Charalambos Psimolophitis

Towards a New Asset Class.

Since the technology came of age in the mid-1990s, making online Forex trading feasible for retail investors, there has been a tug of war between brokerages regarding what shape this market should take. The past decade or so has seen it assume many guises. We have witnessed the Wild West days of little or no regulation, the move towards legitimising the industry under all the relevant authorities, and now the latest step on this journey in which certain segments of the industry are finally aligning their interests with those of their clients.

The wider Forex market is the largest and most liquid in the world, with a daily turnover of around $4 trillion. At its inception retail Forex accounted for a negligible percentage of daily foreign exchange turnover, but in less than two decades it has become a major player. In 2007, a decade after the first generation of retail brokerages began offering their services, the retail Forex market accounted for around 5% of all foreign exchange transactions. Today, depending on the estimate you look at, it accounts for as much as 20% of the overall volume traded.

Sometimes, however, early successes and easy profits can breed bad habits that hamper future growth. The ever-increasing demand for these services and the sheer amount of capital available has led to certain questionable practices quickly becoming the standard model among some brokers. Very early on a zero-sum relationship between broker and client developed in which brokers would make market on their clients and profit from their losses. Extreme amounts of leverage were initially offered, not to extend clients’ reach, but to wipe out their balances should a currency pair fluctuate by a few percentage points. Enticing bonuses were dangled in front of unsuspecting beginners in order to lock deposits down with all kinds of recondite withdrawal and trade volume requirements straight from the world of online gambling. For some disreputable brokers it even became standard practice to use traders’ histories against them. The law of averages was allowed to take care of statistically weaker traders, whom brokers would automatically bet against, while stronger traders were ring-fenced and manually monitored by dealing rooms that would incrementally increase latency and up the occurrence of slippage and re-quotes until the brokerage’s statistical advantage reasserted itself. Finally, the boiler room, which never really disappeared, also reared its ugly head again. Only this time it was part boiler room, part bucket shop with a global reach thanks to the World Wide Web.

The conditions I have outlined above continue to this day. The online Forex market encompasses all manner of companies, from the unregulated bucket shops at the lower end, that never execute a single trade on the market burning as many customers as they can before moving on, to the legitimate market makers that maintain a dealing desk, but genuinely attempt to negotiate the conflicts of interest inherent in their business model. And now a new breed is gaining ground; the few companies, like ours, that are taking legitimate steps towards abolishing all conflicts of interest by adopting an agency model in which all trades are anonymously passed straight through to the interbank network with no interference from a dealing desk.

Since being founded, FxPro has made transparency a primary focus. Our goals have always been to achieve full regulation in all the jurisdictions we operate in and to distinguish ourselves from the rest of the industry by being on our clients’ side every single time they trade. Our transition to the agency model sees both of these commitments to our clients having been met, and we continue to campaign for these same changes to be adopted industry-wide. I believe that for retail Forex to continue to grow, our clients’ successes must become our own. Only companies that are invested in the continued profitability of their traders, that gain from the volume traded, rather than the amounts lost, have the incentive to provide them with all the tools they need to succeed. This is why we have been engaged in developing innovations such as EA Library and Quant, which bring the power of algorithmic trading to retail clients with a level of accessibility never seen before, or to services such as SuperTrader, which is set to redefine trading. It is also why we are investing heavily to ensure that our clients enter the global currency markets as educated and well-rounded traders before they even open their first position with their own capital.

The aforementioned array of contradictory business models and broker types is another obstacle to the industry’s continued growth. Newcomers are bombarded with competing advertising copy from a market fast-approaching saturation point, and many are fooled into trading with unethical companies who use all the right buzzwords but have no intention of meeting their commitments. But even here, the widespread adoption of the business practices secured by the agency model will act as a filter that separates the serious players from those who choose to hit and run. The boiler rooms and bucket shops that tarnish the name of the industry will soon fall away when every hint of a conflict of interests is eradicated by brokerages that are genuinely invested in the long-term sustainability of online Forex. If we can strike this balance collectively, even in an increasingly turbulent economic climate, online Forex promises to become a new asset class in its own right, one in which individuals can take control of their own financial destinies, limited only by their commitment, their eagerness to learn, their willingness to grow, and their desire to succeed.