Charalambos Psimolophitis

Retail Forex Comes of Age.

The rate at which the retail Forex market continues to grow is nothing short of astounding, even for us who have been invested in its growth for so long. In 2007, when FxPro was granted a CySEC licence, retail Forex accounted for around 5% of foreign exchange volume. In 2010, when we received FSA authorisation, this figure had risen to 10%, and by the time we were awarded a full FSA license in 2012, it had almost doubled to 18%. Now in 2013 we’re talking about figures of around 20%. Such growth is genuinely staggering because it means that retail Forex has now overtaken both hedge funds and pension funds, placing it second only to the banks themselves as far as trading volume is concerned. Indeed this year’s big story, aside from the market’s rapid recovery from 2012’s relative lull, has been that retail traders are fast becoming a force to be reckoned with on the global currency markets. With institutional investors exhibiting higher and higher levels of risk aversion since the financial meltdown of 2008, it is retail traders and not asset managers who trend watchers are now keeping a close eye on. In Japan, for instance, it is not unheard of to have upwards of 40% of daily volume coming from the retail sector. In fact Japan has in many ways become the poster-child for a robust and tightly regulated Forex market.

In hindsight we now see that the direction retail Forex has taken has almost entirely been driven by the traders themselves. Marketing departments can flatter themselves all they like, but traders know what they want, and one way or another they have been campaigning for it for as long as the technology has been around to make online Forex trading a viable prospect. The trend speaks for itself. More regulation, higher levels of transparency, segregated accounts, direct access to the interbank network, no phoney bonuses, no intervention from dealing desks, higher liquidity, lower spreads. And if you look at the lay of the land today, it has been a self-fulfilling prophesy of sorts; one where traders have voted with their capital, opting for regulated brokers, sharing their experiences with each other via Internet forums and other online trading communities, eschewing the brokers they have had negative experiences with, demanding real access to the markets and not some videogame equivalent with a broker-come-casino maintaining a house advantage. And now, with daily volumes of $100 billion being standard practice among the top ten brokerages, the volume is actually there for banks and prime brokers to sit up and take notice of retail traders, giving them exactly what they have always wanted.

Of course this evolution has been two-pronged. The educated dollar-voting and myth-busting on the part of traders should never be overlooked, but neither should the ever-vigilant regulatory structure that has grown up around the industry to protect its consumers and safeguard its growth. As far as regulation goes not many understand the delicate nature of the balance that needs to be struck. At FxPro we have always seen regulation as paramount, and are in full support of every effort to increase transparency. I personally regard regulation as an on-going filtration process through which the coarser, less ethical brokers are removed from contending for clients’ highly valued capital. I feel it’s a useful metaphor, because as the industry has developed and continued to diversify its products and services, so too has the subtlety with which many brokers have attempted to stack the odds in their favour, while still slipping through the regulatory net. But in parallel to this, the most dedicated regulatory authorities have continued to step-up their own game, refining their filtration process so as to account for an ever-evolving state of play. Regulation has to continue to change; after all it has to contend with an industry whose development consistently outpaces any attempt to rein it in. But the argument I’m making here is in support of an on-going refinement of the filtration process, rather than any draconian attempts at wholesale purification that would kill whatever was alive and vital about the industry in the first place.

I think the United States is a perfect cautionary tale here. To mix metaphors for a moment, I’ve heard of the U.S regulatory endeavour described as being akin to using a meat cleaver where a scalpel would have sufficed. There’s a very good reason for why the overwhelming majority of retail Forex volume now comes from Europe, Asia and the Far East; U.S regulators have managed to make doing business in the U.S such an intolerable prospect that most reputable brokers are not only unwilling to venture onto U.S shores, but now won’t even touch U.S clients at a distance. And who do you imagine these clients eventually end up trading with? The very brokers that regulators are supposed to filter-out. So far heavy-handed U.S regulation has managed to remove around twenty percent of the value of the U.S retail Forex market, without stemming the demand, and without being able to protect the consumers who end up trading with unregulated brokers.

At the other extreme it should be noted that regulation without enforcement can be as detrimental as brute-force regulation, or no regulation at all. Many brokers are now springing up who claim to be regulated in a number of exotic locales that may have the very best of intentions, but little if any power to enforce their own rules. This is why we were delighted to see CySEC baring its teeth this year and fining a number of brokers who fell afoul of the commission’s rules. It has been refreshing to observe CySEC working hard to respond to those who cast aspersions on Cyprus’s role as a hub for European retail Forex. It is also why we eagerly await MiFID II in 2015, and trust that the on-going trialogue between the European Commission, Parliament and Council of Ministers will be productive, and treat the issue with the sensitivity it deserves. We hope that European legislators have learned a few important lessons from the Dodd-Frank Act, which has effectively straight-jacketed the U.S Forex industry, against, it should be noted, the will of the very traders it exists to protect. A cursory search through some of the more populated forums will quickly confirm this for anyone who has any doubts.

For our part we are focused on continuing to play a big part in the evolution of the industry, bucking the dominant trends and forcing change. Our ECN platform went live before most of the online discussions regarding ECN, STP, and NDD even began. We moved to an Agency Model and fully aligned our interests with our clients while others were still trying to sing the praises of the Market Maker model. With High Frequency Trading being such a hot topic, approaching 40% of total trading volume in Europe and in excess of 70% in the U.S and Japan, we developed Quant, a platform allowing our clients to develop their own automated trading strategies without any prior coding knowledge. Products like Quant are fascinating because we ourselves do not fully comprehend what can be done with them until we hand them over to our traders. They are the ones who run with them and shock us with their results. This is the future of retail Forex trading as we envision it; brokers and traders working in tandem, we behind the scenes, and they achieving the results. Long may it continue.