Hello, complete newbie here – I am wondering if anybody knows how when and/or it came to be that leverage is available in forex trading? and what is the reasoning behind this? What do the brokers gain by offering it? What other markets or types of trading offer leverage? Sorry for the barrage of questions but I have just one more about it – I saw one trader on youtube or somewhere say that there was even more leverage available prior to the “crash of 2008” – did they used to offer even higher leverage than they do now?
anyway sorry for so many questions, but if you know the answer to any of these I would be interested to know it.
All financial markets have leverage available in some fashion or another.
Leverage has always been a feature of forex trading.
And yes, there was more leverage available in forex pre-2008. There’s been a move over the last several years to put leverage limits in place. The US and Japan are the two most prominent examples.
As for the advantage gained by brokers, it’s simple math. Brokers make money on volume. More leverage means more volume which means greater broker revenue. Of course, as some have learned recently, leverage can be a double-edged sword for everyone involved.
Leverage trading were presumably introduced during Tulip Mania in Netherlands in 18 century (first known prototype of modern FX and stock market), where market members chasing for ultimate gains from price fluctuations on Tulips started to involve credit funds. It necessarily led to inflating market bubble (ungroundedly high prices) and sharp crash.
Liquidity and leverage are basically the best friends. Using the risk of high leverage is eased with high liquidity on currency markets but sometimes something can go wrong (as it was with CHF) and all those leverage positions bounce off in negative strike against the traders and brokers that opened them. It may result in severe collapse because a large chunk credit funds (leverage money) that were borrowed can’t be returned by broker or trader. That’s why financial regulators are trying to cut fine any possibility of this scenario, rolling out new margin requirements for brokers and for traders respectively.