If you are a 24 year old college graduate, and you get hired to work at the National Futures Association as a regulator, here is what you are supposed to do: Look through all the shitty marketing material that brokers and introducing brokers and commodity trading advisors put out, and then you are supposed to delete any phrases that appear to be “promissory in nature.” Your job is to regulate.
So what are you going to do all day long? You are going to get all up into the business of good men and women who work in the financial industry. You are going to inspect their marketing with a pair of rubber gloves, and it’s not going to be pretty. Are you doing this because you were born an asshole? No, you are doing this because it is your job. And you are 24 years old and it’s not like you have the power to change the regulations.
The people who work at the NFA are good, hardworking, honest people – and they want to protect American traders from shady, dirtbag money managers. They want to protect Americans from the guy who promises his church group he can make 4% per month, and all he really knows how to do is lie to his church group, and he ends up losing 27 million dollars that could have gone to buy food for orphans in Haiti. The NFA is worried about that guy. So stop just being generally mad at the NFA.
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With that said, let me tell you what the NFA ought to be concerned about and they are not: They ought to be concerned that traders who get stuck in an fx position cannot hedge it. You can hedge a futures trade but holy hell, don’t think about heeding an fx trade. The NFA banned fx hedging because shady fx money managers were riding losing positions forever (I was the Chief Marketing Strategist at IBFX when the hedging regulations were being written and I was involved in the discussions). But the NFA could have banned hedging for fx money managers and not for individuals. Or they could have put a time limit on hedged trades. But to ban it entirely did two things: it took away a strategy from traders who wanted to protect their accounts, and it caused the largest margin call in retail fx history when they shut off hedging. In one day, everyone’s hedged trades were closed and margin calls occurred everyone. Thank you, NFA, for margin calling more fx accounts in one day than were ever margin called for any other reason, at any time, past, present or future.*
*Yes, I know that I can open a separate account and hedge in that account. But that is dumb and time consuming and doesn’t work the same way.
Next, the NFA should worry that you and I can’t close a winning trade before a losing trade. Let’s say that I am riding a loss on the CAD/CHF of $26,000, which is exactly what I am doing right now. In the old days I could take small winning trades on the CAD/CHF here and there, and start closing my losing position. But now, I can’t do that. If I open the losing trade first, which, by the way, everyone in the world does just like me, I have to close that position first. That’s called FIFO, or first in, first out. There is no good reason for it. None. It is a pointless regulation that makes it harder to get out of a losing trade. Imagine if you were in the real estate business and you owned a home that was underwater. And then you bought a second home, and someone offered you more than you paid for it. And then imagine that the Federal Housing Authority tells you that you cannot sell the second home without selling the first. What would you tell them? You would tell them to go fly a kite.
So let’s get back to your original question: is it even possible to regulate retail forex in the United States? Of course it is. That’s what hundreds of NFA employees are doing every day. I mean, CAN they do it? So yes, they are doing it. They are going to regulate the hell out of retail forex for many years to come. Maybe the better question was whether it is even possible to trade retail forex in the United States. Maybe we can talk about that next time.