European Securities and Markets Authority (ESMA) has recently done some research. The research aimed to find out reactions of the investors when they would be given information about the net short positions in the EU.
What it found out
According to the Short Selling Regulation (SSR), 210,341 net positions were reported between January 2013 and December 2016. Most of the 2,000 European shares related to net short positions were German and UK securities. What’s even more astonishing is the number that ESMA showed.
According to its finding, there were more than 1,000 different investors involved in EU shares. This may seem small on the surface, but it is an unbelievable number in reality. What’s even more astonishing that more than 40% of these investors are currently based in the United States, while 30% are from the UK. What’s even worse is that out of the 30% UK based investors only 15% are based in the EU, which could change even more after Brexit.
However, by far the biggest problem that was unearthed by ESMA was the unbalanced distribution of holding within the short selling process. It turned out to be very concentrated, with only 105 investors being responsible for more than 80% of the positions.
Even though it used to be a lucrative business, the research was able to unearth it, give it exposure and media coverage, which was the last thing that the investors wanted. After all having such a profitable position is not meant to be public for some people.
Therefore they tried to keep it secret. Even though they avoided media coverage, refused interviews and rarely appeared in the public, ESMA was able to finally catch them red-handed. Some experts are wondering if the tribal behavior with short selling positions is a side-effect of the net short position public disclosures. However, it is still a reason to be analyzed.
How ESMA is affecting the EU market
Not only is ESMA responsible for those researches, but many traders may also know about it from information about the changes it will be making for the EU financial regulations. Many traders and brokers especially are quite unhappy with the news, but nothing can be done.
The ESMA regulations will inhibit brokers to offer benefits like bonuses and high leverage trading. But there are some exceptions like the XM $30 bonus promotion, that are able to operate thanks to their multiple licenses.
No matter how risky bonuses and leverage are, the trading community doesn’t seem to get enough of it. These recent regulations can actually change the whole dynamic for EU based brokerages in their processes of acquiring new customers. The reason being the massive shift that may happen with trader loyalty. You can’t remain loyal to something that isn’t working out for you can you?
The potential migration
As mentioned above, the dynamic of new customer acquisition will definitely change. There will be some changes in the spreads that brokers will offer most likely, but it will definitely not be enough the satiate the traders’ hunger for high leverage trading.
Many in the EU believe that ESMA will cause nothing but a mass migration of traders to foreign brokerages that are not inhibited by law to offer high leverage and nice bonuses, however, the watchdog disagrees. Nobody knows if the EU brokers will be able to make it through but at this point, there are no signs of slowing down.
ESMA doesn’t completely ban leverage trading, it just restricts it to a specific amount. For example, Forex trading can only be done with 1:30 maximum leverage, that’s the bar they’re setting.
Many EU based brokers had those types of maximum leverage, to begin with, so their time may not be up yet. However, there is no denying that the majority of the EU trading community will find it hard to be separated from their traditional high leverage trading.