What will Mifid mean to spread betting clients?

From November 2007, a new piece of legislation, Mifid (Markets in Financial Instruments Directive), enabled spread betting and CFD companies to openly market products across Europe for the first time. The spread betting firms will face more rigorous regulation on their client intake, and will have to abide by new rules to provide the best possible service to their clients, and disclosure of information.

There has been much talk recently of the implementation of the Financial Instruments Directive (MiFID) and EU legislation and some of the more recent FCA edicts.The outcome has been that spread firms wouldn’t segregate large traders so that big trades would show as part of the spread/CFD’s firms balance sheet and if required could be use to hedge the position. Of course as it wasn’t ring fenced this meant that the client was exposed if the trading firm ran into financial difficulty.

Spread size to rise?

So the current situation means that the spread boys need to have the funds at all times to cover worst-case scenarios. Obviously this means that there is less money sloshing around. It remains to be seen what this means to spread traders, hopefully we won’t see an increase in spread sizes. In the longer term for the industry it could be open season M&A’s. Interesting times in the world of financial trading, as always happy trading!

Best Execution

The main change is that spread betting companies will be required to demonstrate that every trade they do is executed at the best possible price. Although how this will work in practice is uncertain, as spread betting firms typically create a price unique to their company, and possibly for each customer. Comparing prices between companies for an exact trade made at a precise time would be impractical, if not impossible. In practice, the legislation will probably result in increased transparency – the methodology or calculation behind the price creation will likely need to be explained and retained.

The ‘Best Execution’ legislation should have a positive impact to the experience of a spread better; as there should be more openness in explaining the source of prices, calculations behind them, and accountability in event of persistent slippage or poor execution performance.

Client Appropriateness

Currently, the FCA (Financial Conduct Authority) rules state that prospective clients must be vetted to ensure that they “may be suitable” for financial spread betting; yet from November far more rigorous checks must be carried out by the firm to denote whether it is “appropriate” for them.

This is likely to result in longer, more pointed registration procedures, and make it far more difficult for novices to open accounts due to lack of proven experience. Companies may potentially create a hierarchy of accounts with exposure to different products and levels of risk; such as some already do with standard, limited risk and credit accounts. This may not prove to be advantageous to the client; for although it provides a vehicle to limit exposure and risk, this usually comes at the price of wider spreads or controlled risk premiums.

Spread betting companies, from November 2007, are afforded an open passage to Europe; which in theory should broaden the market, increasing competition – so potentially benefiting spread betters. However, as only the United Kingdom and Ireland are free from capital gains tax on spread betting profits, it remains to be seen how great an impact the entry to Europe will prove to be.