IPOs Raise Questions about the Future of Retail Forex

It has been said before, but now I think it’s official: retail forex has entered the mainstream. In the month of December, two retail forex brokerages – Forex Capital Markets (FXCM) and Gain Capital Holdings (GCAP) – went public on the New York stock exchange. Combined with some juicy information revealed in their regulatory filings, I think this event raises some interesting questions about the future of forex.

Some background: both FXCM and Gain Capital operate trading platforms and news/analysis websites (DailyFX.com and Forex.com, respectively). FXCM has a current market capitalization of $850 million, compared to $250 million for Gain Capital. The former earned net income of $98 million last year on revenue of $339 million, and it has 135,000 active clients. The latter earned $36 million net income on $188 million revenue, and its client base totals 52,000. (For the sake of comparison, consider that ETrade has more than $4 million and its ttm revenues exceeded $2.5 Billion).

If you do some simple arithmetic, you will discover that revenue per account is substantially higher for forex brokers than for stock brokers: $2,500/account for FXCM versus $100-200 that I’ve been told is standard for retail stock brokers. Of course, some of that disparity is natural, given that the average forex account-holder trades at a higher frequency and higher volume than the average stock investor, who apparently only makes one round-trip trade per month, on average. However, the bulk of that discrepancy is probably due to a lack of transparency/competition.

Although information on average account size was not released, it nonetheless stands to reason that a significant portion of forex account-holder equity is being “transferred” to brokers every year. (Interestingly, FXCM loses money on the majority of its accounts. Accounts worth more than $10K – which presumably do the most trading – generate the most revenue, and yet more than half of them are still unprofitable for FXCM).

I think this raises some serious questions about transparency in forex commissions. While other brokers make money from the bid/ask spread (which also suffers from a lack of transparency) and by taking offsetting positions, FXCM boasts that it “makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer made or lost money on the account.” Basically, FXCM matches up buyers/sellers with banks and financial institutions, and takes a cut for facilitating the transaction. While this is somewhat less opaque than filling orders directly for customers, the fact that it doesn’t disclose its commissions should be cause for concern. For the sake of comparison, consider that when you buy/sell stock, the commission that you pay the broker is clearly disclosed.

Someone recently asked me if trading commissions (i.e. spreads) in forex were fair/stable, and in the context of this data, I think it shows that there are is still room for commissions to fall. As the number of retail forex traders grows, you would expect spreads to tighten further, and profit/account to decline from the current level of $700+ per year.

Since both FXCM and Gain Capital are now public companies, they will be subject to increased scrutiny and regulatory oversight, and will henceforth be required to make frequent disclosures. If Oanda and other top-tier brokers accede to competitive pressures and also go public, the result should be increased transparency for the industry and better pricing for traders. In short, daily volume figures ($4 Trillion/day) notwithstanding, retail forex trading still has a ways to go before it can really be compared to retail stock trading.

Interview with Boris Schlossberg: “Risk control is EVERYTHING”

Today, we bring you an interview with Boris Schlossberg, director of currency research at GFT Forex, co-founder of BK Forex Advisors, and co-contributor to FX360. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted and appears in numerous newspapers worldwide. He is the author of Technical Analysis of the Currency Market (2006) and Millionaire Traders (2007). Below, Mr. Schlossberg shares his thoughts on risk management, leverage, currency wars, and other assorted topics.

Forex Volatility Remains Abnormally High

Forex Volatility Remains Abnormally High

If you look at a chart of currency volatility over the last five years, two major spikes immediately jump out. The first took place in the wake of the collapse of Lehman Brothers in late 2008, while the second occurred earlier this year during the height of the EU sovereign debt crisis. While volatility has gradually subsided since then, it is still well above its historical average, and many analysts forecast that it will remain at an elevated level through at least 2011.

2010 was a volatile year for the forex markets for good reason. The EU sovereign debt crisis officially emerged, and spread from Greece to Ireland, and potentially to Portugal and Spain as well. There was uncertainty surrounding the impact of the Fed’s second quantitative easing program (QE2), as well as the impact of similar plans announced by the Bank of England and Bank of Japan. A handful of Central Banks ignited what has since been termed the “currency war,” which the G7/G20 are still trying to end. China allowed the Yuan to resume its upward march against the US Dollar, but at a pace that has failed to satisfy most critics. Emerging market currencies in general, and Asian currencies in particular surged, despite the best efforts of their respective Central Banks to contain them.

As a result, investors struggled to figure out what the right levels to buy and sell even the major currency pairs. The Euro has ranged from $1.1877 to $1.4579 (against the Dollar) so far this year; and the Yen has ranged from 80.22 to 94.99. Amidst this backdrop of volatility, investors once again flocked to the US Dollar. On a trade-weighted basis, it appreciated 5% for the year. Against its arch-rival, the Euro, it gained an impressive 10%. The Japanese Yen and Swiss Franc – the other two major safe-haven currencies – also outperformed, even touching record levels against some other currencies.


At this point, the only certainty is that uncertainty will persist well into 2011. Economic and monetary policymakers around the world will continue to struggle to keep (or merely put) their economies on the recovery track, while minimizing the risk of inflation in the medium-term. According to the currency strategy team at UBS, “There is…high risk of policy-maker error in relation to interest rates, quantitative easing and fiscal tightening.” To make matters worse, there is still a lack of coordination among, and in some cases, outright contradiction between countries’ respective policies. “There are doubts about the mutual consistency in economic strategies pursued by major economies…We have seen in recent weeks a tendency by countries to publicly challenge each others’ monetary or exchange rate policies,” said European Central Bank governing council member Christian Noyer.

As a result, it’s more than likely that volatility levels will remain proportionately high. Added UBS, “The euro may range from $1.1 and $1.5…and U.S. dollar may touch as low as 70 yen and high as 100 yen in 2011…Overall investors will have to be more aware of foreign exchange risk in 2011. For at least several more years, volatility will be structurally higher.”

In this kind of environment, the implications are clear. While commodity and emerging market currencies may still be girded by strong fundamentals, a lack of investor risk appetite could trigger another round of capital flight. Meanwhile, the US Dollar (and other safe haven currencies) will benefit, and the Euro will suffer.

The Bad News About Forex Automated Trading

I’ve read a lot about how automated forex trading systems just don’t work in the long run but I can’t conclude this from personal experience. I’ve never seriously traded forex using automation. The following is an email from a trader who can conclude this from his experience. I found it totally worth sharing.

I came across your blog this afternoon whilst casually surfing the various forums in lieu of watching rubbish on TV.

I find your search for trading success an interesting one as in many respects it mirrors my own experience in many ways.

I spent well over two years, pretty much full time, searching for automated solutions to trading, having been in the process automation business for 25 years. To summarise, I have concluded it is a futile exercise with the technologies currently open to the average retail trader. I have yet to find any expert that is reliable enough to be left trading on its own and have pretty much concluded that most are really curve fitting solutions. I have seen no strategies posted anywhere that are consistent or reliable and capable of being automated without significant risk. I see some that pertain to be profitable (Artemis would be an example) but it needs constant adjustment and tuning which makes it akin to semi automation, not full automation.

However, there are manual strategies that are available that are profitable; they just do not lend themselves to automation due to the ability of the human braoin to make decisons based on proce movement that are pretty much impossible for any expert to make. So I abandoned my search for full automation solutions a year ago and concluded semi - automation was probably the right route. I trade manually today, with a few automated aids.

Linked with that, money management and certainly trading psychology are massive keys to success, the first to ensure you are alive to trade tomorrow and the latter because it takes time to get your mental state right to be able to trade at all, and that is what takes the time Rich. Sure, you need to understand the basics of trading, but without the right mental state, you’ll never be consistently profitable.

Your target of 50% per annum is achievable so keep up your search.

Places To Get a Great Forex Trading System

It’s very important that if you’re exploring forex trading or already trading that you have a trading system. One aspect of that trading system are the actual setup rules which usually contain entry and exit techniques. Traders put a lot of time and effort in developing these setup rules too often neglecting other aspects such as position sizing or relative size of your profits compared to losses. Therefore it’s important to find a comprehensive forex trading system.

Where can you find a comprehensive forex trading system? Throughout the last three years, I’ve been through many trading systems obtained mostly from books, forums, or other websites. I’ve found that almost every time, I’ll mold that system into something totally different than the original incarnation, something that fits my personality and style of trading. Many times, the original system will also need to be expanded to include things that were neglected or forgotten. Those of you searching for the perfect system may find this method of modifying existing forex trading systems desirable. There are places where you can find the whole package without any need for modification.

This brings me to the question, "where did you get your forex trading system?" I think there are four main ways of getting a trading system.
Buy it. There are tons for sale out there on the net but heed caution. Many were just copied from forums, books, or other websites. Sometimes when you buy forex education, part of the package will include a trading system. For instance, Rob Booker provides his Arizona rules as part of his mentoring program.
Get a free one. There are many free systems that can be found in books, forums, or other websites. I guess one can question whether a system found is a book is free since you paid for the book.
Create an original system yourself. My main trading system is an original creation. There may be other systems out there that are similar to it since it’s a culmination of years of exposure to other systems and experiences.
Modify someone else’s system and make it your own. As I stated above, I have done this many times.

Rich is Trading Forex Again

So after yet another hiatus from trading forex, I just recently had my first trade in months. It was a successful one also. But the question I want to answer is, “Is this blog dead?” The answer is no. I’ve made a living over the past 3 years ducking in and out of here depending on what’s going on in my life. Sometimes I’m just too swamped at my real job, other times I just don’t feel like writing, but I always come back. The great thing is I’ve built up a lot of content over the years so a lot of it applies to the type of forex trader you’re trying to become.

So where do I go from here? I’m in the mood to start trading forex again so that’s what I’m going to do. I’m also going to talk a little about stocks. I’ve had a lot of success, believe it or not, trading the stock market in the last couple of months and I think I’ve learned some things that I could apply to trading forex. So you’ll hear me talk about some of these things also.

Stay tuned….