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27th March 2024 | Insights

What is next for retail brokers in Europe?

Regulators across Europe are increasingly curbing activities in retail investing. Last year, Spanish regulators introduced a ban on CFD promotions and distribution, marking the latest move in a growing trend towards curtailing retail trading in OTC-based products such as CFDs.

Acuiti recently released a report in partnership with ION exploring how retail brokers across Europe are planning to pivot their business should the CFD market be subject to further regulatory curbs. The report surveyed retail brokers across Europe about their plans for expansion should the CFD market contract and incumbent institutional sell-side and proprietary trading firms about the opportunities and challenges they expect should retail flow move away from the current products.

For retail brokers, the current regulatory crackdown presents a major threat to their business models. In CFD markets, the larger brokers operate the venues on which the products trade. The survey found that curbs on CFD trading would have the biggest impact on revenues compared with other retail products such as turbos.

Our survey found that, aside from looking for growth in CFD trading outside Europe, retail brokers were planning to pivot in two core ways: offering retail clients futures and options and expanding into institutional markets.

These two trends could significantly change the landscape for European listed derivatives markets.

Firstly, and most obviously, additional retail flow to listed derivatives markets will bring more liquidity and diversify regional markets. One of the key reasons for the relative lack of growth in listed derivatives in Europe vs the US has been the lack of retail participation.

The second major change lies in the competitive landscape for institutional execution services in European derivatives markets. This is already a highly competitive market in which fees have been cut significantly over the past decade.

The influx of new entrants from the retail market poses a significant challenge to the incumbents, and one that our survey found was under-appreciated in the market today.

Retail-focused brokers are typically new entrants to the market but operate highly sophisticated tech platforms to offer trading to retail clients and generally boast lower overheads than the traditional sell-side institutions. The challenge by these new retail broker entrants could force further consolidation in the institutional markets.

For retail brokers looking to expand into futures and options and institutional markets, it is not simply a case of plug and play, however. They will have to adapt their offerings and change their approaches to accommodate the specific demands of institutional investors.

Retail brokers that think big in the current climate will be the ultimate winners. However, while many have built their own technology to date, third-party technology is more dominant in institutional markets than in retail and firms that outsource or adopt a buy-and-build strategy will reduce time to market, costs and regulatory risk in their expansion into listed institutional markets.

As well as expanding into listed and institutional markets, this study found that retail brokers were planning to grow their offerings in other regions. This creates the potential for regional players today to become global, offering both retail and institutional client’s access to global markets around the clock.

These are challenging times for Europe’s retail brokers. However, with challenges come opportunities and the potential for reinvention. For incumbent sell-side institutional brokers, the opportunity to offer futures and options to retail clients will present the potential for growth. However, the competitive challenge they may face needs to be appreciated today in order to capitalise on that potential.

To find out more, download the full report here: https://www.acuiti.io/retail-revolution/