Dead Man Walking? Forex in the USA

The US Forex Market is currently at an inflection point. It has been 3 years since Dodd Frank was passed.

The US Forex Market is currently at an inflection point. It has been 3 years since Dodd Frank was passed and the markets are once again in a state of flux. This marketuncertainty has resulted in an overall decrease in US retail based investments (aside from 1 or 2 firms) and the continuing consolidation of US based FCM’s, IB’s, and Affiliates. Clients appear to lack faith in the system due to a collapse of institutions like PFG and MF Global with little financial recourse for the end user, and are still looking for the opportunity to trade outside of US based Forex firms.

Brokers are facing equally discouraging prospects with enhanced regulatory proposals that could affect Net Capital and additional margin requirements coupled with a general decrease in volume and assets (once again aside from one or two firms).

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I would like to preface my content as more of a “wish list” then a true list of tangible expectations.

Tall order at hand- First, we will need to address and make changesin government policy, and I don’t mean deregulation. The common misconception in financial markets it that it is being over regulated and they need to reverse all the changes they have made to “make things better”. Financial markets should and need to be highly regulated; the underlying investors ultimately have too much to lose.  What we need is to correct “misregulation”; our government has always regulated the financial markets, we just need them to be more accountable for the changes they make and the people they instruct to monitor those changes. By putting a real task force in charge of oversight this will force policy makers to constantly review the changes they make and continue to make.  Ultimately it will serve as a barometer to measure the changes and how they have affected the space.

Open the gates – Second is an easing on protectionism and opening up the Foreign Exchange market back to the world.  Naturally, it is impossible to have a true global exchange with all countries working together to regulate the FX community, this is understandably not feasible. This doesn’t mean that we cannot create a level playing field with our global trading partners again.  The United States was easily able to impose its agenda on the rest of the world and impede US traders from opening accounts with NON US brokers. Why can’t they work with other “highly regulated” countries to allow open boarder trading. Once again this is not to avoid regulation, rather it is to create a more globalized community deepening liquidity and increasing innovation to a broader market.

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Meet the Jones’ – Finally, we need new companies in the market.  At this stage the industry has seen a level of consolidation that few would have believed three years ago. The transition period of Dodd Frank reform bore witness to a mass exodus of Brokers, Banks, IB’s, CTAs, Affiliates, Marketers and just about any other entity associated with the space. The cleansing of the space was aggressive but also justified and needed on some levels.  This purge has opened the door for new players in the space including but not limited to Broker Dealers, Banks, and potentially Insurance Companies. The larger more capitalized entities (currently waiting on the sidelines) that enter the space will bring a fundamental change in all areas from platform technology, liquidity solutions, exchange clearing, and cross market trading instrument access that have not been seen before. The important aspect to remember that is typically over looked by industry cynics is that the US market is still mostly untapped. The United States is very “US-Centric” and is still a new comer to the Foreign exchange market. Although Forex has made a dent over the last 10 years, it has been a minor one.  FX Traders or people who are well enough versed in the FX market understand not to buy currencies at a kiosk in the airport make up less that 1% of the US population.  This is a very big opportunity for the larger new entities to enter the space.  By using diversification as a key tool to attract traditional asset class investors in addition to the creation of more stable currency investment vehicles catered to the average investor, the market has potential to flourish again.

In conclusion, I realize that this the industry will not change overnight nor will any of the items I mentioned in my “wish list” will occur as I would like.   Here is what I believe will actually transpire:

Government Policy – This will not change, nor will it even be considered. I am not shocked but sincerely expected with the recent failures of PFG and MF Global that there would be adjustments made to the practices and procedures of the regulators / the policy makers in charge. I don’t have inside access to these entities so I can’t be sure if changes were made or not. I am certain that clients feel cynical and that not enough was done to the firms responsible, to get their money back or to prevent it from happening again.

US Protectionism – This will not change anytime soon.Unfortunately I believe that it will get worse before it gets better. Other major countries are currently following suit (Japan) with the USA and restricting clients from using NON Domestic solutions. I do feel that with the proper pressure from the derivatives industry as a whole it can be potentially amended, but global financial market cooperation doesn’t seem to be first on the agenda.

New Companies – This is where I see a silver lining. There still are undecided and looming regulatory changes and proposals that could affect who and when new entities enter the space, but it will happen. Most of the larger firms, especially equities firms are slower moving and more risk adverse(for good reason). That being said once the first few get their feet wet the market should evolve rapidly. I don’t think we are too far from seeing a few highly capitalized entities offering newForex products and solutions in the United States.

Whether the Government continues to pave the way via regulations or the more institutional financial firm’s steps up and take an active role in new growth, the market will evolve. As a smaller company operating in this market, we look forward to the challenges and changesthat lay ahead.

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