New Saxo Capital Markets Chief Keen to Restore Reputation of His Changing Sector

Radar meets the new CEO of Saxo Capital Markets, and finds him determined to help clean up online trading as well as getting a few things off his chest.

While hostile regulation may cause most online brokers to run for the hills, Andrew Edwards is not your average brokerage boss.

Sitting in his Canary Wharf office overseeing operations at Saxo Capital Markets, the online trading arm of Saxo bank, Edwards is a new CEO and he told Radar that recent moves to curtail so-called ‘contracts for difference (CFDs)’ are the best thing to happen to the market in a decade.

The European Securities and Markets Authority (ESMA) has limited how much traders can borrow to raise the size of their bets on CFDs, which allow retail investors to speculate on the price movement of a raft of financial markets such as indices, equity, currencies, commodities and bonds without owning the underlying asset and regardless of the price volatility.

ESMA flirted first with an outright ban, before laying down rules that go further than the recent UK Financial Conduct Authority proposals. It will hit any businesses offering them, including Saxo, not that Edwards seems to mind.

“The trading sector, particularly the CFD and spread bet sector, is about to go through its most significant regulatory change ever.”

“I have been in the industry 20 years, and it has been in the last five years I saw it go from being a very responsible, handful of companies offering sophisticated products to the right audience, to a potentially irresponsible industry as new players entered offering advanced products to an unsophisticated customer,” he told Radar.

The rise of bargain-basement technology, combined with an influx of new actors pushed out of the gambling sector, has created a toxic environment, that is putting part-time investors at risk, Edwards added.

“We went from a very responsible industry to much less so, to the extent the local regulators weren’t able to do anything, which has led ESMA to step in and impose European-wide changes,” Edwards says. “Some other players worked out that online trading can be rolled out to a much broader segment of consumer, and cheap technology paired with excessive risk flooded the market.”

His mission is to continue the expansion of Saxo as an online brokerage force in the UK and beyond, with a range of newer products that are deliberately aimed at professionals, and to help drive up standards in online trading, starting with basic compliance.

The FCA has been gunning for CFDs since the start of the year, and in January it issued a stark warning following a review that found 76 percent of users lose money when they invest.

ESMA, with new powers that came into effect in January alongside MiFID II, issued a product intervention, placing leverage limits on CFDs and an overall guaranteed limit on retail customer losses, as well as a curb on the incentives to trade provided by firms that offer CFDs, with a required standardised risk warning in addition.

The idea is to target the growing number of spread betting companies that are acquiring customers through incentives or by offering high leverage, as these business models are built around customer loss rather than around long-term customer relationships, the regulator believes.

“Because of the passporting concept, it has been difficult for individual countries to control what is in their territory, the FCA doesn’t have an awful lot of control over a German broker offering its services into the UK for example.”

Regulatory passporting under EU law allows firms to get licensed in one jurisdiction and “passport” their services to another, without having to gain regulatory approval or jump through costly hoops in that member state.

However, Edwards said that loose oversight in some jurisdictions as the CFD market has evolved and become more attractive have led to a huge decline in standards, and often the most visible sign is clear compliance failures which have become endemic in online broking.

In its CFD review, the UK regulator found that at one trading firm, the CEO was also Head of Compliance.

“This amounts to a conflict and so should require the firm to put in place relevant controls”, the FCA said. These were habitually missing, according to the findings.

Other distributors of CFDs were criticized for inadequate oversight of the products, leaving them unable to challenge poor practice. The FCA has said that without “effective monitoring systems,” it was concerned firms “may not recognise process or control failures”.

CFD intermediaries are companies serving as brokers between traders and the financial markets. In March 2017, the FCA received more than 2500 responses to its earlier set of proposals for clamping down on the retail CFD market; a particularly high number for a consultation.

“For that reason, this is an opportunity for Saxo,” Edwards said. The firm recently left an industry association after it believed moves to self-regulate were not strong enough.

“Saxo has been arguing for change for quite some time and this regulatory change has exposed a weakness in our industry, and a regulatory regime in line with our strategy offers a good opportunity for us to grow,” Edwards said.

The direction of travel is tougher oversight of all online trading platforms, and Saxo’s rivals Interactive Brokers have fallen foul of regulators several times this year.

In January, the The London-based business of Interactive Brokers Group was fined more than £1m ($1.33m) for poor market-abuse controls and for failure to report suspicious client transactions.

It had outsourced compliance to the US, and missed several incidents of suspicious trading as its post-trade surveillance reports failed to identify highly profitable trading by an IBUK client close to a public announcement.

Fines in Hong Kong soon followed for a separate allegation stemming from poor controls.

Despite the landscape becoming rougher, Edwards says he still feels the pull and excitement of the industry, nearly two decades after he “saw the future” while working for spread betting luminaries City Index, and was first exposed to online-only offerings.

Stints as managing director and trading director followed at ETX Capital, one of the top British online trading firms, before he took the reins as chief executive of ETX in 2009 and led it for eight years, transforming it from a four-person operation into a 100-strong multi-million dollar revenue machine.

After a total of 13 years at the firm, and with a regulatory overhaul on the horizon, it was time to seek a new challenge.

“When I heard Saxo was looking for someone to drive the UK business forward it was a good opportunity for me to work in a larger environment and bring some of my ideas,” he said. “Everything I strive to achieve at my old firm is in play here, and I am proud to have worked at two of the good apples in the industry.” •