Understanding the Vulnerable Soft Underbelly of the Retail Forex Industry

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woman with euros and dollars

Woman holding euro and dollar bags

Have you ever felt you were bombarded by Google ad network ads telling you how easy and profitable it is to trade foreign currencies? There’s a reason why those ads seem to be everywhere-they are profitable. The lifetime value of a forex customer is much higher than that of alternative high stakes trading businesses like binary options. Retention is much higher since people easily burn out from the win or lose setup of binary options. With that said, the recent wave of financial pain unleashed by the Swiss National Bank’s decision to remove the Swiss Franc (CHF) peg to the euro left many retail customers devastated. Many retail customers (and quite a number of institutional and fund managers) were betting against the CHF because of the EU’s recent moves toward quantitative easing. This would have made it more expensive for the Swiss finance authorities as they would have to scoop up watered down euros to prop it up against the CHF. This would put downward pressure on the CHF. Well, Swiss finance authorities had a different idea and removed the peg entirely.

Lessons learned 
The most obvious lesson is that you can only rely on expected or announced news so much. You have to protect yourself against the unexpected. Second, and most troubling, the CHF fiasco showed that the consumer forex industry, as highlighted by the fortunes of one of its biggest players FXCM, is more vulnerable than most observers thought. How can it not be? The main reason there’s even a retail or consumer forex market is the huge amount of leverage offered by these trading platforms. When the trades go south, the platforms often have to take the immediate hit. Not surprisingly, FXCM had to get a $300 million lifeline just to keep its digital doors open. The amount of leverage involved and the susceptibility to surprise swings in the market make the forex space a dangerous place indeed for investors. Loss coverage by the platforms can completely wipe them out. While retail forex represents a modest 10% or so of the total forex daily spot market, the pain as far as consumer investor confidence in forex trading and trading platforms can’t be overestimated. At best, expect fund diversion which can weaken equities positions or other investments.

Jacob Maslow is our Editor, and has extensive experience with writing about global financial matters. He also runs a successful SEO consulting business, Mekomi Marketing