The Dodd-Frank Act which passed past last summer in the US is continuing to affect the operations of US regulated brokers and the clients they serve. A provision which goes into effect on July 16th brings into question the ability to offer spot gold and silver on a leveraged and OTC basis to retail customers. Trading on gold and silver has become popular not only because of the diversification pitch from financial advisors, but also because it is hard for anyone to ignore the recent highs seen on these metals. We decided to research various participants and see who the winners and losers are as a result of Dodd Frank.
There were three retail forex brokers offering spot gold and silver to US clients: Forex.com, FXDD and Oanda. Forex.com and FXDD have announced that they will no longer offer these products to US residents after July 15th. Interestingly, Oanda will continue to offer these products to US residents but without any leverage. Oanda has interpreted this Dodd Frank provision to affect only leveraged metals. One of the main reasons retail traders are attracted to OTC markets is the easy access to leverage, so I don’t see a whole lot of traders taking up Oanda’s offer to trade on 1:1 basis. Firms like FXCM and GFT, who have never offered spot gold and silver to their US residents, will see this provision as finally leveling the playing field.
So what’s left for US spot metals traders who are looking for leverage? It’s seems that only Nadex for now can offer leveraged metals trading as it is an exchange and therefore Dodd-Frank restrictions do not apply to it.
Nadex is a Designated Contract Market and Derivatives Clearing Organization registered with the CFTC. This allows Nadex to offer on exchange binary options and bull spreads on gold and silver, among other products. Binary options trading allow a trader to leverage his/her capital just like regular options although the leverage is a bit different due to the limited risk nature of binary options. On these option contracts, the risk/rewards are limited and are traded on a fully collateralized basis with notional values as low as $100.
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The Nadex platform offers several option contracts on gold and silver at various strike prices. For example, the premium for a single gold binary option contract at a strike price of $1500 with gold futures trading at $1490 may be $15.00. The trader’s maximum profit is $85.00 and maximum loss is $15.00 (less exchange fees). When trading a binary option on Nadex, instead of margin, the trading is actually putting up collateral in the amount of risk they are taking on the trade. In the previous example, the buyer at 15, has a risk of $15.00 and that is the amount held in collateral to secure the trade. The seller of the contract puts up collateral of $85.00, which is the difference between where sold at 15 and the maximum risk of the contract settling at 100. The full contract value of $100.00 is held by the exchange and neither the buyer, nor seller, can lose any more on the trade than they put up in collateral. According to Dan Cook, Director of Business Development at Nadex, “Nadex occupies a unique niche in the market as we are a regulated exchange, a status that requires a lengthy and demanding review by the CFTC to achieve, that offers a wide array of unique, retail-focused products, including gold and silver.”
Even though Nadex is an exchange, they allow individual retail traders to become direct members. Traders can also sign up for a two-week demo account to try their services. Brokers who have been affected or have held back from offering gold/silver can also plug in directly to Nadex to offer binary options to their clients. Nadex has recently signed up their second FCM member PFGBEST and I can see PFGBEST gaining market share quickly, if other brokers are slow to react.