Online FX Trading

The future of online FX trading depends on finding a balance between risk-taking and regulatory compliance.

Forex online trading is a dynamic industry where flexibility, agility and innovation are of key importance to success. This was highlighted in January 2015 when the Swiss National Bank decided unexpectedly to give up the 1.20 EUR/CHF cap. The impact of this decision is far-reaching. One of the biggest global brokers required a bailout in the hundreds of millions of dollars. Many smaller brokers are also on the edge of surviving due to their open positions and lack of liquidity.

Today’s industry drivers are not what will shape its future

Key differentiation factors of online FX brokers include speed of execution, smart order routing, customizable algorithms, highly scalable low-latency technology, multiple platforms (up to 5 for some brokers), good customer service, mobile solutions and provision of social trading capabilities etc. While some of these will continue to play a vital role for future brokers, recent developments suggest that there is an urgent need for change in order to stabilize the industry.


What is expected to change and why? 


Regulatory catch-up

The online FX trading industry has not been affected by regulations as much as other financial services branches. However, this is already changing. The first step, which we hope will be supported by brokers, is to reduce the leverage levels. Leverage of 1:100 or even 1:200 is simply not sustainable. Each shock or intervention, such as the one from the SNB, reveals systemic vulnerabilities. One of the options is to considerably reduce the applied leverage levels as soon as possible via investor protection regulations.


Time to reposition and target new client types

It is widely acknowledged that the majority of the online FX broker’s clients are inexperienced. Statistics also show that more than 80% of them lose money or have lost their whole equity capital at least once during their investment process. These resemble the statistics of a casino – far from the regulator’s vision for investor protection.

In addition, the ongoing dissatisfaction with the return on investment of traditional asset classes is reinforcing the trend to consider FX as its own asset class. More should be done to understand the long-term impacts of this trend.

In the context of the expected tighter regulations, online FX brokers should try to adjust their public image in order to target a different client segment – more risk-averse, disposing more equity capital, perhaps with fewer transactions but a higher trade volume, having more expertise and experience in managing the risks involved. As a consequence, the client retention and incoming funds rate should rise and the rate of account closures due to stop out should decrease. This change of client type together with additional value-added services will help the industry stabilize and evolve.