Did the Swiss Franc Disaster Open The Door To the Death of Retail Forex Trading?

The Commodities Futures Trading Commission (CFTC) is taking a long hard look at one of the least regulated sectors of the futures market-retail forex trading. Retail forex platforms have been proliferating over the past several years thanks to the Internet. The sector also got a boost as former operators of online gambling and poker sites rushed into the forex sector due to legislative restrictions against online gambling. Well, the recent Swiss Franc debacle that saw large and small forex investors alike take a bath has shed an uncomfortable spotlight on retail forex platforms.

Thanks to the bandwagon investing mindset of many forex traders, many who lost money on the Swiss Franc-Euro cross were betting that the Swiss franc will decline under the weight of the ECB’s much-anticipated quantitative easing program. The flood of cheap euros is sure to drag the Swiss franc due to its euro peg according to conventional wisdom. Not surprisingly, they bet big on the Swiss Franc. When the Switzerland National Bank took the Swiss Franc of the euro peg, the Swiss Franc soared and investors got burned. The carnage was most visible in the retail forex market. According to the CFTC, the retail forex market has always been rough on retail customers. Indeed, one of the biggest retail players, FXCM, reports that 70% of its customers lost money in the past quarter alone. The percentage of customers losing money has been going up quarter after quarter this past year.

Considering the huge losses incurred by customers as well as the impact this has on the platforms and their financiers, it is understandable that the CFTC would want tighter regulations on retail forex. One proposal is to limit leverage to a multiplier of 10.  This might, at best, devastate the industry or, at worst, destroy it outright. These platforms’ popularity stem mostly from the fact that consumers don’t have to pony up too much cash. Raise investor outlays too much and this might kill off a substantial chunk of the retail forex industry. Since the CFTC is looking at forex, they might want to look at the huge number of sites offering binary options as well.