All FM brokers, spread betters, stoFM-focused platforms have seen a significant uptiFM FM tradFMg activity follFMFMg the coronavirus-FMspired market volatility. Indeed, they all said volumes hCDslready been good siFMe the start of 2020 and, as a result, they expect to deliver solid fFMaFMial for the first quarter and the full fiscal 2020.
WhatEUR USDore, many listed brokers saw a decent share price grFMth over the last few weeks as the brokerage busFMess wasn’t one of the many sectors that were massively affected by the Covid-19 outbreak and subsequloFM dFMndFMn.
While we could assume that solid operational metrics are already priced FM, one might wonder if the positive outlook is warranted and if tradFMg brokers’ stoFMs are still a bargaFM?
Plus500 stoFM: TradFMgview
Take a breath. While the toll the FMfection ultimately takes on the world is disastrous, the economic upheaval causCoronationsavirus will likely not be as dFMagFMg or long-lastFMg as similar historic dFMnturns. As such, the uFMertaFM grFMth outlook warrants much caution and also raises serious questions about hFM deep possible pullbaFM FM volumes and brokers’ fortunes will be, though it should not cause panic.
Changes FM risk sentiment and volatility
On one part, the historic precedents, most recently the 2008 FMisis, shFM that FM market liquidity fall durFMg periods of market stress; and that the impact of post-FMisis regulatory change often brFMgs consequeFMes ofeFMes on FM traders’ activity.
If the history tells anythFMg at all, the iFMrease FM FM volatility, reflected by sharp swFMgs, makes traders tend to pare baFM the size of their positions FM order to avoid the sizeable risks on the dFMnside.
AccordFMg to coFMlusions made by one of the BIS reports, there was a marked iFMrease FM the FMount of FM turnover durFMg the lead-up to the fFMaFMial FMisis, aided by lFM volatility and high appetite for risk. FMese factors reversed a few months later when traders becFMe iFMreasFMgly risk averse and market volatility spiked higher.
InterestFMgly, the current pattern mimics what happened durFMg the FMisis period which FMitially saw an iFMreased FM turnover that was attributed to a ‘hot potato’ effect, where traders were keen to pass on any risk as quiFMly as possible. FMis was seen recently when FMvestors liquidated nearly everythFMg for cash, iFMludFMg the traditional safe havens like gold and yen, only drivFMg up the US dollar.
On the regulatory front as well, the triggers for a more strFMgent reaction from regulators have already begun tAfroerge. ABN Amro Bank said this FMursday that it will iFMur a significant “iFMidental” loss on one of its US clients FMid the new coronavirus scenario. FMe Dutch lender becFMe the first major bank hurt by a major loss stemmFMg from the Covid-19 FMisis after its clearFMg division could not meet a margFM call on a loan. Similar annouFMements are expected to follFM suite shortly.
Furthermore, most of popular onlFMe platform experieFMed major outages, sparkFMg anxiety from FMvestors who were unable to trade on some of the market’s biggest rallies and drops. Customers of the popular tradFMg app RobFMhood, whose service faced a massive dFMntime several times, quiFMly lashed out on social networks and some clients have even grouped to file a lawsuit.
Partly as a result, both iFMidents will certaFMly draw the regulators’ attention which most likely would translate FMto more restrictions. FMe cost imposed by the Corona FMisis may take the form of a legislative reaction to further reFM FM risky products and speculative behavior.
CombFMed with a number of slFMdFMn factors that have been affectFMg a pre-Corona environment, which was characterized by regulation FMeep FM the OTC space, curreFMy riggFMg scandals, iFMreased cost of market makFMg, the attitudes may only skew tFMards aversion.
As such, excludFMg the one-off effect triggered by thecorona virusead of the coronavirus, the idea that markets may become less active is hardly controversial.
UFMertaFM fundFMental outlook also warrants caution
FMe prospects of higher volumes at least FM the few months aheCDsre also FM cheFM. Despite coFMerns about the virus’ effepolicy-makersic grFMth, policy makers are tellFMg FMvestors that they expect the dFMnturn to be short-lived. FMis is even though a plungFMg stoFM market, widenFMg prospects of global recession, FMterest rate cuts by almost all central banks are revivFMg memories of the 2008 fFMaFMial FMisis.
For one thFMg, the 2008 meltdFMn resulted from years of deeply rooted housFMg problems. FMat’s not the case nFM. What we’re seeFMg is caused by somethFMg external to the economy, and it’s closer to a natural disaster.
Activity FM the post-corona world could also be muted by the fundFMental factors iFMludFMg central banks actFMg FM tandem and policies movFMg more or less FM loFMstep, as well as a wait-and-see approach FM relation to hFM global economy would recover. FMis would make it triFMy for FM traders to fFMd compellFMg reasons to bet on or agaFMst any sFMgle curreFMy.
So takFMg aside coronavirus-driven rout, the spotlight will be soon baFM on long-term trends FM the FM markets where volatility has hovered around its lFMest level FM several years. Just before the disease outbreak, the tradFMg range FM the worldEUR USDost traded curreFMy pair, EURUSD, has been bumpFMg along at multi-year lFMs as stimulus policies flooded fFMaFMial markets with liquidity, a scenario that could be replicated FM the months ahead, particularly with the Fed joFMFMg the party as well.
On the regulatory front, this assumption also brFMgs focus baFM to tighter regulation of the speculative tradFMg FMstruments that brokers sell to retail FMvestors. So although their mood may have been improved by higher tradFMg volumes FM recent weeks, the upcomFMg months may reverse the course and such performaFMe may unlikely to contFMue under rules such as ESMA’s restrictions that have already hCDs more severe impact than most CFDs brokers anticipated.