Will regulators allow organized contests (i.e. bets) between clients of forex brokers?
We often wonder where are the regulatory borders of legality in binary options. Should they be treated as a financial product (as does Cyprus’ CySEC and Malta’s MFSA), or should they be regulated by gaming commissions (as in the UK)? We take no preference here as long as client funds are safe and they are aware of the risks arising when dealing with any type of financial instrument.
A new product by Cyprus based retail forex broker XM, however, causes us to ponder about where the limits are between online gambling and forex trading. The company’s newest initiative appears to have more to do with a casino floor rather than a forex market offering. XM’s Contest Arena is a place where traders can power up their skills against each other in a competition with $10,000 of virtual money in their accounts.
Essentially every trader has to buy in to a contest by purchasing a ticket to the contest and paying a fee to the organizer of the event – in this case XM. As far as we noticed, buy-in fees to XM range from 10% to 50% of the ‘ante’. It all works in a very similar fashion to a casino organizing a poker tournament.
The money from the tournament ‘tickets’ is pooled and there are several payout structures, like winner-takes-all or, depending on the tournament, top 3 or top 6 players can take certain amounts of the pool home. The contests’ length ranges from 15 minutes to 4 hours to a full trading day, and the number of participants can range anywhere from 2 to 100 people.
The brokerage on its part is collecting its fee regardless of the outcome from the contest – just like the casino takes rake fees from its players. We are curious to hear the regulators’ take on this particular way of promoting forex trading. As far as we noticed in the Terms and Conditions section of XM’s website the service is running through its regulated Cypriot subsidiary. It would be interesting to know what’s CySEC’s official take on this ‘trading’ mechanism.
The issue with such contests, in our view, is that it is not investing. A contest participant can ‘get it right’, be on the right side of the market, and do well trading, but still lose – if another contest participant does better.
Contests like these also encourage poor trading habits. To win, especially in a large-number-of-participants contest, a trader generally needs to churn trades and use all the leverage he/she can, and ‘go for broke’. That’s fine in a contest, but if traders build those habits and then bring them to their ‘regular’ forex trading accounts it can end up with disastrous results.
XM’s regulated parent company is Trading Point (or formally, Trading Point of Financial Instruments Ltd), which used to operate under the XEMarkets brand. Trading Point rebranded XEMarkets to XM last year after purchasing the XM.com domain last year for what we estimated was high six / low seven USD figures — by 1998 all two-letter domains were already registered. By comparison, IG Group bought the IG.com domain name for several million dollars at around the same time.
In an industry which does a lot to distance itself from online gambling, we think that this type of activity is a step backward.
What do you think? Should regulators allow these kind of broker-organized contests between traders? Please let us know what you think in the Comments section below.
Forex Industry Report