our site.
In summary, the advantages to professional status with Spreadex are lower margin requirements (they will stay the same), credit limits and the ability to trade binary options.
The downsides, or benefits of retail client status would be that there is a no negative guarantee (trading certainty), higher margins might result in better client outcomes (due to the limits on leverage) and future changes by the regulator might not apply to professional clients.
All clients maintain the same level of client money protection, and someone can switch easily back from professional status to retail status.
Here’s a quick look at the advantages of being a professional trading with the leading broker IG.
Benefits of becoming an elective professional trader
- You’ll actually get a reduction in margin rates. For example, margin on the FTSE will decrease from 0.5% to 0.45%. If you remain retail, FTSE rates could be 5%, FX 3.3% and stocks 20%.
- You can still use collateral as margin. This means if you hold physical stocks you can use this as collateral (with a haircut) against your spread betting and CFD account.
- You can still trade Digital 100’s. Which are short term trades that expire 0-100 on 5 minute to 1 month timescales.
Disadvantages of becoming an elective professional trader
- No-negative protection: You can lose more than the balance of your account. Of course, you can still use guaranteed stops to mitigate this risk.
- No leverage or product restrictions on CFDs/binaries: So you can basically trade what you want.
- Communication: Your broker will be able to use professional and more actionable language when they discuss the markets with you. Inexperienced traders may get confused and find the terminology complicated.
- Experience assumption: If you are a professional client, brokers will assume you know what you are doing so won’t explain things unless you ask.
- Best execution: For retail clients the major factor in best execution is price, for professional it tends to be speed and convenience.
The truth of the matter of course is that if anyone is trading derivatives they should be professional clients because derivatives are an exceptionally high risk product.
But, the reality is that traders want high risk, even if they don’t have the experience. So, in the regulated world we live in the regulators must ensure that brokers properly categorise their clients to provide risk appropriate products.
For more information you can look up the FCA’s criteria for an ‘elective professional client here.
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.