CFTC’s New Proposed Leverage Threatens Retail Forex TradingThe CFTC has proposed new leverage rules for retail forex traders, which if implemented could threaten the vitality and growth and appeal of the retail forex market. “leverage in retail forex customer accounts would be subject to a 10-to-1 limitation,” It seems they are proposing a 10 to 1 maximum leverage for retail traders. Most retail traders are small account traders compared to institutions. It may seem that the CFTC is trying to “safeguard” the trading public and marketplace with these new proposed changes. However the reality is that most financial disasters that occur because of over leveraged trading are because of a rogue trader at an institutional trading desk who is trading unchecked and without restraint. Most retail traders currently trade at upwards of 100 to 1 or even 200 to 1 leverage. Most retail traders also trade less than 10 standard size lots which is less than 1 million dollars worth of currency. The current standard leverage amounts allow traders to control $100,000 worth of currency for a $500 or $1000 margin. If the new rules are enacted it will mean traders will have to put up $10k to trade a standard size lot of foreign currency, instead of $500 or $1000. This will put most retail traders out of business and many retail forex brokers will go with them by the wayside. Instead institutional FX trading desks will continue to thrive and trade higher leveraged amounts. Instead of safeguarding the industry the new rules will put a damper on the industry in general yet still allow institutional traders to continue to trade with the higher unchecked leverage amounts. In other words the new rules will do nothing but curb the growth of one of the fastest growing sectors in the financial services and markets. Since forex dealing desks and retail brokers are highly computerized and mark to market on a tick by tick basis, there is virtually almost zero chance that a retail trader would go into the red on a bad trade. His position would be liquidated well before the balance on his account went into negative territory. On the other hand, many institutional transactions are done with a phone call and a promise and not marked to market tick by tick, but by daily accounting, the promise to deliver funds on a trade are as good or as big as the institution behind the trade. Because of this, we unfortunately hear of over leveraged trading desks at times almost bankrupting a bank or trading firm because of a rogue trader. We think the new 10 to 1 rule will cause retail traders to open accounts outside the USA and existing brokers will just funnel their retail USA business to a foreign trading desk. The FX market is the larget market in the world. Although the CFTC may appear to be doing something good for the industry, the bottom line is that it will ultimately end up not making much impact and become difficult to implement effectively.
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