Market Watch
RETAIL FOREX: EVOLUTION, REGULATION, AND CURRENT TRENDS
The retail Forex market has evolved quickly, from being nearly non-existent 20 years ago, to being a major Forex liquidity provider (about 5% of Forex volume is retail trad- ers). Unlike other more established financial markets, such as the Stock, Commodity, and Bond markets, Forex trading didn’t start until the early 1970’s and the retail Forex market didn’t begin until the early 1990’s. With the retail offering of forex brokers such as Oanda, Saxo Bank, and others, retail traders had the same access as banks and other large institutions. So retail Forex can be examined and defined by brokers offer- ing retail trading, because without this market access, the retail Forex market would never have evolved.
Also, because Forex was an unregulated market, it allowed for many unethical practices and outright fraud. This has been approached by the regulator, the National Futures Association, although not explicitly a Forex regulator, they became the de-facto global Forex regulation model.
FX
DEFINING RETAIL Even the definition of what ‘retail’ is has evolved. Retail used to be a 100,000 minimum, now at some brokers retail is 100. Generally, retail is considered to be individual traders
opening accounts with
relatively small deposits. The NFA defines retail as anyone who isn’t a QEP (Qualified Eligible Person)i
.
However, reading the regulatory definition precisely, one notes several categories that although QEP’s, would by industry standards be considered retail: “non-United
States persons” and “Knowledgeable Employees”.
The thinking here
is that the NFA doesn’t regulate foreign persons and foreign markets, which is correct. However most would consider a non-US person from India with a $500 deposit retail.
Retail traders are - almost by definition - undercapitalized. Tus they are subject to the problem of gambler’s ruin. In a “Fair Game” (one with no information advantages) between two players that continues until one trader
goes bankrupt, the player with the lower amount of capital has a higher probability of going bankrupt first. Since the retail speculator is effectively playing against the market as a whole - which has nearly infinite capital - he will almost certainly go bankrupt. Te retail trader always pays the bid/ ask spread which makes his odds of winning less than those of a fair game. Additional costs may include margin interest, or if a spot position is kept open for more than one day the trade may be “resettled” each day, each time costing the full bid/ask spread.
FX TRADER MAGAZINE July - September 2011 15
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