Is leveraged spot forex going away?

Hello.

Recent ESMA restrictions on leverage and margin, as well as the general attitude legistrators seems to have towards small retail traders, made me wonder about their endgame.

We are already seeing a significant shrink in leverage offered to traders, increasing the barries for entry in the markets. Do you think they will stop here, or continue until eventually leverage will be a thing of the past?

Personally, I think there are two separate issues here.

Firstly, there is the protection of individuals against fraudulent manipulation and exploitation as a result of their unawareness of risk and financial matters. Binary options provided plenty of evidence of how people are stripped of their wealth by unscrupulous operators, taking advantage of their blatant gullibility and craving for riches. It is not the duty of regulators and legislators to hold these people by the hand and guide and advise them, they can only place obstacles in their way and restrict access to such markets and thereby attempt to protect these people from themselves.

The second issue concerns the principle of freedom of the individual to do with their wealth whatever they choose (within the legal framework). It is a very different matter to just prevent private individuals from participating in risk-taking such as leveraged spot forex simply because it carries a risk of losing or is considered an irrelevant component of financial markets. This issue is government control over personal freedoms.

We allow horse racing, casinos, betting shops, lotteries, etc where most people probably lose at least their stake money, and there is nothing to prevent people even borrowing money to feed their pet obsessions here. So I see no reason why leveraged spot forex should be singled out in principle as something to be eradicated as “not suitable for human consumption”.

However, it remains to be seen how these changes will alter the business model of the brokers providing this market and whether it will still be a viable business for them. I suspect many smaller brokers will close or merge or function as IBs to larger broker firms. The requirement for negative balance protection is a big change in broker operations, I think.

So, I guess I think that the industry will indeed continue, but I suspect the entry requirements will tighten considerably (which i personally consider to be a very good thing!) and the profit structure for the brokers will change and thereby impact on the costings for trading. We may see, for example, scalping priced out of existence (from the traders point of view) and a tendency towards holding longer term positions. I don’t really know.

Just some early thoughts on the topic… :slight_smile:
. . .

2 Likes

I’ve got nothing against that. Binary Options were malicious, useless to the industry and overall damaging.

How much higher do you think requirements are going to get?

That is indeed one huge area for consideration! :slight_smile:

The requirement that brokers will have to (somehow) inform publicly how many of their clients lose money changes the ball game quite considerably from the brokers’ perspective, I think. Whereas previously, it did not matter whether traders were successful or not as long as there was a constant flow of new entrants, now there will be a marketing advantage in attracting, retaining and promoting a core of successful clients.

There are (at least) two criteria for new entrants that should be looked at. The first is their financial stability and sufficiency and the second is their level of competence. It is normal banking practice to consider these aspects in both retail and commercial lending and so it should not be any surprise that brokers should also extend these areas of suitability before accepting clients.

The trouble is there is always a conflict for a bank or broker in tightening conditions because on one hand it improves the quality of their assets ( in this case, traders) but on the other reduces the quantity of acceptable assets. What will happen here is that brokers will search for the right compromise, or balance between these two impacts.

1 Like

That’s something I didn’t think about. Brokers might actually become more like business partners for traders rather than a way to enter a market. I can see this happening either by raising the minimum capital (which might actually prevent me from trading for a few years, since I’m still in school and on a demo account) or by putting more effort into educating their clients about how to trade.

1 Like

I think it is more likely to be both these rather than “either/or”. At least, that is the way that I see it going at the moment and I think in the long run this would be a good thing. The danger is whether the changes are too big and too soon to give the industry time to adjust…

I think or at least hope that the industry will have enough time to adjust. These changes will have an impact for sure, for some brokers and traders they might come as quite shocking. I didn’t think about the educating part but I find that quite possible. Hopefully something positive might come up frol all these “draconian” measures.
They could help shrink the barrier between brokers and traders as both sides will need to adapt in order for the industry to survive.

1 Like