Here are inherent contradictions in leverage trading

CFDs don’t lose money, traders do. PHOTO | SHUTTERSTOCK

Life is full of funny ironies and paradoxes. Remember: we applauded Mark Zuckerberg (founder, Meta) “moving fast and breaking things” and then he ended up testifying before the US Congress about election interference. We cheered Sam Altman (founder, OpenAI) introducing ChatGPT and then turned to warn us that his famous product could bring about the end of human civilisation.

We jubilated when the Capital Markets began issuing licences offering contracts for differences (CFDs) and then it (recently) turned to ask the industry to ensure “satisfactory outcomes” for all stakeholders. To speak on the last-mentioned, data from various sources has remained consistent; about 75-85 percent of retail traders lose money. But since some ironies come with twists, ever heard of the cliche: “Guns don’t kill people, people do’’?

I would equally argue, “CFDs don’t lose money, traders do”? This being said, to not tie down the industry, we may need to define “satisfactory outcomes” a little bit widely. I’d suggest, solving key industry problems be considered as part of fulfilling and delivering “satisfactory outcomes.”

Let’s list them. One of the key problems lies around client segregation. It’s not uncommon to see firms simply onboarding the wrong clients and then proceed to encourage them to put money at risk they cannot afford to lose, including where they are pressured to top up margin to avoid the crystallisation of losses on open positions. Similarly, some encourage clients to elect to be professional customers to circumvent consumer protections.

Another issue applies to the gamification of adverts, especially “easy money” narratives that do not highlight the negatives of leverage trading.

Another problematic area is found in the distribution side. With most firms relying on third parties (read introducing brokers), unfortunately, there’s usually very little robust oversight. The outcome is churning accounts and in some cases lost client money.

If CFD firms are able to demonstrate increasing improvements towards these issues within specific time cycles, this should be considered a substantial fulfilment of “satisfactory outcomes” even if trader losses remain at the same level.

That is not to say these firms should not consider clients’ losses and profits when assessing whether good outcomes are being achieved. In fact, to a certain degree, firms will always have influence over customer outcomes. However, the ugly truth is that anyone can reasonably foresee that retail CFD clients are likely to lose money. Practically, it’s also hard to protect clients from poor outcomes.

Therefore, any focus on client losses (or giving it too much weight) may appear unfair for firms operating in the context of investments where most retail clients lose money. In any case, this is an open market where there’s an assumed “willing buyer, willing seller” scenario at play.

To summarise, whilst the coming guidance is welcome, I highly doubt it’ll achieve much in getting a different outcome relating to trader losses. Nonetheless, the industry can try to solve what’s solvable, aimed at providing a better environment and leave the industry’s inherent contradiction (trader losses) unsolved.

Mwanyasi is MD Canaan Capital.