Discover the top 3 serious challenges rocking the CFD industry.
More than 12 years since Contracts for Difference (CFDs) were first introduced in Australia, this once sky-rocketing industry is now facing some serious challenges.
Aside from the unprecedented level of market volatility that seemed to have relegated many traders on the sidelines, the effects of new rules and regulations introduced in response to the global financial crisis (GFC) are also now biting and may have some reverberations among CFD providers.
Like other industries that have gone through the different stages of growth, the Australian CFD sector is now showing signs of maturity.
In an earlier post, we’ve looked at some of the challenges and opportunities facing the CFD and FX industry in Australia.
What are the top 3 serious challenges rocking the CFD industry?
Whether it’s just a sign of a maturing market or not, there are strong signals that this once double-digit growth industry is up for some challenging times. In this article, we will examine these signs and challenges being faced by the CFD industry as a whole.
Challenge #1 – Falling number of CFD traders
The latest industry research showed that the number of CFD traders in Australia have fallen from 43,000 in 2015 to only 37,000 in 2016. The drop in number of traders came despite increased market volatility and trading opportunities, which used to attract more traders into the market.
Should this fall in the number of CFD traders be cause for concern for CFD providers? Or is this a one-off blip that can be ignored? Is the decline in the number of CFD traders an indication of something more significant in an industry affected by the whims of the markets? Are traders looking for other financial instruments that could deliver better returns than CFDs?
These are just some of the questions that could be pre-occupying all CFD providers as they themselves look for growth in this competitive space. And these challenges could be keeping CFD executives up at night.
Surprise in numbers
“The decline in CFD trader numbers is somewhat surprising in the face of reignited market volatility and healthy client inflows,” said Dr Irene Guiamatsia, senior analyst at Investment Trends.
|# of Active CFD Traders in Australia|
|YEAR||# of Traders|
Source: Investment Trends
CFD providers confirm weak numbers
While the researchers were surprised with their findings, it seems that CFD providers were not. In fact, the providers confirmed the survey figures, which suggest that CFD providers knew all along that the number of active traders are dwindling.
Challenge #2 – Regulatory and Compliance changes
Some of the regulatory and compliance rules introduced after the global financial crisis (GFC) are only now coming into effect. While others that have been implemented earlier on are now seeing their impact on the entire financial services industry.
And while Australia continues to be one of the most tightly regulated markets in the world, Australian Securities and Investments Commission (ASIC), is expected to gain more power in policing the local financial markets. This includes new rules and regulations or implementation of tighter rules for CFD providers.
According to Su-King Hii, principal at InnoInvest, a premier advisor in the Australian Financial Services sector, “ASIC will continue to apply a close scrutiny on the CFD and FX industry in the foreseeable future.”
At the same time, he said there are pending laws and regulations that may also bring more changes to the industry including:
- Pending legislation or new laws to further tighten client money rules
- New laws that will give ASIC more enhanced powers to approve change in ownership of licensees, and the power to intervene in product designs.
In an interview with Profile Booster, Mr Hii said, “We are about to see potentially more changes in the regulatory environment. It is not inconceivable to think that ASIC may be very proactive in dictating how CFD and FX products are delivered.”
Tough regulatory environment a boost to providers
From a Compliance and Regulatory perspective, Mr Hii said the existing regulatory environment in Australia is healthy and robust as it provides a strong level playing field for CFD providers.
He said, “I don’t believe ASIC’s tough regulatory approach should deter brokers from thriving. In fact, there are many brokers who do the right thing and operate their businesses in a compliant manner,”
“A lot of the issues raised by ASIC are matters of common sense. It is not difficult to put a proper compliance framework in place, and it is not hard to monitor the employees and representatives, and document the processes.”
Challenge #3 – Rapid changes in technology
Like many other industries, the CFD industry is not immune to the impact of rapid changes and advancement in technology. The coming of advanced technologies – both in hardware and software – have brought massive changes to the CFD industry. And this means immense changes in different areas such as:
Trading platforms – Aside from developing and offering their own proprietary trading platforms, most CFD providers are also forced to offer the more commonly used platforms such as MT4, cTrader and others. Gone are the days when CFD providers rely on their clunky platforms with limited capabilities. Today, traders have more options when it comes to trading platforms. This means that they are no longer tied up with a provider and can switch from one provider to the other as long as they have access to those non-proprietary platforms.
Directly related to the availability of advanced and full-featured trading platform is the coming of introducing brokers and white label operators who, in a way act as ‘pseudo’ brokers. But the reality is they only serve as middlemen between the big brokers and the direct retail traders.
Trading tools – Advanced trading tools come side by side with full-featured trading platforms. This means Expert Advisers (EAs) advanced charting, risk management tools, different order types, alarms and reminders.
All these tools and features, which have definitely made trading a bit more efficient for traders, could come at a cost to CFD providers. While the software and development cost could be a one-off item, most of the add-ons and feeds required by these tools mean ongoing cost to CFD brokers. The dilemma for many brokers is that if they don’t offer these advanced tools – all the bells and whistles – they won’t be able to attract traders to their platform. On the other hand, to be able to offer these full-featured tools, they have to wear the ongoing costs.
The CFD industry is more than 12 years old in Australia. It could be older if you count the first couple of years when the first of the few providers were still setting up shop and trying to educate the Australian trading and investing community about the merits and benefits of CFDs.
And like any other 12-year old (or teenager?) trying to find oneself, the Australian CFD industry could be at a crossroad now. While the days of double digit growth – volume of trades and number of CFD traders – are long gone, there are still pockets of opportunities being grabbed by new and relatively younger players and providers.
These ‘newish’ players may have some advantages over the long-established players in terms of their agility, particularly when it comes to delivering advanced platform technology. These players could also be more nimble and aggressive in terms of exploring new markets and attracting younger generations of traders.
On the other hand, the long-established providers enjoy the loyalty and support of their existing client-base who may prefer the stability of their old reliable platform provider.
Is consolidation just around the corner?
A major sign of a maturing industry is the presence of a handful of well-established players as well as a solid second tier of competitors. And though a third tier is still a possibility, their presence and share of the market may be too small to pose a threat to the big players.
This situation is also an ideal scenario for an industry consolidation. At the moment, the Australian CFD industry is showing some signs of an imminent consolidation. The major players are enjoying their established positions while the second tier players are aggressively expanding and growing to catch up with the big providers. At the same time, investments and additional capitals are being poured into companies that are showing the most potential to join the major players.
Similar to other industries going through the natural patterns of growth and consolidation, the Australian CFD industry has its share of challenges and opportunities. Whoever will be able to grab the opportunities and survive the challenges will be rewarded richly.
Do you agree with the views and observations in this article? Share us your views, opinions and observations on the Australian CFD industry. We will be very happy to hear from you.