Last week a number of regulators across the European Union announced their opinions regarding ESMA’s take on the retail foreign exchange and CFDs trading market. Several national regulators across the continent have issued communiques to companies from the industry regarding Forex , CFDs and binary options trading.
The U.K. Financial Conduct Authority (FCA) has been leading the charge with a cap on leverage for retail traders at 1:50. The German BaFin has taken a milder stance and is not limiting the leverage offered to clients, however it intends to forbid brokers that do not offer Negative Balance protection to their clients from advertising in Germany.
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After the proposed changes, the share prices of spread betting and CFDs trading operators like IG Group, CMC Markets and Plus500 have fallen off a cliff. Investors in the industry have been on the back-foot and are very worried about the prospects for the industry going forward.
The changes in maximum leverage in Japan and in the U.S. have had substantial effects on forex brokers operating in those countries. The more notable changes in leverage for retail traders in Japan however didn’t have as dramatic an impact as in the U.S. where brokers have been subjected to very strict capital requirements that have made the costs of operating in the U.S. prohibitive.
Those that were most affected by the new rules have been retail traders in the U.S. Their costs have increased dramatically and they don’t have access to a variety of instruments that are available across the rest of the world (for example CFDs).
Traders Can Influence Regulatory Decisions
With the changes to the industry coming to the forefront, challenges are facing retail traders across the European Union. If the regulators take matters into their own hands they could make several strategies that have worked before become obsolete, or as is the case with the negative balance protection in Germany, some instruments might become unavailable.
Clients of retail brokerages across the European Union can still influence the decision of the regulators. The news about stricter requirements in France, Germany and the United Kingdom are still not final. Ultimately it's all about the desires of the consumer and the desires of the clients to pursue risks if they are doing so willingly.
There is no doubt that higher leverage is more dangerous for traders that are risking a lot in this market, but why should those that are making informed decisions be prevented from having an equal opportunity as more sophisticated investors?
The Freedom of Choice Matters
Leverage can increase gains and can increase losses, brokers should have this disclaimer clearly written and traders should be well informed about the risks, but ultimately it should be up to the traders to make their choice about how risky their bets are.
A study published on DailyFX, which at the time was owned by FXCM, clearly demonstrates that a lot of brokers are making efforts to inform their clients.
A full 40 percent of traders which are using leverage which is less than 1:5 are reporting profits. The numbers deteriorate as we get closer to the bracket between 1:5 and 1:10 - 29 percent of profitable traders remain in this bracket. Looking at the 1:10 to 1:25 bracket, the number drops once more and only 22 percent retain profitability. The figure above 1:25 has the least successful traders - 17 percent.
These 17 percent of traders might be using 1:100 or 1:400 depending on their trading strategy and they might have hedging enabled which if adequately used, can greatly optimize a trading style.
All those traders that are keen to stop the FCA from regulating their strategies have the ability to submit their feedback on the following link via the FCA’s website.
