Is FIFO The Elephant In The Room No One Is Talking About?

The NFA has stipulated that brokers must close out offsetting positions each day and that those positions must be closed

elephant-in-the-roomThere are less than 60 days remaining for U.S. Forex dealers to modify their platforms to comply with the new “hedging” requirements.  However, while NFA-registered brokers are busy offering creative hedging alternatives to get around the new regulation; and the U.S. trading public is crying out that NFA has no business interfering with how a person chooses to trade; no one is shining any light on the part of the new regulation that may have more significant implications than the hedging controversy. The NFA has stipulated that brokers must close out offsetting positions each day and that those positions must be closed on a first-in-first-out (FIFO) basis.

Yes, FIFO is the elephant in the room that no one is talking about. The implications of FIFO are complex to say the least. For example, let’s say that a trader opens a long-term position and a short-term position on the same currency pair, and the stop-loss is hit on one position.  The stop order will be executed against the first opened position on that currency pair. Think about that one for a minute.

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FIFO will require more sophisticated strategies to deal with these types of scenarios if holding offsetting positions on the same pair is your chosen strategy.  Think of all those autotrading robots that utilize offsetting strategies that will no longer work after July 31st and now have to be re-analyzed and re-programmed.  Now consider what the brokers have to do to their platforms in order to accomodate the rule change.

So, U.S. Forex brokers have one thing more to deal with that, some think, will make them less able to compete internationally. FXCM’s U.S. traders are already abandoning U.S. accounts for the UK.  Some U.S. brokers are contemplating offering one trading platform for domestic traders and another for offshore traders in an effort to preserve their client base.  Others are petitioning NFA to modify other rules to counter the impact of the new regulation.

Whatever the outcome, Forex trading in the U.S. has changed once again and the only way to adjust to the change is to first admit that there is an elephant in the room — and his name is FIFO.

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