1. ESMA Is Interested in Retail Traders Habits

ESMA’s call for feedback on how retail investors engage with investment services—and whether regulatory or non-regulatory barriers may be discouraging participation in capital markets—is unlikely to set pulses racing. After all, this is just the latest in a long line of similar consultations and is seen in some quarters as an admission that excessive regulation is one of the main factors holding back retail investment in Europe.

Read more: ESMA Asks Firms and Trade Bodies - Are Rules Making It Harder for Retail Investment?

Later this month marks the fourth anniversary of the European Commission’s consultation on its retail investment strategy for Europe—a process that has been plagued by disagreements between the European Parliament and the EU Council. So, it would be understandable if firms felt a sense of déjà vu here.

The objective of encouraging households to shift their savings away from bank deposit accounts has been pursued for some time. Fitch Ratings recently expressed optimism that the European Commission’s Savings and Investment Union proposal could encourage more retail investment—an area where Europe lags far behind the US.

There are also regional disparities. In the UK (which has been successful in attracting overseas investment), there is acknowledgement that capital markets would benefit from more retail involvement. Yet the Nordic countries have had greater success in attracting non-institutional investors into their capital markets.

As with many of these initiatives (think Capital Markets Union), success will depend on buy-in from all European countries, not just those with the least developed capital markets.

The scale of this challenge is summed up in an exchange from a well-loved 1980s British political sitcom, in which a hapless government minister discovers that the UK only joined the Common Market (the forerunner of the European Union) to take it down from the inside. The moral of the story when it comes to Europe-wide initiatives seems to be: “If you can’t beat them, join them—and then beat them.”

2. No More UAE Free-for-All

The news that the UAE’s federal financial regulator is clamping down on ‘finfluencers’ will have caused consternation among so-called celebrities beyond the Arabian Peninsula.

The role of social media experts in pushing a variety of crackpot schemes—and even outright scams—is well understood. It came to a head during the pandemic, when a mix of working from home and savings from lockdown led millions to try their hand at trading FX.

Read more: Finfluencers Telling You What to Trade? UAE Says Not Without a Licence

Various regulators have attempted to take those behind misleading posts to task. For example, the UK Advertising Standards Authority ordered a reality TV star to remove a post that promised huge returns from a currency tip service, because she didn’t inform her audience that she was being paid to promote it.

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The Financial Conduct Authority has brought charges against several individuals in relation to unauthorised FX trading schemes promoted on social media, with cases set to go to court in 2027. In March, the Financial Industry Regulatory Authority fined Robinhood $26 million over its use of finfluencers. Meanwhile, the Financial Sector Conduct Authority is reportedly considering subjecting South African finfluencers to the same regulatory responsibilities as licensed financial advisers.

However, the UAE is set to become the first jurisdiction to require these individuals to register and obtain official approval. The Securities and Commodities Authority will offer eligible individuals the chance to apply for authorised finfluencer status, allowing them to share investment analysis and offer recommendations on approved financial instruments or entities via digital or traditional media.

Successful applicants will receive a three-year waiver on registration and renewal fees, along with access to legal advisory services. Let’s hope other financial regulators have taken note.

It would be nice to think potential traders aren’t gullible enough to fall for the modern equivalent of get-rich-quick schemes that have been around in one form or another for more than 150 years. But as my mother used to say, “A fool and his money are soon parted.”

3. Propping Up the Balance Sheet?

One of the more interesting comments at last week’s Finance Magnates Africa Summit (FMAS) came from the operations manager of a Malta-based prop trading firm.

Catch the key moments from FMAS: “Are Deficits and De-Dollarization Reshaping Markets?”

When asked about the risks surrounding the capital levels of prop trading firms, he suggested that advertising more and more deposit offerings might be a red flag indicating low capital levels.

However, one trader I spoke to this week dismissed the suggestion that prop firms are running out of money. His view was that they are simply preparing for possible changes to capital requirements as regulators pay closer attention to their operations.

Capital has always been a major topic in the prop trading world. One of the first questions a new firm will ask itself is whether it is achieving the best possible return on its capital.

Cost-benefit analysis often centres on how much a firm is willing to spend to retain full control of its business. Return on capital is a key issue, and some firms say their goal is to set aside as much capital as possible to invest in their traders—helping them scale up and creating a clear difference from competitors.

Capital is also a factor when deciding whether to build a platform in-house or use a white-label solution. Many firms trying to mirror others’ success opt for the latter to save time and money. However, there have been recent murmurings that some tech providers are demanding extremely high profit-sharing models, making it harder for firms to thrive under that setup.

Many firms aiming to replicate others’ success adopt the latter approach to save on the cost and time of in-house development. However, there have been murmurings of late that some technology providers are demanding exorbitant profit sharing models, which make it increasingly difficult for prop firms to succeed under that structure.

In this context, it’s understandable that firms would want to raise as much capital as possible to fund platform development.

Source: Finance Magnates