Differences in client profitability between providers of leveraged trading
Different providers have different proportions of profitable and unprofitable traders. These differences can give you valuable information about the average level of fees a provider charges, as well as the efficiency of their execution.
You should use this metric with some caution, however, as other factors may drive inter-firm differences. For example:
1. Different product offerings
Firms specialising in CFDs on individual equities may show a different profitable/unprofitable client split to a firm specialising in CFDs on FX. However, this may largely result from a difference in characteristic trade frequencies and fees per trade between these different asset classes, rather than from any particular competitive difference in transaction fees or trade execution efficiency.
2. Size of client sampling
Very small firms, with a limited number of clients, may generate a client profitability statistic that varies significantly from quarter to quarter. This is much more likely to reflect statistical noise resulting from the firm’s small sample size, rather than any quarter-to-quarter alteration in the commercial terms or execution quality offered by the firm.
3. Greater number of trades
A firm offering a very broad spectrum of products, used by many traders as their primary provider, may show an apparently worse ratio of profitable to unprofitable traders than a specialist firm used by the same pool of traders as an occasional back-up provider. The reason for this is that the trader results of the former firm, where the bulk of trading occurs, will be split over a greater number of trades than those of the latter firm. The greater the number of trades placed, the sharper the shape of the bell curve will become and the larger the proportion of trader results that will fall to the left of the zero P&L axis – even if the same traders, paying the same fees per trade, are driving both sets of data.