Brokers inability to hedge against client trades has caused an exodus in the Russian retail market
With all of the buzz surrounding the European Securities and Markets Authority’s (ESMA) most recent exploits, regulatory news concerning other jurisdictions has been pushed to the side over the past couple of months.
ESMA is not the only regulatory body making life tough for brokers across the globe. This Tuesday, the Russian Association of Forex Dealers (AFD) noted that regulation in the world’s largest country is forcing traders to open accounts with offshore brokers.
At a press conference this Tuesday in the city of Yekaterinburg, almost a thousand miles east of Moscow, Evgeny Masharov, the head of the AFD, called for regulatory change. He claimed that only 1.75 percent of all forex traders in Russia use brokers that have the local authorities’ approval.
Generally one should take demands from groups such as the AFD with a pinch of salt. After all, the organization is made up of FX brokers who may be inclined to put their interests, and not necessarily their clients' needs, first.
In this case, however, Masharov seems to have a completely legitimate point. To understand why that is, it’s worth briefly looking at the situation of brokers in Russia and the legislation they must adhere to.
No Hedging, Minimum Leverage
In 2014, Russian president Vladimir Putin signed the country’s Forex Law. As the above sub-heading suggests, this brought about a number of significant changes to the Russian FX brokerage industry.
Firstly, brokers are now only able to offer leveraged trading of 50:1 to retail clients. That’s more than the maximum 30:1 leverage that ESMA’s regulation permits but it still puts a damper on brokers’ plans.
The reason for this is fairly straightforward; clients want high leverage. One of the main appeals of FX trading for retail clients, rightly or wrongly, is the ability to trade with huge sums of money that would otherwise be beyond their means.
Perhaps more significant than the cap on leverage, brokers are not permitted to hedge against the positions taken by their clients. That means brokers cannot resend orders to market, to a Liquidity provider for example, and are forced to take the positions opposite to their clients.
That makes for a particularly unappealing proposition for any prospective client. If a broker has to take positions against its clients, then it is impossible for the broker to have the client’s interests at heart. This is because, in this scenario, the client’s loss is the broker’s gain and vice versa.
Heading Offshore
Just by reading the above regulations, one could deduce that Russian retail traders would head offshore. The extent to which they have is still somewhat surprising. Indeed, it could be viewed as a testament to how informed Russian traders are - they aren’t foolish enough to use brokers whose interests are diametrically opposed to theirs.
As noted, 1.75 percent of Russian retail traders use offshore brokers. That means, that of 400,000 retail traders, only 7000 trade with the eight brokers that have, thus far, received the stamp of Russian regulatory approval.
Amusingly, many of those traders are using the sister companies of brokers that are registered in Russia. Alpari, for example, will get Russian clients via its local website but then get users to sign contracts with one of its offshore, sister brokers.
Wrongheaded Regulation
All of this illustrates why Masharov was right to call for regulatory change. In Tuesday's press conference he asked that regulators enable brokers to start hedging against their clients’ positions.
That doesn’t seem partisan but entirely reasonable. Rather than protecting clients, as it was supposed to do, Russia’s current FX regulation is pushing clients to offshore brokers, many of which are unlikely to offer any sort of client protection.
The reason for this is that traders, rightly, don’t want to use brokers that are trading against them. Were that law to change, we would likely see a large number of Russian traders starting to use domestic brokers. Whether that will happen is unclear - we’ll just have to hope President Putin is a Finance Magnates reader.
With all of the buzz surrounding the European Securities and Markets Authority’s (ESMA) most recent exploits, regulatory news concerning other jurisdictions has been pushed to the side over the past couple of months.
ESMA is not the only regulatory body making life tough for brokers across the globe. This Tuesday, the Russian Association of Forex Dealers (AFD) noted that regulation in the world’s largest country is forcing traders to open accounts with offshore brokers.
At a press conference this Tuesday in the city of Yekaterinburg, almost a thousand miles east of Moscow, Evgeny Masharov, the head of the AFD, called for regulatory change. He claimed that only 1.75 percent of all forex traders in Russia use brokers that have the local authorities’ approval.
Generally one should take demands from groups such as the AFD with a pinch of salt. After all, the organization is made up of FX brokers who may be inclined to put their interests, and not necessarily their clients' needs, first.
In this case, however, Masharov seems to have a completely legitimate point. To understand why that is, it’s worth briefly looking at the situation of brokers in Russia and the legislation they must adhere to.
No Hedging, Minimum Leverage
In 2014, Russian president Vladimir Putin signed the country’s Forex Law. As the above sub-heading suggests, this brought about a number of significant changes to the Russian FX brokerage industry.
Firstly, brokers are now only able to offer leveraged trading of 50:1 to retail clients. That’s more than the maximum 30:1 leverage that ESMA’s regulation permits but it still puts a damper on brokers’ plans.
The reason for this is fairly straightforward; clients want high leverage. One of the main appeals of FX trading for retail clients, rightly or wrongly, is the ability to trade with huge sums of money that would otherwise be beyond their means.
Perhaps more significant than the cap on leverage, brokers are not permitted to hedge against the positions taken by their clients. That means brokers cannot resend orders to market, to a Liquidity provider for example, and are forced to take the positions opposite to their clients.
That makes for a particularly unappealing proposition for any prospective client. If a broker has to take positions against its clients, then it is impossible for the broker to have the client’s interests at heart. This is because, in this scenario, the client’s loss is the broker’s gain and vice versa.
Heading Offshore
Just by reading the above regulations, one could deduce that Russian retail traders would head offshore. The extent to which they have is still somewhat surprising. Indeed, it could be viewed as a testament to how informed Russian traders are - they aren’t foolish enough to use brokers whose interests are diametrically opposed to theirs.
As noted, 1.75 percent of Russian retail traders use offshore brokers. That means, that of 400,000 retail traders, only 7000 trade with the eight brokers that have, thus far, received the stamp of Russian regulatory approval.
Amusingly, many of those traders are using the sister companies of brokers that are registered in Russia. Alpari, for example, will get Russian clients via its local website but then get users to sign contracts with one of its offshore, sister brokers.
Wrongheaded Regulation
All of this illustrates why Masharov was right to call for regulatory change. In Tuesday's press conference he asked that regulators enable brokers to start hedging against their clients’ positions.
That doesn’t seem partisan but entirely reasonable. Rather than protecting clients, as it was supposed to do, Russia’s current FX regulation is pushing clients to offshore brokers, many of which are unlikely to offer any sort of client protection.
The reason for this is that traders, rightly, don’t want to use brokers that are trading against them. Were that law to change, we would likely see a large number of Russian traders starting to use domestic brokers. Whether that will happen is unclear - we’ll just have to hope President Putin is a Finance Magnates reader.
TradeStation and Coincheck Drive Monex's 850% Profit Surge
Network, Learn, Grow | FMAS:24
Network, Learn, Grow | FMAS:24
Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
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Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
Don't miss out on this 5-second invite packed with energy and urgency!
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
📣 Stay updated with the latest in finance and trading!
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Follow FMevents across our social media platforms for news, insights, and event updates. Connect with us today:
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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