News & Updates

Credit card bans and the future of US retail forex

Last week I brought up the subject of a prospective new NFA ban on the use of credit cards to fund accounts in retail forex. There has been considerable discussion about this, as tends to be the case any time the regulators come out with new rules (or at least plans for them). Once more we are hearing the claim that the NFA (and CFTC) is out to kill retail forex in the US. A blog post at Forex Magnates on Friday definitely takes that view. I have a hard time agreeing with this.

Let me pick on one particular comment:

NFA has gone a long way trying to completely kick retail forex out of the US eventually reducing the number of retail forex brokers from several dozens to just 11. With FX Solutions heading out as well the number of US forex brokers may fall below 10 within few months.

There’s no doubt we have fewer US forex brokers now. Is that a function of NFA/CFTC regulations? In some cases, I’m sure it is – especially when we talk about minimum capitalization rules that were put into place. I would contend, however, that such consolidation is simply a natural product of a business that is maturing.

Think about what we’ve seen in retail forex in the last decade or so. Topping the list is the way bid/ask spreads have come down very sharply. This means less income for the brokers, most of whom operate in some fashion on a dealer-based model. To put it another way, profit margins have been squeezed considerably. Any time that sort of thing happens industry-wide you get consolidation as those companies unable to compete either go out of business or get absorbed by those who can.

I would suggest we’re likely headed for a handful of major US forex brokers. We need only look at the stock market to see how few big brokers there are in that sector despite the fact that it features a bigger customer base.

Now, this is not me disagreeing with many of the arguments against the NFA credit card ban. I actually think it’s somewhat silly in a lot of ways given the many ways customers can access and move around money. If avoiding the use of borrowed money is the main focus (and I’m largely in agreement on that) then this ban only makes it slightly harder, as others have noted.

One question I would bring up, though, is that of expenses. Who foots the bill for credit card transaction fees, which are generally in the 2%-3% range? My guess is in most, if not all, cases it is the customer paying that bill. Preventing the use of cards from that perspective automatically keeps traders out of a performance hole. This game is hard enough as is, as I observed in Starting to detail forex profitability data.

I’d still love to hear your thoughts on the credit card ban, by the way. Feel free to leave a comment below, on Facebook, or Twitter @RhodyTrader.

Trading News

This is NOT the Death of US Retail Forex Trading!

I came across a post on the BabyPips forum this morning. It was written a couple of days ago, but somehow I missed it the first time around. It had the inflammatory title “The end for Retail Forex in the United States?” The posts references a CNBC article and an SEC ruling about the subject of the SEC putting through a rule (as required by Dodd-Frank) to extend existing retail forex trading regulations for another year so new rules could be properly written. Had the SEC not made this move, retail foreign exchange trading by SEC regulated firms would have been rendered illegal.

Please note here that this only applies to SEC regulated firms. That means securities brokers and deals. These are the likes of Schwab, Ameritrade, etc. This does not include the vast majority of US retail forex brokers, as they fall under CFTC regulatory purview (see New CFTC Rules for Retail Forex Trading).

The CNBC article portrays the SEC chief has being uneasy about retail forex, but it doesn’t sound like he’s racing to crank up the regulation. There is a concern in the securities industry about the impact new rules might have on traders and investors who transact in foreign stocks and bonds and look to hedge their currency exposure.

So, the bottom line here is that while the final SEC rules may determine future developments related to retail foreign exchange trading where the securities brokers are concerned, as some do operate in the space and others have talked about expanding into doing so, it is not something which is going to impact the vast majority of existing US forex traders in any meaningful way.