The Future of Forex: Advantage Customer
Forex has come a long way over the past 4 or 5 years. It was only a few years ago when we had a pretty good idea that the regulatory agencies were going to be taking a more active role in policing U.S. forex dealers. This is when I decided to do business with fx dealers — prior to that I was strictly in futures. I remember being on a fact finding trip in California and attending a forex workshop. The educators were instructing a large group of us on trading, and encouraged us to down load demo accounts from a dealer which we’ll call FXBS. I was astonished to see the spreads — the difference between the bid and offer – as wide as 5 pips for some majors and as wide as 9 even 10 pips for some cross pairs! Being a futures broker I knew this was the equivalent of a $65 to $75 transaction fee, or what in futures would be called a commission, to trade just one standard contract for a pair with a 9 to 10 pip spread! Throw in that the accounts were not interest bearing on unmargined funds– meaning the dealer collects the interest on all accounts, and the same dealer took the other side of every retail trade they booked — given an estimated 90+% of retail clients lose, that’s one nice pot of pips at the end of every month — and I had a pretty good idea that things were going to change. A business that lucrative, and unregulated, had to be raising eyebrows.
As I was sitting there looking at my laptop screen at quotes so wide you could drive a Paddy wagon through them, a representative of FXBS stepped up to the mic. She was a little nervous but gave a decent presentation on what fundamental occurrences were currently affected currencies, and why we all had to stay on top of them. Standard “rearview mirror” industry speech. I must say if the goal was to show us someone knowledgeable and trustworthy she looked straight out of central casting with her nerdy glasses and little business suit. Afterwards she asked if anyone had any questions. I raised my hand because I had a question about the interest rate charged to hold short positions in some of the contracts. I raised my hand and she acknowledged me.
“Regarding the interest paid to the dealer by the client on short positions in USDJPY and the other yen pairs”, I asked, “wouldn’t it make sense that if one were going to take short positions there that they would be better off doing it in the futures market, where the spreads were much tighter and they wouldn’t be charged interest?”
She looked at me like I’d just squeezed a lemon on her sturdy little half heels. It was a loaded question for sure because I already knew the right answer. I wanted to know if she was going to answer it straight in front of all those people which would also tell me if I would ever consider doing business with her.
She gripped the podium and spat out, “in futures they charge commission”.
“That’s right” I came back, “but commissions are negotiable and generally less than a tick” and the spreads are one to two, three ticks at the most”.
To her credit, she rocked east / west one more time on those half heels and said slowly, “Well…if that’s true, then under some circumstances, yes, that would make sense”.
What my gut told me about that exchange was that she may really have believed at the time that her firm’s clients weren’t getting charged a transaction fee/commission.
Today it is now widely known by most dealers employees and clients that every time an individual trades they generate a transaction fee. On the futures side of the business we see exactly how much we are being charged in commission because we see it on our statement every day. In futures we actually call our daily trade/position statement our “commission statement”, because it reminds us that there’s a two way relationship going on here. In exchange for paying commission we expect a bit of service, and the occasional perk. The more successful futures houses in Chicago have a trader’s lounge where they provide a continental breakfast in the morning, free desks and computers with charts, and even free beer after the close. It isn’t really free – the clients pay for it via their commissions. But it’s a nice touch.
In Forex we are going to be seeing more perks for clients as dealers and brokers jostle for positioning for survival. And for those that do, what will determine who grows from there will be who provides not free beer, but quality, real time, live market education.
The concern over margins are a side show in my humble opinion, as was the whole “hedging” distraction. Draw up a logic map and then please, someone, show me how hedging did anything other than tack on more transaction fees to your account? Even for an automated system trading simultaneous strategies all you would have had to do was open individual accounts for each strategy and keep them all in a master account. You can lead a horse to water…but unless you hold his head under, you can’t make ‘em drink.
My guess, and that is all it is: a guess, is there will be a sliding scale for margins based on individual experience and finances. If an individual qualifies he will likely be able to trade at margins equivalent to futures or even higher. The smaller the account though, the lower the margins. We could see “day trade” margins also as we have in futures where a client receives a much higher margin if he does not hold positions overnight — not sure what time period would qualify as overnight in a 24 hour market. I never paid much attention to it because I believe in keeping risk to under 5% of the total account but even margins down to 25 to 1 isn’t a bad idea. A $25,000 block of currency can cause some serious damage to a $1,000 account; as well as provide a nice reward. Unless you absolutely know what you’re doing and are experienced at it, and have a sound financial statement 100 to 1 is ridiculously high.
The real show, as always, is going to come from following the money. Who’s afraid of the possibility of not being able to collect those transactions fees anymore? Which websites and educators are actually IB’s collecting a percentage of the fees? Who’s currently panicking? You’ll start to figure things out when you start getting suggestions from your educators and signal and news providers during their free webinars to consider moving your account to FXYZ’s overseas branch where you won’t have to worry about the NFA or CFTC trying to tax your cup of tea. And I sincerely apologize to those industry professionals who do not recieve transactional income but who have stated they think overseas brokers are best given all the questions marks, but this is serious business, and it’s either lead, follow, or stay out of the way.
Meantime those brokers who understand what it is that clients real need: education, education, education, and are there to provide that day in day out by helping clients to identify and define market direction, and provide real time support in live markets by way of highlighting trade set-ups and signals in whatever environment the market shows us that day, week, or month — trending and counter-trending – are going to be the ones who you will be doing business with 5 years, 10 years, 25 years from now.
I certainly don’t have a crystal ball but there are two things I have a real good idea are going to happen for the forex trading industry. Clients are going to continue to ask what are they getting in return for those transaction fees they generate, and brokers are going to start to provide those services to justify that income. I look forward to being in the forefront of this movement!
Competition in business is always to the customer’s advantage.
Jay Norris
jnorris@brewerinvestmentgroup.com
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Risks include the potential that changing political/economic conditions may substantially affect the price/liquidity of a currency. Investors may lose all or more than their original investments.
Sir … Shame on you for assuming that I am to STUPID to trade/risk my money at 100-1 leverage. The Forex Market is not the same as Commodities nor Options. What you FAIL to see is the goverment/regulators seeing this massive group of people trading the Forex Market and they ARE NOT getting a cut of each trade. If the Regulators really looked out for us little , stupid traders they would force the Brokers to insure our accounts like they do in every other country of the world.
Thank you RJR,
I do apologize if I came across that way.
There are certainly philosophies greater than my own. If you do trade thru an American broker and you look at your daily statement you will see thier is a miniscule NFA fee deducted from every transaction.
And the forex market is nearly identical to currency futures in the scope of price movement. The most noticable difference being spreads are a bit tighter in futures…
Or will see one or two brokers left in the US and due to decreased competition they’ll add other fees on. How did hedging hurt anyone, if it really was that bad and fifo and reducing leverage down to 100:1 was supposed to make things better, why are they putting forth more options, clearly the NFA’s rules and changes did nothing and nor will these. This is starting to look like PDT rule rather then protection. Why did the sec increase the available leverage from 2:1 to 4:1 if your a PDT, I though leverage was the killer in the dark.
Valid points you mentioned, I agree with you about the high commissions that I used to pay years ago, high commissions of 95.00 to trade 1 contract of Corn, or Wheat was pretty normal years ago, then I found a broker who only charged me 55.00! What a bargain, but each time I switched to a different broker, I received no help other than quotes, which I already had access to. Go figure…. Paying high commissions, and getting little to nothing in return. Glad there are some companies stepping up to the plate to offer some educational assistance, Much needed and greatly appreciated.
I do not agree that brokers will start educating their clients in return for the money they make on their clients. (” by way of highlighting trade set-ups and signals in whatever environment the market shows us” )
Brokers offer the client to trade through them and for that they are getting paid by spreads.
Why would any bucket shop show trade setups for their clients knowing that their bussiness could go under as a result thereof? Brokers with small spreads and 5 star client services will stay in bussiness.
Any trader who turns to a broker for forex education should think twice. It is not in the best interest of any broker nor their clients to teach traders how to trade. Have you ever seen any broker educating traders on the subject of stop loss hunting???? Why will they do something stupid like that? Brokers are here to make money. It is a business. A business needs profit to survive. Wake up and get your education elsewhere where there is no conflict of interest.
Gerhard
You make valid points. And there was a time I might have waffled and begrudgingly agreed with you…But I am as opptimistic as I’ve even been that select brokers will/can direct their resources toward delivering what their cleints want/need…I completely understand your POV…the proof will be in the pudding…stay tuned…
Thanks for your thoughts!
Thanks Annon,
But that’s what is good about the overseas competition…it will keep everything balanced, and leave brokers more fearful of losing clients for trying to raise fees.