By Jon Light, Senior Director of Product Management at Devexperts.
A major shake-up in retail trading venues is underway due to the expansion of crypto exchanges, neobanks, and zero-commission brokers into each other’s traditional territories.
As the lines between these businesses continue to blur and users gain more access to a variety of assets and instruments via their preferred platforms, many are questioning what the future will hold for OTC brokers, which have historically focused on providing multi-asset services through the flexibility offered by contracts for difference.
Below, we explore the phenomenon and highlight what CFD brokers can do to remain competitive in this shifting market reality.
The great asset expansion
Of the trading businesses mentioned above, crypto exchanges have been a notable success story. Crypto is a much younger market and has come a long way from a fringe concern to a globally accepted asset class.
Exchanges like Coinbase and Kraken are now licensed broker dealers with Futures Commission Merchant licenses. Alongside spot crypto, they’ve expanded into margin trading, and now offer stocks, ETFs, futures, and even debit cards to their customers, as well as tokenized stocks to EU customers. This expansion has them now competing with both zero-commission brokers and neobanks in the services they offer.
We see the same dynamic with zero-commission brokers like Robinhood, which has also expanded its roster of assets to include crypto and banking services. Since the pandemic, Robinhood has added cash management and debit cards. Last year the business also added futures trading, tokenized US stocks and ETFs for EU customers, as well as introducing savings accounts.
The larger neobanks have been pursuing a similar strategy. Revolut was quick to recognize the potential of crypto trading, having added the asset back in 2017, but has also expanded into stocks, commodities, and robo-wealth management services since then.
The trend is clear, as is the underlying logic of these expansions. Leveraging initial success in their own segments, these businesses have sought to cover as much of the retail finance landscape as they can, turning themselves from specialists to finance everything apps.
But what does this mean for incumbent CFD venues that once represented the easiest and most accessible access for retail traders to global markets?
What it means for OTC
Over the past few years, we’ve witnessed larger OTC names like IG and Plus500 implementing a similar strategy. Both firms appear to be moving in a direction that suggests an intention to lessen their dependence on CFD revenues.
IG acquired Tastytrade in 2021 which gave it access to the firm’s US traders, as well as its regulatory and execution infrastructure centered around futures and options trading. The acquisition of Freetrade last year added UK stocks, ETFs, mutual funds, and government bonds to its offering.
Plus500 has been on a similar journey. Its strategic acquisition of a US Futures Commission Merchant in 2021 opened the US futures and options market to the firm. Last year it acquired an Indian financial services firm which opens stocks, options and futures in the country’s massive retail market to the company.
However, not all CFD brokers enjoy the reach of entities like IG Group or Plus 500. So, what can small-to-medium OTC venues do to remain competitive in a retail trading segment that’s rapidly shifting? The changes described above speak to a retail landscape that’s evolving from specialist firms to a one-stop-shop dynamic that threatens older business models.
How smaller brokers can respond
The good news for these brokers is that the same kind of blending of financial segments described above has also been taking place in fintech at large. Increased competition between technology providers is levelling the playing field. Today, the cost of the trading platforms, instrument-specific risk management, venue integrations, and market data required to expand beyond CFDs is more affordable, reliable, and customizable than ever before.
We’re also seeing brokers leveraging their hard-earned expertise in the OTC niche to white-label their infrastructure for other businesses, such as P2Ps and banks, that are interested in entering the brokerage business or offering OTC facilities to their existing clientele.
The possibility of a shift in the provision of liquidity to institutions over retail clients was highlighted in a 2024 report from Acuiti. More than half of institutional participants surveyed confirmed that they expected an increase in competition from retail brokers were a pivot away from retail CFD trading to occur.
The everything app reality can also be seen in the light of a broader expansion of retail trading from a specialist niche served by venues like CFD brokers, to a lifestyle product served by the large vertically integrated businesses described above. The retail trading explosion has indeed brought more traders to these markets, but it hasn’t changed the fact that there is still a sizable group of retail traders who value precisely what OTC brokers have to offer.
A meaningful portion of retail traders still favor what these venues have, in many ways, cornered the market on. Easy access, high-leverage, comprehensive asset coverage through a single, simple instrument, and the option between regulatory jurisdictions where certain regulators have become restrictive. The onus is now on these venues to not just keep these traders, but to attract new clients to their niche from the growing group of lifestyle traders, as well as expanding into markets that are familiar with and have an appetite for FX and other CFDs, such as Latin America.
Finally, the availability of AI tools created specifically for brokerage businesses strengthens their ability to cost-effectively convert and retain clients. These tools allow them to run efficiently while providing pre-emptive customer support, segmenting incoming traffic and existing clients in much more granular ways, as well as personalizing communications much more effectively at scale.
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