Liquidity And Regulation Forcing FX Broker Attrition In US, Canada?

Whether FX broker attrition is happening is the million dollar question in the North American market right now. In the current US/CAD space, there is an increase in regulations and steady consolidation of FCMs, RFEDs, IBs, and market participants such as affiliates / signal providers. This consolidation is creating a corrosive effect on the existing customer base, because of limited broker options and reduced trading capabilities due to increased regulations (i.e. reduction of Leverage , FIFO constraints, removal of hedging, etc.). Basically the clients have stopped trading, retail Liquidity is drying up, and clients are going away because they are unhappy with the current offerings.

What happens next? In my opinion, there are two paths the market can take:

1. Continued consolidation leading to a new market equilibrium where fewer brokers control the market

2. Consolidation creates opportunities for an influx of new market participants

Regulation and liquidity are major concerns to brokers. Both of these market forces have wreaked havoc on the US market since 2011 and are starting to impact the Canadian space. It is a very real possibility that the North American FX market has plateaued and will never recapture the growth track it was once on. Retail clients may have lost interest in the US space given the increased regulation and less attractive investment opportunities. Brokers may be forced to leave the US in search of clients. If this is the case we will most likely see a few major firms hold on to spot FX as a novelty product and focus on FX options and exchange traded FX vehicles as long term trading solutions.

While I unfortunately see a continued slide in customers and volume (potentially over the next 2 years), I feel that the attrition will be short lived. The silver lining is that the US and CAD markets present opportunities as consumer participation in the FX market overall is very low. The North American space has one of if not the highest percentage of investable wealth per person per capita in the world. These assets have never been exposed to currency as an investment vehicle (conservatively less than 1% have actively traded or invested in currency products), and given the growing demand for alternative assets FX is a likely progression. I have personal opinions on how to attract this new client class but am not sure how it will be ultimately served by larger institutions (managed products and funds, options, ETFs, self-directed, etc.).

The industry since 1999 has seen its fair share of speed bumps with disorganization, regulatory reform, consolidation, and over all instability. This is most likely attributed to a natural cycle and is indicative of a maturing space/industry. This maturation process and the participants who have worked in the space have served as incubators for the next level of entrants. I think that during the next 12-18 months we should anticipate seeing a new wave of FCM’s/RFEDS/Banks looking to make a mark in the industry. Some may be established firms that look to increase their exposure and market share, others will be new faces to the industry that enter to offer alternative investment solutions to customers.

In conclusion, although there are many variables that could dictate the direction of the Foreign Exchange industry in North America, I feel it comes down to two paths: continued attrition or new opportunities. I believe that the upside is strongly on the side of growth and increased exposure to a new consumer base and new investment products focusing on FX.