When the Switzerland National Bank caught the global forex market by surprise by suddenly pulling the plug on the euro peg for the safe haven Swiss Franc, many investment and finance firms took a beating. Forex trading, after all, is heavily leveraged. However, big investment houses walked away unscathed compared to the massive hit retail forex platforms took. If you think heavily leveraged trades are risky and potentially disastrous at the institutional level, take a look at the retail level.
Retail forex has been exploding precisely because many of these players, most notably FXCM, have been offering retail forex investors the tantalizing opportunity to turn a relatively low amount of cash into a decent payday. The secret, of course, is margin trading. For a tiny fraction of investors’ actual cash, they can take outsized risks in the hopes of turning that small investment into a large windfall. Who can blame them for clicking on those snazzy forex online ads, right?
Well, when FXCM got caught flat-footed by the surprise turn of events in the Swiss Franc-euro cross trade, it got hit by massive losses and had to take a $300 million infusion just to stay alive. This incident has brought the otherwise freewheeling world of retail forex onto the radar sights of regulators. No less than Commodities Futures Trading Commission is on the record as saying there needs to be more scrutiny of retail forex players. Among all types of forex players, the retail market is the least regulated. While this move towards greater regulatory oversight may bolster investor confidence, it can also mean consolidation in the industry or the outright exit of firms who tend to push the margin trading envelope too hard.
Images Courtesy of DepositPhotos