Increased Regulation of Forex Markets and Brokers Upcoming

After releasing new regulations to govern retail foreign exchange dealers in September 2010, the US Commodity Future Trading Commission (CFTC) is now beginning to penalize dealers who remain non-compliant.

The new CFTC regulations were implemented as a part of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Food, Conservation, and Energy Act of 2008. Under the new regulations, leverage will now be limited to 50:1 for all major currency pairs and 20:1 for other retail forex transactions. Retail foreign exchange dealers are also required to register with the National Futures Association (NFA), as either a futures commission merchants (FCMs) or retail foreign exchange dealers (RFEDs).

Currently, only 28 forex firms are registered with NFA, and of those 28 only 12 are listed as retail foreign exchange dealers. CFTC strongly encourages US retail forex traders to only work with the 12 registered firms if they manage their own accounts.

Since such a large number of forex firms are either not registered as forex brokers or not registered at all, the CFTC has begun to take action against them. In total, 14 firms have had enforcement actions filed against them by the CFTC. Amongst those 14 include firms such as EuroForex Development LLC, FXOpen Investments Inc., and Wall Street Broker, LLC.

Although 14 firms have actually had action taken against them, the NFA is currently reviewing all of its members to be certain of no foul play. In particular, NFA is looking “for any signs they are designing computer systems to take advantage of what is known in the industry as ‘slippage,’ or small price movement that happen between the time a customer orders a trade and when that trade is actually executed.”

Two firms, IKON FX and Gain Capital, were already convicted of such behaviors and fined a total of $800,000 last year. NFA hopes to continue its investigations to make sure traders are not losing money due to a broker’s foul play, and to gain further industry transparency.

5 Responses to Increased Regulation of Forex Markets and Brokers Upcoming

  1. There definitely needs to be some cleaning up in the industry. I work with a number of these companies, and I’m less than impressed with many of them.

    I don’t think leverage is as much of a concern as is the “slippage.” Bucket shops abound, they’re soaking up a ton of money on less educated investors.

    No one is trading 100% of their account balance at 100:1, so any limits on leverage won’t do much to cool the currency markets at all. The only difference is that someone will trade 1% of their balance at 50:1 instead of .5% their balance at 100:1. That won’t solve anything.

    • This post was written by a contributor (I know very little about Forex). I’d love to hear more about your experiences. How do you work with them? In what capacity?

      • Marketing.

        I can tell you that forex brokers are willing to pay insane prices for customer acquisition. This is partly to do with the fact that “commissions” (spreads) are larger/more profitable in currencies than they are elsewhere.

        With foreign brokers, it is related to the fact that many stand as the counter-party to the investor, making money as the trader loses it. And lose it they do…I don’t work with these guys. Garbage.

        Broker earnings on trades are astronomical…a 10 lot trade at a 3 pip spread means $300 in revenue for the broker. To trade similar amount in stock would be far cheaper, depending on the broker/fee schedule.

        Forex fees at spot are spread only, which means lots of revenue on active/big traders.

    • I have never looked into it – just seems like there are some very smart guys who never sleep and that is all they do playing around on there…

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