From the October 01, 2007 issue of Futures Magazine • Subscribe!

Retail trading and contracts overseas

More than 1,000 private derivatives traders recently forked over a few thousand euros each to attend a two-day “Trading Expo” in Aschafffenberg, Germany — one of three trading-related conferences organized annually by independent trader Bruno Stenger (see “Bruno Stenger: Brewing up profits,” September 2005).

Stenger has run the events since 1999, but this year he changed the name to “Trading Expo” to reflect not only the return of equities traders to the fold, but the flooding of the retail market with what he calls “synthetic” derivatives products such as Contracts for Difference (CFDs), which are broker-issued, non-cleared mini-contracts tied to the price of an exchange-traded futures or equities product, and so-called “Zertifikate” (certificates), which are uniquely German securities compiled from a combination of derivatives and also issued by banks and brokers, similar to the products issued by spread betting firms in the United Kingdom (see “CDFs, Zertificate and the regulatory gray zone,” on the online version of this article at

“CFDs have been big in England for about six years,” says Stenger. “But here in Germany, they didn’t start to kick in until about two years ago.” Now, he says, they and Zertifikate have come to dominate the retail sector, which lacks the array of exchange-traded “mini” contracts popular in the United States and parts of Asia.

Eurex has completely abandoned the sector in favor of high-volume, low-margin algorithmic business.

Into the void left by Eurex and other European exchanges have stepped a variety of intermediaries old and new, large and small — leaving private European traders arguably better-serviced than their Asian and Latin American counterparts, most of which are in regimes that lack competitive retail distribution networks.

To be sure, there are exceptions. Both India and China, and to a lesser extent Japan and South Korea, enjoy vast networks of retail brokerages, which have managed to cultivate business from hundreds of thousands — if not millions — of retail investors, but with limited access to global markets. In India and China the retail trader is king, but the markets lack the deep liquidity of a Chicago Mercantile Exchange or Eurex.

South Korea, on the other hand, is home to the most deep and liquid product on the planet: options on the Kospi 200 (see “King of retail,” below).

Retail trading continues to thrive in India despite the suspension of futures on certain food commodities earlier this year, and one exchange, the Multi Commodity Exchange of India Ltd. (MCX), is surviving the suspension by offering so-called ‘mirror’ contracts, which are mini contracts tied to larger contracts traded outside of India.

Thus, a world gold contract on MCX is just one kilogram, and a crude oil contract tied to the New York Mercantile Exchange is just 100 barrels. Until India opens its markets, these mirror contracts are the only way most Indian traders can access the products of Chicago, London and Frankfurt.

Despite their differences, these markets share awareness on the part of speculators that tradable products exist, and an awareness on the part of exchanges and intermediaries that a retail market needs to be serviced. Where they diverge is in the barriers between user and provider, which are in turn dictated by an array of cultural, structural and regulatory traditions.


Traders in many countries, especially those lacking a retail distribution network, have flocked to OTC forex platforms. The dominant platform in Europe appears to be Oanda, but it’s difficult to see who comes out on top in Asia, due largely to the fact that solicitation of Asian customers by offshore platforms is either illegal or ignored by regulators. Platform providers are, thus, shy about discussing the amount of business flowing from these countries.

Jeremy Ang, a managing director with DBS Vickers Securities (Singapore), says that when local traders look to trade on offshore forex platforms, the stamp of approval many seek is membership in the National Futures Association (NFA) of the United States, which is a practice he says reflects badly on the existing regulatory framework in many Asian countries. “What you have is a lack of clarity in a lot of these countries, coupled with a lack of understanding among investors,” he says. “They don’t know how to evaluate a service provider, and they think, ‘Hmm, NFA — that’s a U.S. association, and this must mean they are credible.’”

NFA Senior Vice President Karen Wuertz cringes when she hears that. “The NFA’s primary focus is to ensure its forex dealer members are complying with its rules, and taking disciplinary action when firms violate these rules,” she says. “But anyone looking to invest should first go to our Web site to see, number one, if they are even an NFA member, and if we have taken any disciplinary actions against them.”

She points out that the NFA regularly conducts educational projects targeted to U.S.-based retail investors and also posts detailed market primers on its web site — exactly the kind of activity Ang says is lacking in Asia.

“Too little is being done to educate retail traders at the moment,” he says. “And when you look at the profit margins that retail brokers have, you have to ask where the money is going to come from.”


The rise of CFDs and Zertifikate in parts of Europe and Asia also has regulators worried, and represents, in many ways, the return of the intermediary. Such products offer beginners a chance to play the markets with little in the way of capital. Stenger points out that CFDs on Germany’s DAX Index require as little as €500 margin, compared to €14,000 for the DAX futures trading on Eurex.

The leverage on the two is comparable: in Stenger’s example, one DAX point equals €1 on the CFD, compared to €25 on the Eurex futures. The kicker, however, comes in the cost. “The bid-offer spread on DAX futures is about a half a point to a point,” says Stenger. “On CFDs, you typically end up paying two points.”

The two dominant providers in Germany are Dutch bank ABN Amro and British broker CMC Markets, but those fat margins have brought German institutional powerhouses like Deutsche Bank into the CFD game, lending the retail derivatives segment a degree of credibility it never enjoyed even when Eurex was actively supporting the sector.

The CFD boom also has caught the attention of large Asian banks that had previously ignored the retail segment. “There had always been a market in Singapore for products targeted to high-net-worth, global individuals,” says Ang. “But accounts in what you would call the ‘retail’ range — say $10,000 or less — have not been serviced.”

The result: a proliferation of gray-zone products like CFDs and offshore forex platforms, and little marketing of mini-futures. “Exchange-traded contracts aren’t getting their fair share of retail growth,” he says.


A quick comparison of Germany and the Netherlands makes one thing clear: stark differences exist from country to country, and these differences are often stronger and more clearly-defined than differences from region to region.

Take options markets: Europe’s strongest retail options market remains that of the Netherlands, and you could argue that’s not because the Dutch are gamblers or traders at heart, but because the Amsterdam Options Exchange (now part of Euronext.Liffe) was adept at promoting the retail sector by conducting workshops for investors and routinely inviting school groups, civic groups and anyone interested to tour their colorful trading floor. Those days are long gone, but the legacy is an educated and informed community of traders.

In Germany, on the other hand, options have failed to catch on among retail traders, and Stuttgart’s once-promising European Warrants Exchange (EuWaX) continues

to generate consistent but disappointing volume. Former Eurex boss Rudi Ferscha says that’s because Deutsche Börse recognized too late the value of the retail sector before abandoning it completely.

“I’ve been in this business 44 years, and there’s one thing I can’t stress enough,” says former Chicago Board of Trade product developer Pat Catania, now an advisor to India’s National Commodity & Derivatives Exchange Ltd.: “The most important activity an exchange can engage in if it wants to grow steadily and cleanly is education.”

It’s perhaps telling that one of the world’s great retail success stories is India, where exchanges like MCX have built huge volume by targeting the retail customer. “We have active training programs organized by the training department, including large road shows for retail customers,” says MCX Deputy Managing Director Joseph Massey. “They are organized either by ourselves or combined with regulators and brokers.”

Japan also has a thriving retail sector, albeit one considerably smaller than a few years ago, due largely to a bit of regulatory creative destruction: specifically, an overhaul of the commodities exchanges that purged shady operators. That’s left the retail sector leaner but cleaner — and hopefully primed for long-term growth (see “Asia: Almost there,” June 2007.

One reason to expect a bright future: those disreputable Japanese commodities houses left an appetite for futures and options and a network of brokers to sell them. “In the United States, boiler rooms were our best friend,” says Barry King, a former retail broker at Jack Carl Futures (now part of Man Financial). “We’d get people all the time that had gotten burned by some high-pressure salesman, but instead of giving up on the markets, they would then seek out a legitimate broker.”

A distribution network like Japan’s is unheard of in Singapore, where just one reputable futures house, Philips Futures, has targeted the retail segment in any big way, and is reportedly doing quite well as a result.


Of all the entities servicing the retail derivatives sector, Man Financial is the only one with a global presence. Outside the United States, however, the company deals almost exclusively in managed accounts and hedge funds.

One company that managed to be a true global retail futures broker was the now defunct Refco. The company had retail operations from Hamburg to Hong Kong before its dramatic implosion in 2005. It evaporated just as CFDs were luring mainstream financial institutions into the retail game, and its former employees have largely found homes in the new retail sector.

Although Man is believed to have been the biggest beneficiary of the Refco implosion, Stenger says the business has been spread among several European providers. Ang says the same thing has happened in Asia.

“You can’t really say that one single company picked up the business,” he says. “But you can say that Refo drove business to the big banks, because now investors aren’t looking at how big a company is, but how safe it is — and to most, ‘safe’ means ‘bank.’”

To even more, however, safe means equities.

“Futures lost credibility among retail traders with the Refco debacle, but equities got hot again,” Ang says. “Paradoxically, we’re also seeing more and more CFD business in Asia, especially CFDs on individual stocks, partly because people don’t see them as derivatives for some reason, and also because it is so difficult to short stocks in most Asian countries.”

In Europe, 200-year-old Bankhaus Sal Oppenheim has, over the past decade, built up a respectable business in retail derivatives, with operations in Germany, Spain, Italy and France. Like CMC and ABN Amro, they’ve also concentrated on CFDs and Zertifikate instead of futures and options. The success belies a retail demand for mini-futures, but begs the question: what would make the marketing of such products worthwhile?

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