Has the CHF Fallout Broken the Forex Industry?

I run a prominent Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term company and believe there needs to be a better understanding of what occurred than what is portrayed in the headlines. It implies that someone made money in the markets, just not the brokers, and the brokers were caught with their britches down.

The only people I know of that won are the sharp bankers, who are my friends, and like to tell me that retail forex is for losers while dropping $1,000 in a casino. At the moment, it's a low point for the fledgling forex industry, but - like trading - from adversity comes opportunity. Moreover, I wish to point out how both the trader and the broker can profit on a sustainable basis as market uncertainty rises.

It may be fun to see a 40% drop in a currency, as long as it doesn’t happen to you, but the current pricing and leverage in the industry does not match current market conditions where Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term has been at decade lows. It is very painful to anyone that took on a liquid contract with 100:1 leverage. In one moment, the loss is magnified 4,000 times (40x100). Most traders that I have observed were short the Swiss franc. So it was the traders with the brokers backing their trades that lost the funds. Remember it was the losers that cost these brokers their business, not the winners.

The main problem is that online forex brokers do not pass on the liability to their customers. As a result, the broker has to eat those losses. When a broker is a Market Maker, there is no real cost involved. But the new fashion in forex is to offer an agency model where each and every trade is placed into the interbank market - in addition to the very large expense of maintaining regulation. So the broker now, against his better judgment, places one sided trades on behalf of clients with large leverage (up to 200:1), at a very small commission (it's online after all) while taking on all the risk. Many of these clients are also beginners and building up experience.

At the end of the day, offering an agency model is the best solution as it avoids most conflicts, except encouraging overtrading which generates commissions. I believe that brokers will have to spend more time educating traders about trading on lower leverage while taking a larger commission. So while liability is still on the brokers shoulders, the larger commission and education of traders should give them better tools to focus on low-risk profitable trades for the longer term.

But until this is more accepted by the mainstream, a good healthy market maker is what is needed for all kinds of traders as volatility is set to increase and allow the broker to setup his exposure as deemed appropriate.