Over the past 5 years, the list of retail spot forex brokers domiciled in the U.S. and regulated by the CFTC has shrunk from 24 brokers in early 2009 to 8 brokers currently. That’s a 67% reduction in the number of independent retail brokers operating in this country.
There were two main reasons for the disappearance of two-thirds of the retail brokers in the U.S. — (1) the increasingly difficult regulatory environment created by the CFTC (primarily the increase in required net capitalization from $500K to $20M between December 2007 and May 2009), and (2) a substantial decline in retail forex trading volume (and in the aggregate total of customer trading funds on deposit) over the past several years.
The brokers which have disappeared can be grouped, as follows: (1) brokers driven completely out of business because they could not meet the CFTC’s greatly increased net capitalization requirements, (2) brokers which moved their operations offshore in order to escape the CFTC, and (3) brokers which merged into other, larger and stronger brokers.
Generally, the 8 brokers which have survived are larger, stronger and more tightly regulated than any of the 24 brokers we tracked back in 2009. However, some of these surviving brokers continue to face serious issues threatening their future existence. And it’s likely that we have not seen the last of the mergers and liquidations in this industry.
[I][B]Forex Magnates[/B][/I] has just updated their Final Q1 2014 US Retail Forex Profitability Report for the 8 U.S. retail forex brokers still standing. A couple of interesting metrics gleaned from this Report are worth pointing out:
• There are now fewer than 100,000 retail forex customer accounts in the U.S. (the actual number, according to [I]Forex Magnates,[/I] is 94,882, and continues to decline). Compare this to Japan, which has 768,000 retail forex customer accounts in a population only 40% the size of the U.S.
• Overall, 37.6% of non-discretionary retail accounts were profitable in the first quarter of 2014. Brokers have been reporting profitability in this approximate range for many months now. So, whenever that old myth about “95% of retail forex traders losing money” gets bandied about, we should be cautious about accepting that figure at face value. Instead, we should ask: Which group of retail forex traders, over what period of time? Actual numbers published by brokers (as required by the CFTC) would indicate that a 63% failure rate is much more accurate.
The [I]Forex Magnates[/I] article refers to [I]non-discretionary trading accounts.[/I] The term “discretionary” can be confusing. In forex nomenclature, there are [I]discretionary traders,[/I] and there are [I]discretionary accounts;[/I] but, these two uses of the word “discretionary” mean [I]different[/I] things. The problem here is that a discretionary trader — by definition — trades through a non-discretionary account. Let’s try to sort it out.
[B]Discretionary trader:[/B]
If you make your own trading decisions, and execute your own trades, then you are a [I]discretionary trader.[/I] Your trading decisions are left to your personal discretion. Those trading decisions could be based on technical analysis, fundamental analysis, lunar cycles, tea leaves, or any other analysis method — but, regardless of how you arrive at your decisions, [I]you[/I] are gathering the data you deem to be relevant, and [I]you[/I] are trading on that data yourself.
[B]System trader:[/B]
If you rely on AE’s or robots to make trading decisions for you, then you are a [I]system trader[/I], not a discretionary trader. You control the system (AE, robot, etc.) which is making your trading decisions, but technically you are not making those trading decisions yourself.
But, discretionary traders, and system traders, alike, trade through [I]non-discretionary accounts,[/I] and these are the accounts [I]included[/I] in the profitability metrics reported by [I]Forex Magnates.[/I]
See this article — The Discretionary Trader vs The System Trader — in [I]Investopedia.[/I]
[B]Discretionary accounts:[/B]
If you give your broker partial, or complete, control over the trading of your account, then your broker (not you) has discretion over your account, and your account is referred to as a “discretionary account”. These accounts are [I]excluded[/I] from the profitability metrics reported by [I]Forex Magnates.[/I]
See these definitions —Discretionary Account Definition and Limited Discretionary Account Definition — in [I]Investopedia.[/I]