A recent market investigation by Germany’s financial
regulator, BaFin, revealed that a significant majority of retail investors
trading turbo certificates incurred substantial losses. Covering January 2019
to December 2023, the study found that 74.2% of these investors lost money,
with average losses of €6,358 per losing investor. Total losses exceeded €3.4
billion during this five-year period.
Turbo certificates are leveraged derivative products similar
to contracts for difference (CFDs), another popular but high-risk instrument
among retail investors. Both allow for leveraged exposure to underlying assets
but can lead to rapid and total capital loss.
Due to their complexity and risks, CFDs have faced EU
regulatory restrictions. BaFin’s findings may prompt renewed scrutiny of turbo
certificates, which are also marketed under various names such as “Knock-Out
Options,” “Mini-Futures,” or “Wave XXL Certificates,” potentially obscuring the
associated risks.
High-Risk Trading Hits German Retail Investors
These certificates enable investors to amplify exposure to
price movements of assets like stocks, indices, or currencies. They include a
knock-out threshold: if the asset price reaches this level, the certificate
expires immediately and becomes worthless. While gains can be magnified, losses
can quickly wipe out the entire investment.
The BaFin analysis examined approximately 113 million
transactions by 543,000 retail investors, based on data reported under Article
26 of the EU’s Markets in Financial Instruments Regulation (MiFIR). It focused
on small investors with German citizenship, excluding trades via intermediaries
outside the EU or by non-German residents.
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German Intermediaries Handle Most Turbo Trades
Over five years, the number of investors and transactions
more than doubled. In 2023, about 231,000 small investors traded turbo
certificates in Germany, an increase of around 110% since 2019 despite being
slightly below the 2021 peak. Investors placed over 62 million purchase orders
averaging €3,003 each, with a combined purchase volume near €195 billion.
The market is highly concentrated. Among 20 active issuers,
the top five accounted for over 75% of transactions. Similarly, the top five of
1,294 intermediaries handled more than three-quarters of the volume. Most
intermediaries 1,147 were based in Germany.
Frequent Turbo Traders Suffer Higher Losses
BaFin’s evaluation also highlighted a correlation between
trading frequency and losses. Investors with 1–10 trades had a 70% loss rate,
rising to 76% for 10–100 trades, 83% for 100–500 trades, and 91% for over 1,000
trades. Around 12% of investors lost more than €10,000, while only 2% earned
profits of similar size.
This article was written by Tareq Sikder at www.financemagnates.com.
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