February 18, 2009
The Death of Leveraged Forex Trading?
Recently I received several emails about a proposal to limit the leverage available to U.S. Forex traders to 1.5 to 1. One of the main reasons that Forex trading is so popular today is because of the high leverage with 100:1 being standard and 200:1 or even 400:1 available through some brokers. This enables traders to open accounts with a small amount of capital and realize profit on trades that control a much larger amount of capital. For instance a Forex trader can open an account with $5000 and enter a trade with only 5% of the capital at risk and if the trade is profitable by 100 PIPS, $500 could be earned in one day which is, of course, a 10% return on capital in one day. Many Forex traders are willing to accept the risk of loss in order to learn to realize this kind of profit consitently over time.
Some Forex traders were a little nervous when they heard that the FINRA, Financial Industry Regulatory Authority, proposed to virtually eliminate high leverage for Forex trading accounts. Well, that is how some misinformed traders were interpreting this proposal. As it turns out, there is more to the story.
Last year Rosenthal Collins bought MG Forex just as the first capital requirement was set to kick in. RCG then announced that MG Forex was a subsidiary of Rosenthal Collins Securities, which is regulated by FINRA, not the NFA. Thus MG Forex was able to avoid the $20 million capital requirement since FINRA members need only $250,000 in capital. That was then.
Last week FINRA released a proposal capping the margin level that forex brokers can offer at 1.5 to 1. Essentially, FINRA is saying you can’t trade Forex on margin.
FINRA - Regulatory Notice 09-06:
The rule will not effect NFA registered forex brokers. But for those Forex brokers with FINRA licenses the party appears to be over. Why is FINRA doing this?
Quote:
"FINRA has observed a potential migration of retail forex activity from the FCM channel to Broker Dealers…"
Hmmm, couldn’t be that forex dealers who didn’t have the capital to keep their NFA licenses were suddenly showing up to get a broker dealer license on the cheap? Well, if that was the case consider that escape hatch to be boarded up. My take is that FINRA does not want to regulate forex brokers. So what they are saying is "sure you can offer forex trading. But you can't offer any leverage so why bother to offer Forex trading at all?"
A lot of forex brokers were trying to get licenses with FINRA because of the low capital requirement. FINRA basically put this rule in place to keep forex brokers out of their club. So the Forex trading industry is still going strong and still providing one of the best recession proof business opportunities available. I believe it will continue to be one of the best businesses in the world for a long time into the future.
Filed under Forex Trading 1 by admin
Comments on The Death of Leveraged Forex Trading? »
Hi Scott,
Honestly I did't know what is FINRA before untill I've found it in your post. Are we cannot use any leverage again?
I still don't understand what do you mean about "sure you can offer forex trading. But you can't offer any leverage so why bother to offer Forex trading at all?"
Btw… nice info and thanks for sharing…
I think to be safe, traders should trade with companies with NFA regulatory. Leveraged forex trading will not go away
as it is the main reason why forex is a darn good recession-proof business. High leverage, low leverage is not as important as money management and trading psychology.
I think all should be very careful choosing any FCM especially located outside ones own country. Even the best prime brokers can turn off the market making in extreme adversity and volatility.
Cheers - David
http://www.ForexTickData.com
hye… actually i interested to know more about forex trading.. maybe i will got some informations here.. thanks for your info…
Yes, I believe so and its still providing the best business opportunity.
Great info…give me an idea about leverage..thanks for sharing..:)
I don't think leveraged forex trading will go away as it has allowed many people to enter the retail forex market and created quite a few forex brokers. As you said, it is one of the best businesses in the long run ;-). I do recommend that forex traders use brokers certified by the NFA, for the same reason you mentioned above, which is their better capitalization.
Forex industry is bigger than we all can think of, will it get larger? yes my friend, everyday more and more people realise how good this business is. Think of all the banks in the world trading forex, think of all the giants companies trading forex, hedge fund etc… Forex is the future guys, learn it, study it get good and make money cos u deserve it, but remember a pilot doesnt become a pilot on a weekend course, it takes time and patience, the mistakes and losses make you a better trader, learn from it. 3 rules i give you here 1 learn how to trade properly 2 learn how to trade properly 3 learn rule 1 and 2. God bless you all. Sergio
scott - its now 2010 and the cftc is proposing a leverage cap of 10-1 on American Forex Brokers. Do u still see a bright and rosey Forex picture long into the future? Any thoughts?
Retail forex is not a major industry, retail trading accounts for 4% of daily volume so the possibility of using this as a way to curb or shrink the market isnt there. Second, as for consumer protection, if a scammer wants to takes someones money, they will find a way except instead of losing $1000 a person will lose $10 000. Instead of regulating the people, regulate the brokers and educate the people. Prior to opening an account make then learn about leverage, force a minimum demo time and force people to take 25 trades on a demo account. If some people want to take the risk of higher leverage so be it and those that want to trade and are uneducated will just lose more money, slower.
Absolutely!. I don't think this regulation will pass and brokers outside the U.S. are a much better choice due to the U.S. regulations already in place. And none of this can stop you from trading commodities, futures, and other markets. The ability to trade will always be an extremely desirable skill and even if leverage goes away there will still be a need for our skill managing funds for investors with capital and trading other financial instruments.