Who Has More Leverage?

After the furor that was raised by retail traders when CFTC enacted the new anti-hedging policy, I am surprised that online forums have not been inundated with protests in anticipation of NFA's new proposal to limit the Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term FDMs will be allowed to offer their clients.

When brokers offer higher leverage it generally encourages traders to trade larger positions, thus increasing the market maker's trading volume and profits but also increasing the risk of a margin call for the trader. The NFA proposal would limit leverage to 100:1 on ten major currencies and 25:1 on all others.

I understand why some novice traders would assume that decreased leverage would inhibit their opportunity to make profits, but most don't realize that leverage is a double-edged sword that can cut their trading lives short if not managed judiciously. While professional currency dealers use 1:1 to perhaps 10:1 leverage, it is not uncommon for inexperienced retail clients to use leverage from 50:1 to 400:1 and, if they happen to trade with IG Markets, 700:1.

The intent of the proposed regulation is to protect over-leveraged traders and brokers alike. However, some Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term brokers are concerned it may make them uncompetitive in the global market. So, are the NFA and CFTC over-reacting to the current administration's call for more transparency and tighter regulation? The Foreign Exchange Committee (FXC) obviously thinks so. In a letter dated three days before Thomas Sexton (NFA Vice President and General Counsel) sent his proposed amendments to the CFTC, FXC transmitted their comments on a proposed rule establishing a leverage limitation to FINRA. The FXC letter stated, "The FXC believes that the protections currently in place with respect to retail forex transactions are adequate to protect retail market participants and that the proposed Rule is unnecessary and potentially counterproductive."

Earlier this week, when CMS Forex reduced their leverage offer from 400:1 to 100:1, it may have been done in anticipation of the proposed regulation. The company's press release used almost the exact language used in the NFA's letter to the CFTC. It stated, "We will be requiring 1% margin on the notional value of clients’ positions on the major currency pairs and 4% on the minor currency pairs."

So who is going to win this battle?