Retail vs Professional Traders

Regulators increasingly use a distinction between what is a retail vs professional trader.

They vary by regulator and are used to assess the level of sophistication and understanding of the end client.

Some regulatory jurisdictions make very little differentiation between these groups of users.

There is usually a different onboarding process for retail vs professional traders as part of the signup process.

Retail: More numerous but trade less

Retail traders often are the highest in number when it comes to users, but the minority when it comes to the actual trading volume conducted.

RETAIL: LOW LEVERAGE

leverage limits on the opening of a position between 30:1 and 2:1, which vary according to the volatility of the underlying asset:

• 30:1 for major currency pairs;
• 20:1 for non-major currency pairs, gold and major equity indices;
• 10:1 for commodities other than gold and non-major equity indices;
• 5:1 for individual equities and any underlying not otherwise mentioned;
• 2:1 for cryptocurrencies;
• a margin close-out rule on a per account basis;
• a negative balance protection on a per account basis;
• a prohibition on benefits incentivising trading; and
• a standardised risk warning.

Retail: Best Execution

There are more strict guidelines on best execution for retail vs professional clients. Example ESMA:

CESR considers that the concept of total consideration is relevant for the assessment of best execution for professional client orders too, because in practice a firm is unlikely to be acting reasonably if it gives a low relative importance to the net cost of a purchase or the net proceeds of a sale. There may be circumstances, however, where other factors will be more important for professional clients and MiFID clearly allows firms flexibility in this regard.

RETAIL: Risk Management

In some jurisdictions, Client and Firm conflict of Interest clauses disallow certain risk management strategies.

RETAIL: B-Booking the flow is not allowed

Some grey area over this

"For example, a firm offering CFDs or other speculative products acting as the counterparty to a retail client’s trade without any hedging arrangements in place has no incentive to execute orders in the best interest of the client, because if the client “wins”, the firm “loses.” Such a conflict of interest in all likelihood cannot be managed and should therefore be avoided, by not adopting such a business model."

RETAIL: Can't B-Book via another group Entity

If the firm hedges with another entity within the same group, given the link between the commercial interests of the firm and the group that it is part of, a conflict of interest will still exist that would need to be managed.

RETAIL: Slippage

Symmetrical slippage is fine, the client over time will have both positive and negative slippage with a distribution centred around 0.

A firm dealing on own account should not take advantage of slippage to act in a manner that benefits the commercial interests of the firm, to the detriment of its clients (so-called asymmetric price slippage).

RETAIL: Position baSed Asymmetric markup

It would be poor practice if a firm applies an asymmetrical or inconsistent mark up to core spreads. This may indicate that the firm has a conflict of interest with its clients, for example the asymmetric spread may reflect an attempt by the firm to balance its own market position and risk --- This is specifically related to the use of mark-up/down (potentially skew) to balance group risk exposure.