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Thanks to ESMA and the 2018 Product Intervention Decision, EU-licensed retail brokers must display a specific CFDs risk warning on their websites.
I won't go into many details (you can read the original ESMA document HERE) except for the most critical ones:
ESMA definition of CFDs:
"A derivative other than an option, future, swap, or forward rate agreement, the purpose of which is to give the holder a long or short exposure to fluctuations in the price, level, or value of an underlying, irrespective of whether it is traded on a trading venue, and that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event."
How to calculate the percentage for that risk warning:
"The risk warning shall include an up-to-date provider-specific loss percentage based on a calculation of the percentage of CFD trading accounts provided to retail clients by the CFD provider that lost money. The calculation shall be performed every three months and cover the 12-month period preceding the date on which it is performed ('12-month calculation period'). For the purposes of the calculation:
a. An individual retail client CFD trading account shall be considered to have lost money if the sum of all realized and unrealized net profits on CFDs connected to the CFD trading account during the 12-month calculation period is negative.
b. Any costs relating to the CFDs connected to the CFD trading account shall be included in the calculation, including all charges, fees, and commissions.
c. The following items shall be excluded from the calculation: i. any CFD trading account that did not have an open CFD connected to it within the calculation period; ii. any profits or losses from products other than CFDs connected to the CFD trading account."
I was able to collect 40 public CFD disclosures. They are typically located at the top or bottom sections of retail broker websites. I excluded retail brokers with Disclosures where spread betting was mentioned.
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After a few Excel formulas, here's what we have:
1. Consistency. The percentages, although varying slightly between providers, are relatively consistent. This suggests that the risk associated with CFD trading isn't necessarily tied to a specific platform or broker but is a more inherent trait of the financial instrument itself.
2.The average risk of loss is lower than expected (the generic ESMA warning indicates 74-89%). The percentages are mostly clustered in the 70-79% range, with a difference of 39% between the highest and lowest values.
3. The maximum reported percentage of retail traders losing money is 89%, and the minimum is 50%.
Points of Consideration:
The available data is limited. If this were part of a broader dataset, I'd be curious to dig deeper into other factors. For instance, does the percentage of loss correlate with the size of the broker, their educational offerings, or the tools they provide to their users? What was the data collection method? The disclosures may come from different internal data sources at each broker. All 40 brokers have at least two trading platforms. Survivorship bias: traders experiencing losses may quit while others may deposit more funds, skewing the true loss rate over time. What is the average size of the losses, the duration of trading before losses occur, and whether these figures have been improving or deteriorating over time? Also, how is ESMA enforcing the accuracy of these percentage calculations? For brokers with a percentage significantly lower than the industry average of 71%, could it be a selling point as it might suggest better tools, education, or simply a matter of luck?
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As I finished writing, I realized my curiosity hadn't been fully satisfied. I spent time diving into related numbers and statistics. (I guess I'm more of a nerd than I initially thought.)
In 2018, research on retail traders' profitability was conducted by the Australian Regulator (ASIC) as a part of "Improving practices in the retail OTC derivatives sector" report. According to their findings (they also used 12 months period), 62% of Margin FX traders and 73% of CFD traders were unprofitable.
Another study was carried out by CNMV in 2021 (I couldn't find it in Spanish, so I have to use this ESMA opinion as a reference). They gathered data from eight entities offering CFDs in Spain and found that the “average client losses within each firm ranged from -1,649 to -7,269 EUR per client.”
This 2021 data from CNMV was referenced again in July of this year (or perhaps they collected new data without releasing it?), during the announcement of a marketing ban on CFDs for retail clients. This decision used the observation that “between 70% and 90% of CFD investors incur losses.”
The CFTC require requires the public disclosure of retail traders' profitability. These numbers look different because: a) reporting is done quarterly, not annually; and b) these numbers cover Forex Accounts only."
In summary, data from various sources appear consistent, suggesting that only about 15-29% of retail traders might be profitable. However, this is somewhat of a generic estimate, based primarily on the more developed European market. I haven't come across any reports for Southeast Asia, LATAM, or the Middle East.
RE: I have many ideas on more granular research related to retail traders' profitability. If you're interested in collaborating, please PM me.
If you happen to notice any errors or oversights, please know that I am always receptive to constructive feedback and appreciate any insights you might offer.
