More from the FT … (gated, but can be read with a free registration): Swiss franc turmoil hits retail currency traders
(ps. an FT subscription is money well spent)
- for clients of Alpari, client-segregation rules introduced in the wake of Lehman Brothers should ensure their funds are safe
- UK-based brokers are regulated by the FCA, which means clients are covered by the financial services compensation scheme in the event of missing funds
- But pressure may grow on regulators to look more closely at this trading ecosystem operating in the shadows of the much larger institutional investors and global bank trading desks
- The biggest criticism aimed at the industry has been the amount of leverage that companies offer customers to entice them to trade
- Europe has no caps in place
- In London it is usually 100-200 times the amount deposited into a retail account, but can be upwards of 500 times
- Such hefty use of margin borrowing can reap large gains, but also leaves investors highly exposed to sudden changes in the market
And, more (again from the FT, link):
- Regulators in the US … The National Futures Association requires brokers … to demonstrate that they had sizeable capital buffers and, more importantly, a 50/1 leverage cap on trades was imposed
- The industry howled, arguing that in the face of such regulation the business would move abroad, probably to London … And guess what? The industry did move to London
- Of … 4m retail forex traders ( the number cited by Citi) just 150,000 are thought to live in the US. The rest are spread across Europe and Asia
- Leverage levels of up to 500/1 are typically on offer to customers in London. In Cyprus leverage can rise to 1000/1
- … policy makers in Europe and Asia need to realise that they have some serious catching up to do
