The abrupt change of policy by Swiss authorities to relax the limit on the value of the Swiss Franc against the Euro has caused substantial chaos in foreign currency markets. Alpari, one of the leading forex trading platforms in the UK, has gone into administration and others such as Saxo Bank admitted they would incur losses as a result. In the case of UK listed company IG Group it had some impact on their share price and they had to say that “The market exposure occurred where client positions were closed at a more beneficial level than the Company was able to close its entire corresponding hedge due to the market dislocation”.
These platforms also often offer trading in CFDs and spread betting. The result of the administration at Alpari is that clients have had their holdings frozen and it might take many months to sort out. Although client funds are normally kept separately, as always in this kind of circumstance it remains to be seen whether that was actually the case and that they cannot be claimed by the administrator.
There are likely to be hundreds of thousands of unsophisticated punters who have been caught out by these events (Alpari alone claimed 170,000 active clients). It has become clear that these platforms have been attracting gullible new investors by the promise of high leverage and instant riches. In other word, the punters are buying on margin and almost all of them lose money by the spreads and being closed out when price volatility occurs. Indeed you can tell this by looking at the turnover (“churn”) of clients in these businesses.
There was a very good analysis of the market for forex trading by Paul Murphy and others in the Financial Times on Saturday the 17th which should be required reading by all those tempted to speculate in forex. And yes there are many who are. This writer remembers talking to more than one person at trade exhibitions who when asked if they were experienced investors said something like “no I am just starting and am trying out some forex trading”.
According to the FT, retail forex trading now accounts for around 20% of the global forex market. There are no caps on the level of leverage in the UK or the rest of Europe, unlike in the US and other jurisdictions. So for example, leverage of 200 to 1 is possible, so you can trade $1million by putting up $5,000.
There is remarkably little regulation of forex operators. The Financial Conduct Authority (FCA) seems to take little interest and European regulators likewise. It’s rather as if they took the view that what does it matter if a fool and his money are soon parted – it might be an educational experience for the typically young and inexperienced speculators who are clients of forex trading platforms. It probably comes back to the question of how much one should protect investors from their own stupidity and ignorance.
But surely it would be wise to look at some minimal regulation and limits on leverage.
Retail FOREX trading is certainly regulated, both here and in the USA. My experience suggests compliance with such regualtion as there is is patchily enforced. There are also suspicions that some FOREX platforms run software to “nudge” the benefit of trades towards the platform’s advantage – slowing down adverse trades, and speeding up trades profitable to the platform.
IG’s loses show it was not properly hedged in the market. If I was an investor I would want to know if this is a systematic approach taken by the company? (in which case, I would sell my investment).
As for retail clients, most will have not really understood the risks they were taking trading FX (leverage, tail-related risk, money management principles). If the business model relies on the ignorance of its clients to make money, should the FCA not be taking more interest in its business?
Lot’s more coverage in the FT this morning on some of these issues. It’s clear hedging with counterparties might not work if there are delays in doing so when markets are moving rapidly, and there are also risks that retail clients might default on their debts (or margin calls).
Perhaps the FCA should mandate a health warning to new retail clients that simply says “WARNING: MOST OF YOU WILL LOSE MONEY!”