The End of Retail Forex Trading

The End of Retail Forex Trading – Part 2

Posted on 22. Jan, 2010 by admin in Random Noise, broker

Yesterday I wrote a post about the new regulation proposal from the Commodity Futures Trading Commission, which you can read here. Today I stumble upon two posts related to this topic, one of them from John Forman, the author of The Essentials of Trading; he basically states that leverage on retail forex trading will not be cut down to 10:1, due to the following: (take a look at his post here)

Firstly, the one line is in a write-up which otherwise focused entirely on requirements of brokers in terms of capitalization, compliance, transparency, and communication. As such, I think it relates to the leverage brokers will be permited vis-a-vis the balance of customer accounts, not what the customers can actually trade.
Secondly, the NFA only a short while back set a new 100:1 cap on the leverage brokers can offer retail traders (see New NFA Retail Forex Leverage Restrictions). Why in the world would they be coming through with another change at this point? They haven’t had much time to gauge the impact of that adjustment.

I specially think his second point is interesting, as I agree that we surely have not seen the full effect of the recent NFA regulations. With this new proposal they seem to be jumping conclusions. The other article is from futuresmag.com, where forex brokers share their thoughts on the CFTC proposal: (Read the article here)

If this rule goes through [customers are] not going to trade with our firms anymore. They’re going to take our accounts and go to the UK or unregulated offshore locales. This could mortally wound the U.S. domestic industry,” says Charlie Delano, director of government affairs at FXCM…

Glenn Stevens, CEO of GAIN Capital, says, “To stay competitive in a global marketplace and protect against further incidences of fraud to the retail sector, 100-1 leverage is required. If in fact the 10-1 leverage rule proves to be highly unpopular with traders, as an informal poll from FXStreet indicates…U.S. customers may look to services based in other countries [and] more people will trade with unregulated firms.

Surely this is highly company biased, but nonetheless there is some truth to this as well. If people can get higher leverage with offshore brokers, it seems likely that we will see an increase of retail forex brokers in other countries, and probably a bunch of new scammers. Although I agree that the proposed 10:1 leverage is too low, I definitely think that this should be a wakeup call to all the new traders out there. There is a reason for this proposal, and the fact is that the majority of new forex traders tend to blow up their account in a very short period of time; needless to say that too high leverage is definitely one of the reasons for this. As far as I know, the pattern day trading regulation was made for the same purpose:

In addition, the SEC believes that people whose account sizes are less than $25,000 may represent less sophisticated traders, who may be more prone to being misled by advisory brokers and/or tipping agencies

(Source)

At this moment I don’t believe that all the aspects of the proposal will be implemented, but who knows what will happen. What are your thoughts on this?