It is the first week of January, a time when most of us are recovering from holiday revelry, going back to work, and shaking the cobwebs away from our consciousness. It is also a time to take stock of where you are on achieving your current goals, the reason many of us take the time to write down New Year’s resolutions, which, unfortunately, may end up in the back of a drawer, never to see the light of day again. Yes, it can be an amusing time, but, if you are a forex trader, it is also a prudent time to take a good hard look at your broker. Is it performing up to snuff?
If you are like most of the human race these days, you are far too busy with too many things to stop and review prior decisions that you have made. If it ain’t broke, then don’t fix it. This mindset can be valuable at times, but, when our industry is being buffeted on all sides by fundamental forces of change, it would be wise to monitor your current broker’s performance to determine if a switch might be in order. Have you noticed any delays or slippages on the execution side? Have customer service personnel suddenly become distant and non-responsive? Have you asked for a withdrawal, but it seems to be held hostage for some unknown reason? Have there been any negative press reports concerning your broker that might be an early sign of bad days to come?
Industry storm clouds are suggesting that forex brokers are under pressure.
Competition is omnipresent in our industry, which is to be expected, but its presence is somewhat diminished, if and when transaction volumes are dramatically expanding and revenue opportunities abound. Since the late nineties, retail foreign exchange volumes have skyrocketed for nearly two decades. It seems that everyone across the planet has wanted a chance to profit from currency movements, once they understood how the game was played and after finding a reliable and trustworthy broker.
Initially, fraud and high casualty rates plagued the industry, but regulators and brokers combined efforts and invested time and energy into education, fraud prevention, and creating new innovative trading tools. If trading proved too difficult, one could delegate the task to a fund manager, use automated trading software robots, employ copycat trading techniques, switch over to binary options, or try your hand at social trading. Depending upon your level of ability and risk appetite, there was a mode of trading that could limit your risk and increase your chances of prevailing in the market.
New brokers hit the scene on a monthly and sometimes weekly basis, but the growth dynamics of the industry began slowly changing about three years ago. A recent report from the Bank for International Settlements (BIS) actually showed that volumes for the past three years have actually declined by 5.6%, primarily due to reduced speculation. The pie is no longer expanding, so to speak. The competition for new customers and the revenues they provide just got tougher. Due to industry crises over the last three years, regulators have also stepped up their game and gone on the attack, while the press has had a field day exposing a host of shady business operators and big bank scandals.
The level of negativity in recent headline stories has also taken a turn for the worse. It is difficult to find any glasses that are half full at this stage. Industry Internet rags like “LeapRate” and “Finance Magnates” are replete with articles of heavy volume declines, aggressive regulator tactics, and gloomy forecasts of more constraints and less flexibility. Yes, there are winners and losers, but it will be quite a task to avoid any of the pitfalls or sinkholes that suddenly appear on the broker horizon. Here are just a few of the stories that grabbed the headlines in the first week of this New Year:
- “Publicly traded forex brokers lose $2.4 billion of market value in 2016”: The majority of these losses materialized after the FCA and CySEC announced their draconian proposals for limiting leverage to 50:1 on CFDs and spot forex. For high profile companies on stock exchanges, the carnage was immediate, as stock prices fell 37% for industry leaders. The hardest hit were firms like IG, CMC Markets, and FXCM.
- “FxPro shelves IPO following FCA crackdown”: FxPro had planned to announce its initial public offering, but instead, due to the carnage noted above, it withdrew its planned IPO in order to wait for a better investment climate. Other firms are even considering a transfer of operations to more accommodating markets, where regulators are more lenient.
- “December Forex volumes down…”: There are a host of articles that begin with these same four words. December may traditionally be a down month in foreign exchange, due to the holidays, but the sensitivity and confidence of the public can be easily shaken when negative reports proliferate the news cycle. It should be stressed that these are only the initial reports hitting the news channels. This first wave includes brokers like FastMatch, Exness, Deutsche Börse cash markets, Hot Spot FX, and FXSpotStream. The latter firm is a multi-bank FX aggregation service, which speaks volumes for what is happening in banking backrooms. Not all news, however, is bad. CME Group, a derivatives marketplace operator, posted a 12% annual gain in derivative contracts, primarily in the futures markets for commodities and financial instruments.
What is on tap for the near term that will impact forex brokers?
The brokerage industry is still in shock over the bombshells released by the FCA and CYSEC in December. The proposed rules in the UK appeared to be focused only on CFDs and spread-betting firms, as opposed to spot forex, but the latter is de minimis in the UK, due to favorable tax treatment accorded to so-called “bets on future outcomes.” Gains in these arenas escape tax altogether. The FCA couched its proposal, such that comments will be accepted before actual rules are finalized. The time is now for brokers to attempt to convince officials to offer more flexibility.
The CySEC rules, on the other hand will impact all forex brokers, including binary options. The FCA mentioned that it would attend to binary options at a later date, after the Gambling Commission transferred regulatory oversight responsibilities, so we can assume for now that more surprises are down the road. The new rules propose cutting way back on leverage, similar to what was done in the United States a few years back. CySEC has at least allowed an option, but the rules will also require more disclosures and transparency. For example, actual winning/losing percentages of customers must be conveyed up front to indicate the high-risk aspect of the potential trades.
The pressure on revenue and earnings, exacerbated by regulatory curbs, will undoubtedly bring about more consolidation in the industry. The M&A scene has already been active over the past year, with new acquisitions in the news as we write. Large, well capitalized firms will grow by absorbing many of their weaker brethren, either by buying the entities outright or by just transferring portfolios over to their platform for an agreed upon price. After all that has occurred over the past few years, there are many brokers that are holding on for dear life. A subset of these may resort to shady business practices, i.e., ripping off their client base, in order to stay alive, but the wise ones will choose to join forces with more able partners or investors.
Lastly, many veterans of the industry see moves behind the scene to force forex from its informal environment to one that is more like a regulated exchange. Per one pundit, “Scandals in the OTC industry, bankruptcies related to SNB type events and binary options scammers have given ample justifications to exchange lobbyists to argue against the OTC retail industry. It is quite apparent that the regulators, along with other
Institutions, are setting in place the framework to have the entire non-bank OTC business revamped on exchange.” OTC FX and OTC derivatives may soon migrate to an exchange model in major markets like the U.S., the UK, and the Asia-Pacific region.
How can a forex trader prepare for these potential changes?
Preparation begins with awareness. Are you aligned with one of the weaker brokers in the industry? It might be time to do a little more due diligence on your existing broker to determine if you should be prepared to make a change if the situation goes downhill. If you begin to notice a breakdown in communication with your broker, then this may be a warning sign that trouble is brewing. Slippage may become more prevalent, another bad sign. You also need to know that most all reviews on the Internet were prepared at a point in time. Things can change rapidly. Look for comments that are current by their nature to arrive at a better understanding of the current situation.
Now may be a good time to test out a few other brokers, if only to bring you peace of mind. Check complaint bogs for problems with withdrawals or customer support. Validate registration credentials with the national regulator, as well as other general due diligence queries. Be particularly wary of overblown enticements for your patronage. Are the bonus programs at your option or automatic? This can be one area where you need to be aware of the exact terms and conditions or you may become trapped in a maze of trading entanglements. It is also prudent to start small and then determine how order execution compares to your current broker. Request a small withdrawal, and see what happens. Access a customer service rep and check for responsiveness. Follow your intuition, too, because, if something is not right, you will feel it in your gut.
Forex brokers, like it or not, are having to deal with a rapidly changing world, where revenues are declining, regulatory attacks are frequent, and consolidations are becoming commonplace. Now may be a good time to take stock of you current broker and, even possibly, to search for a better alternative, hopefully, in your own jurisdiction. Selecting a new broker is not an easy task, but we do provide guidance in this area and have already rated many of the top performers to help with your decision-making process. We can help you find the best of the best. At the end of the day, it is smart to have a “hot backup” in times like these.