Retail Forex

The ugly truth about this industry.  I couldn't agree more with this:
"Obliging operators to disclose more about the performance of their clients — such as average returns and churn rates — would help, too."
Same goes for FCMs too, not just Forex!

From:  More scrutiny needed of retail forex trading platforms
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retail foreign exchange trading accounts for some 6 per cent of global daily forex volumes, or about $300bn.
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According to the Autorité des Marchés Financiers in France, nearly nine-tenths of the clients it surveyed over four years lost money, with the average loss being almost €11,000. Worse, the AMF concluded that there was no correlation between trading experience and making money. The most active and regular punters simply saw their losses pile up steadily over time.

This is not entirely incidental to the way in which platforms conduct their business. Punters are encouraged to leverage their stake several hundred times its underlying value. Ratios of 200:1 are not uncommon, with more aggressive operators going as high as 500:1.

High leverage may provide investors with the opportunity to magnify gain in the case of a winning trade. But it also means that only a tiny adverse shift in exchange rates can wipe them out.

The trading platforms tilt the odds further by urging clients to put stop-losses on their bets. The consequent blend of market volatility and high leverage means that many trades are stopped early, even if the investor’s underlying view of rates is correct.

Heavy client losses help make platforms profitable. Most operators run flat books overall, simply pocketing the spread from each punter. Plus500, for instance, boasts a pre-tax profit margin of nearly 70 per cent.

But it also requires operators constantly to replenish the legions of burned-out clients. In its interim statement last year, Plus500 put its active client base at 67,000, but said it was adding 5,500 customers a month.

To fill these gaps, operators rely on affiliates. Some make use of so-called “educators” to provide a steady stream of ingenues. Lulled by images of helicopters and beach houses, potential investors are persuaded that “trading skill” will allow them to make a killing. Yet many of these “educators” earn their living from referral fees rather than trading.

It is not the function of the regulator to keep a fool and his money from being parted, but a few steps could offer a more realistic prospectus to the would-be client. Capping leverage would prevent platforms from cynically gearing punters with a view to profiting from volatility. The US has done this, operating a 50:1 limit since 2010. Significantly, much of the growth in the market has occurred elsewhere.

Obliging operators to disclose more about the performance of their clients — such as average returns and churn rates — would help, too.

None of this will stop more hapless souls from taking the plunge, but it might put a little more grit into the machinery. It would at least alert investors to the quality of companies they are increasingly being invited to back.