FINRA moves forward to limit Forex leverage
- Thread starter ozzymandius
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tradersboredom
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FINRA is the broker/dealer UNION in the US markets.
FINRA same organization i presume which proposed the min. $25,000 to daytrade US stocks and options.
Only reason to limit fx leverage from 100:1 to 1.5:1 is to wipeout competition for stocks, options and futures business.
fx is cannibalizing their options, stocks, and futures trading business
With 1.5:1 leverage US traders fx isn't an option or feasible.
FINRA same organization i presume which proposed the min. $25,000 to daytrade US stocks and options.
Only reason to limit fx leverage from 100:1 to 1.5:1 is to wipeout competition for stocks, options and futures business.
fx is cannibalizing their options, stocks, and futures trading business
With 1.5:1 leverage US traders fx isn't an option or feasible.
Not necessarily. Margins were also reduced for stocks in the U.S. after 1929. This is a way to prevent currency bubbles from forming (Soros talks about the instability of the fx in his book "Alchemy of finance")
I wrote the following to the SEC's Trading and Markets department (tradingandmarkets@sec.gov), they ask you include a phone number. I suggest anyone who doesn't like this rule write them and make your opinion known...
Dear Sir or Madam:
I am a new retail trader who is trading the over the counter Forex market. It has come to my attention that FINRA is proposing that the SEC adopt a regulation forcing brokerages to reduce their leverage to a maximum of 1.5 to 1 ("Rule 2380").
I find this proposal, while well intentioned, entirely counter-productive for the purposes of investor protection.
Throughout its history, the SEC has provided vital protection to investors while at the same time providing them the opportunity to profit from the trading of financial instruments. It is unrealistic to profitably trade the currency market at such low levels of leverage as proposed by Rule 2380 unless extremely large sums of cash were used. Such sums are out of the reach of many retail traders, especially those who are starting their careers. The large amounts of capital as would be required by Rule 2380 could grow in other equally or even less risky investments at a competitive pace, making the retail trading Forex a very low profit proposition in comparison to other investment opportunities.
If the SEC so severely reduced the legal use of leverage in the Forex market, it would be akin to banning participation in the Forex market for traders that do not meet a capital requirement that is beyond the ability of most average retail traders. This would effectively put many professional retail traders, who follow proper risk management rules, out of business. Such disenfranchisement of trading professionals is not in the spirit of the SEC's purpose.
A beginning trader like myself can use the current levels of leverage offered by Forex brokerages to trade very small amounts of cash via micro contracts, and thus slowly build up account equity with a small account size. Many traders like myself use a stop loss in size anywhere from 15 to 30 pips on average. Using leverage as high as 400:1, it is entirely reasonable that any trader with an account size of at least a few hundred dollars who uses micro contracts can fit their risk well within the 2% of their account size that is prescribed by proper risk management guidelines.
Another concern is that if the SEC adopts Rule 2380, it will in fact encourage a flight from regulatory protection, thus making investors fall prey to unregulated brokerages and exposing them to higher risk. Many investors will also seek refuge in other leveraged markets such as the futures market, where the risk of loss is just as comparable as with Forex trading. Passing this rule, in essence, would not have any practical positive effect on investor protection and may even have the opposite effect.
If the FINRA would wish to help beginning Forex traders become more profitable, a wiser solution would be to take more steps in regulating those brokerages who regularly trade against their clients and practice "stop running". This, in my view, is a greater barrier to profitability than the improper use of leverage.
I ask that you do reject FINRA's proposed Rule 2380 and not consider any such further attempts at limiting leverage in the Forex market, which is a tool that is essential to being profitable for retail traders.
Thank you for your consideration.
Dear Sir or Madam:
I am a new retail trader who is trading the over the counter Forex market. It has come to my attention that FINRA is proposing that the SEC adopt a regulation forcing brokerages to reduce their leverage to a maximum of 1.5 to 1 ("Rule 2380").
I find this proposal, while well intentioned, entirely counter-productive for the purposes of investor protection.
Throughout its history, the SEC has provided vital protection to investors while at the same time providing them the opportunity to profit from the trading of financial instruments. It is unrealistic to profitably trade the currency market at such low levels of leverage as proposed by Rule 2380 unless extremely large sums of cash were used. Such sums are out of the reach of many retail traders, especially those who are starting their careers. The large amounts of capital as would be required by Rule 2380 could grow in other equally or even less risky investments at a competitive pace, making the retail trading Forex a very low profit proposition in comparison to other investment opportunities.
If the SEC so severely reduced the legal use of leverage in the Forex market, it would be akin to banning participation in the Forex market for traders that do not meet a capital requirement that is beyond the ability of most average retail traders. This would effectively put many professional retail traders, who follow proper risk management rules, out of business. Such disenfranchisement of trading professionals is not in the spirit of the SEC's purpose.
A beginning trader like myself can use the current levels of leverage offered by Forex brokerages to trade very small amounts of cash via micro contracts, and thus slowly build up account equity with a small account size. Many traders like myself use a stop loss in size anywhere from 15 to 30 pips on average. Using leverage as high as 400:1, it is entirely reasonable that any trader with an account size of at least a few hundred dollars who uses micro contracts can fit their risk well within the 2% of their account size that is prescribed by proper risk management guidelines.
Another concern is that if the SEC adopts Rule 2380, it will in fact encourage a flight from regulatory protection, thus making investors fall prey to unregulated brokerages and exposing them to higher risk. Many investors will also seek refuge in other leveraged markets such as the futures market, where the risk of loss is just as comparable as with Forex trading. Passing this rule, in essence, would not have any practical positive effect on investor protection and may even have the opposite effect.
If the FINRA would wish to help beginning Forex traders become more profitable, a wiser solution would be to take more steps in regulating those brokerages who regularly trade against their clients and practice "stop running". This, in my view, is a greater barrier to profitability than the improper use of leverage.
I ask that you do reject FINRA's proposed Rule 2380 and not consider any such further attempts at limiting leverage in the Forex market, which is a tool that is essential to being profitable for retail traders.
Thank you for your consideration.
1.5 :1 is a joke in forex. You get 2:1 in stocks and more than that in options and futures. Since major currencies change so little on a percentage basis per day you need high leverage to make it worthwhile.
Major players in forex are not retail traders at places like FXCM, they are banks like Deutsche Bank, etc.
It is no secret that during 2008 fiasco, forex became an attractive place. FINRA wants to prevent people from going into forex. Let's hope this rule gets shut down in SEC and NFA does not go the same route.
You take out leverage from forex, you destroy the retail forex trading business.
This is rediculous. When I first heard about this I thought they would reduce it from 400:1 to 100 or 50:1. 1.5:1 is joke! You get 4:1 daytrading stocks. Why canât anything just be simple? Obviously stocks and futures are the main trading vehicle, but why canât they just leave forex alone? Sometimes itâs just nice to trade something and not worry about daytrading rules, or 3 day clearing, or sec and data fees, or stock market hours, or $5000 minimum accounts.
just one more reason to trade liquid currency futures. Along with funds being segregated and getting away from forex brokers who are less than honest with their customers' trades.
I would not be surprised if the 1.5:1 ratio is being used as a negotiations gambit by FINRA. In other words, FINRA may have a target leverage of 4:1 or 10:1, but figures its best to ask for something more severe so they'd have to meet in the middle.
SEC: "Hmmm, well 1.5:1 is not really effective, how about we do 5:1?" FINRA: "Done!".
Otherwise FINRA might be afraid that if they ask for the more reasonable leverage, the SEC might keep it even higher (i.e. 100:1).
Either way I always get freaked when I see legislation like this for one simple reason: precedent. The American legal system is built on common law, and the establishment of a precedent can cause an avalanche effect in other regulatory agencies.
I seriously think you should write to the Trading and Markets department of the SEC (see my earlier posting, I included an email). This may not affect you now, but if they pass this, it may not be long before the NFA adopts something similar. Act now so you won't have to act later.
SEC: "Hmmm, well 1.5:1 is not really effective, how about we do 5:1?" FINRA: "Done!".
Otherwise FINRA might be afraid that if they ask for the more reasonable leverage, the SEC might keep it even higher (i.e. 100:1).
Either way I always get freaked when I see legislation like this for one simple reason: precedent. The American legal system is built on common law, and the establishment of a precedent can cause an avalanche effect in other regulatory agencies.
I seriously think you should write to the Trading and Markets department of the SEC (see my earlier posting, I included an email). This may not affect you now, but if they pass this, it may not be long before the NFA adopts something similar. Act now so you won't have to act later.
I'm going to take a more optimistic view of what's to come. Remember the proposed transaction tax from a few months back? Now you don't hear anything about it. It went away because common sense prevailed. I'm expecting the same here. The 1.5:1 leverage is such a change from current practice, and at such a ridiculously low level, that I think it dies in the SEC. But if I'm wrong:
1) CME futures, in particular the cross trades such as EUR/CHF, AUD/JPY, etc. will have explosive growth.
2) Overseas banks/brokers, or overseas affiliates of U.S. brokers, will find a way to accommodate U.S. traders.
3) The rule is adopted, but like day trading rules, doesn't apply to all retail traders. Only those with limited account balances or who don't meet some definition of "sophisticated investor".
4) Least likely, but still a possibility, would be establishing an exchange for spot forex as it's the unregulated nature of the business that today causes most of the problems.
What they want to accomplish has merit. But how they propose to address current problems makes me agree with other's comments. They have a hidden agenda.
1) CME futures, in particular the cross trades such as EUR/CHF, AUD/JPY, etc. will have explosive growth.
2) Overseas banks/brokers, or overseas affiliates of U.S. brokers, will find a way to accommodate U.S. traders.
3) The rule is adopted, but like day trading rules, doesn't apply to all retail traders. Only those with limited account balances or who don't meet some definition of "sophisticated investor".
4) Least likely, but still a possibility, would be establishing an exchange for spot forex as it's the unregulated nature of the business that today causes most of the problems.
What they want to accomplish has merit. But how they propose to address current problems makes me agree with other's comments. They have a hidden agenda.
If you read the rule it is only for finra b/d , the main firms like fxcm, gft etc... are not affected. They are nfa regulated and not with finra. Everyone is crying over this and it really has no bearing on the avg retail us fx trader. The nfa is looking to limit fx leverage as well if you read the press releases and rulings between them and the cftc, but its down to 100-1 and not to allow the big 400-1 leverage which is just fine. But again the finra ruling doesnt affect oanda, gft fxcm forex.com. They might effect IB if there fx division is not separate from their b/d offering equities. Please read the ruling in detail and you will see its not for all u.s. fx shops