Financial crisis eases - tough times ahead for Forex brokers

It's not yet known if this severe financial crisis is over completely but there is no doubt that it has eased in the past few months.

And this is bad news for all brokers, including Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term ones.

Forex traders prefer turbulent economic times because Forex markets are very volatile as a result and respond more strongly to any economic news. Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term leads to larger profits for some and larger losses for the others. Some trading systems can only operate in volatile markets. When markets are calm traders tend to place less trades as there are less triggers to trade, less 'action' and less 'blood' in the air in general. On the other hand this in part is offset by returning fundamental traders who tend to take a step back when markets are irrational.

For Forex brokers this means lower volumes which means less commissions which in turn is directly reflected in the P&L statements. For market makers this means less traders losses.

We have already seen the signs of that in IG Index's quarterly report a month ago which showed decline in Forex growth in UK, Australia and Japan (was offset by increased equities trading).

Today we see that the trend continues across all financial instruments with London Capital Group reporting a large decline in profits amid strong growth in number of clients. On the other hand Institutional Forex business reported a very strong growth, rising 41%.

What does this tell us? Just like I wrote in the IG Index's post - retail forex growth is slowing down in emerging markets and is expected to slow down or even decline as the markets calm down and traders stop betting and start actually investing in equities instead. Retail brokers should expand to emerging markets and/or offer additional products.

On the other hand, institutional trading which is more conservative by nature and which tumbled by 25% worldwide is expected to restart its growth. LCG's report is the first sign for that.