FCA Proposals Highlight Need for Market Education
- The best traders in the industry are more focused on risk than reward.
By Nick McDonald, founder and CEO of Trade With Precision.
Nick McDonald
The UK Financial Conduct Authority’s (FCA) proposals to curb the use of excessive Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term by retail traders came as a shock to the market.
But the planned overhaul of the regulatory structure highlights an important point that is sometimes overlooked - education is important for retail clients, and should be encouraged. Many brokers do this already, others leave their clients to figure it out for themselves. The longer term impact of the proposed changes will be positive for the industry, even if there is pain in the short term.
The FCA’s consultation paper proposes leverage caps of 50:1 for all retail clients and 25:1 for clients with less than 12 months trading experience. It also says brokers should publicly disclose profit/loss accounts of all clients, and suspend all bonus practices. Companies have until March 2017 to submit their feedback.
It will be interesting to see how brokers respond. But it’s worth noting that, just because 200:1 leverage has been available, that doesn’t mean it needs to be used. Traders who have been well-schooled and learned their business are virtually never leveraged to the maximum extent.
Those who do push out beyond sensible margins tend to have not been properly educated in market risk. Or they treat every trade as a gamble. And the reality is that even if the FCA lowers the cap to 50:1, there will still be those with a gambling mindset who will maximise their available margin. By contrast, traders who have been educated on the potential dangers of being over-leveraged, tend to manage their risk more responsibly.
We have been encouraged to see the number of brokers endorsing a more risk-averse approach in recent years. The gamblers need to be made aware that trading isn’t a game of high stakes poker in a Western saloon where a hidden derringer offers a get-out-of-danger option.
Successful traders realise that - like any other profession - trading requires training and a commitment to studying how markets work, and staying on top of best practices. The FCA proposals offer an opportunity for brokers to place more focus on educating their retail clients on Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term. In our experience, the best traders in the industry are more focused on risk than reward.
By Nick McDonald, founder and CEO of Trade With Precision.
Nick McDonald
The UK Financial Conduct Authority’s (FCA) proposals to curb the use of excessive Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term by retail traders came as a shock to the market.
But the planned overhaul of the regulatory structure highlights an important point that is sometimes overlooked - education is important for retail clients, and should be encouraged. Many brokers do this already, others leave their clients to figure it out for themselves. The longer term impact of the proposed changes will be positive for the industry, even if there is pain in the short term.
The FCA’s consultation paper proposes leverage caps of 50:1 for all retail clients and 25:1 for clients with less than 12 months trading experience. It also says brokers should publicly disclose profit/loss accounts of all clients, and suspend all bonus practices. Companies have until March 2017 to submit their feedback.
It will be interesting to see how brokers respond. But it’s worth noting that, just because 200:1 leverage has been available, that doesn’t mean it needs to be used. Traders who have been well-schooled and learned their business are virtually never leveraged to the maximum extent.
Those who do push out beyond sensible margins tend to have not been properly educated in market risk. Or they treat every trade as a gamble. And the reality is that even if the FCA lowers the cap to 50:1, there will still be those with a gambling mindset who will maximise their available margin. By contrast, traders who have been educated on the potential dangers of being over-leveraged, tend to manage their risk more responsibly.
We have been encouraged to see the number of brokers endorsing a more risk-averse approach in recent years. The gamblers need to be made aware that trading isn’t a game of high stakes poker in a Western saloon where a hidden derringer offers a get-out-of-danger option.
Successful traders realise that - like any other profession - trading requires training and a commitment to studying how markets work, and staying on top of best practices. The FCA proposals offer an opportunity for brokers to place more focus on educating their retail clients on Risk Management Risk Management One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, One of the most common terms utilized by brokers, risk management refers to the practice of identifying potential risks in advance. Most commonly, this also involves the analysis of risk and the undertaking of precautionary steps to both mitigate and prevent for such risk.Such efforts are essential for brokers and venues in the finance industry, given the potential for fallout in the face of unforeseen events or crises. Given a more tightly regulated environment across nearly every asset class, Read this Term. In our experience, the best traders in the industry are more focused on risk than reward.