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#1 13-03-2019 21:17:22

johnedward
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From: Paris - France
Registered: 21-12-2009
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Global trends for forex brokers in 2019

Global trends for forex brokers in 2019


http://www.forex-central.net/forum/userimages/brokers-forex-2019.PNG


Article originally appeared on Topbroker

The past two years have been monumental to the retail forex arena because of the numerous changes that have been implemented. The changes have come mainly in the form of regulatory changes, but we can also observe changes stemming from geopolitical issues as well. Because of these changes, forex brokerage houses have had to adapt and change the way they run their business. The changes have not been quick to be implemented, but we can already begin to see some differences in the way the forex companies structure their companies. This shall be our main focus today as we consider the changes that have come to the arena and how various brokers have responded to these changes.

What are some of the changes in the currency trading arena?

Before we can begin to discuss how the brokers are changing their business models, we first need to consider the actual changes in the field. Only then can we show that the brokers are changing tact in response to these changes.

As previously mentioned, the main change in the forex arena has come from changing regulations in different regions of the world. The most relevant change in regulation went into effect in July of last year when the ESMA imposed a new set of forex regulations. These laws made changes to various aspects of the arena, but most importantly reduced the amount of leverage down to a maximum of 30:1 for major currency pairs and even less for exotic pairs, commodities, indices and other trading instruments. These changes are still in effect throughout Europe and even in the UK since it is still a part of the EU following a breakdown of Brexit talks.

When the new rules by ESMA were first suggested, last year in June in a final draft, many traders considered them draconian. Fortunately, the currency trading arena is decentralized and one doesnít have to be restricted by borders. By the way, donít take that as us advising you to break the law; many countries do not allow forex trading with forex brokers that are not licensed in the traderís country. But it does happen, and this is the reality. Therefore, a lot of European traders sought forex brokers abroad in countries like Cyprus, Australia, Russia, etc. We have already discussed the dangers of working with offshore brokers many times, and thereís no need to keep harping on that, but the evidence does show that a lot of retail traders moved to offshore brokers.

Unfortunately, there seems to be a wave of restrictive laws blowing across the forex arena, and now even those countries previously thought to be friendly might also make the same changes. CySEC, for example, suspended the licenses of several brokers they had registered over some offences, showing that even they were taking a tougher stance on regulations. Over in North America, the laws regarding forex trading are still very restrictive as they have been for years, but a repeal of the Dodd-Frank Act seems likely. If this does happen, we can expect to see a lot of changes across the forex arena, but this is unlikely in 2019 and thus not worth considering too much for now.

Besides the changes in regulation about forex pairs, binary options trading seems to be completely ignored now - even looked down on - in a majority of the world. ESMA completely banned the arena, as have several other countries outside the EU. For those countries that havenít banned binary options, warnings about the risks are often issued by forex regulators to protect their residents from the dangers. Surprisingly, you can still trade binary options in the US, but only two brokers are licensed to do so, which makes it pretty safe.

Finally, brokers are no longer allowed to incentivize clients or advertise their services, and are instead required to show a risk warning. This has been a major challenge for the brokers who have to find new clients, and it should be interesting to see how they have managed to get around this hurdle.

Geopolitical issues

If you have been watching the news this past week, then you know there is a lot of geopolitical tension across the globe. A lot of countries are at loggerheads with each other, and these kinds of tensions affect the brokers too. Not all of them do, though, because some are out of their control, but all the same the brokers have to adjust their structures. Take an example of the currently ongoing Brexit negotiations; the outcome will determine how European countries will be relating with the UK. As a result, both Europe and UK based forex trading companies must make changes within their operational model in order to adapt.

There are also other defining issues being experienced such as the trade wars, trade deals, embargos and other restrictions across borders. While these issues do not affect the forex arena directly, the policies might affect the currencies involved in forex trading. A good example was the effect of adding the Chinese renminbi to the IMFís basket of SDR (Special Drawing Rights) currencies. The move rapidly increased the liquidity of the currency around the world, making it more widely traded on forex arenas. The IMF decided to allow the renminbi after the government showed interest in making the currency free-floating.

Such kinds of geopolitical changes have a major impact on the entire forex arena, and brokers must keep them in mind as they go along with their business and make necessary adjustments. In the case of geopolitical changes, the brokers must pay attention to the laws and how they change to protect themselves from being on the wrong side and risking heavy fines or the business itself.

Changes in arena liquidity

The FX arena is perhaps the most liquid arena in the world with a daily turnover of $5.1 trillion every day. A majority of the turnover is generated in swaps, but retail, over the counter, trading has been on the rise too. The Bank for International Settlements (BIS) keeps track of the entire forex arena and releases a report every three years on the state of the arena. The last report to be released was back in 2016, and weíre expecting the next one this year in April. The good news is that they also release quarterly reports, which we can use to keep track of the changes. In the last report, 2016, the BIS indicated that the daily turnover had dropped from $2 trillion in 2013 to $1.7 trillion in 2016 for spot forex transactions. The effect of such a drop is obvious Ė less trading means less liquidity. With less liquidity comes many other problems like wide spreads, slippage, etc.

We then reviewed the latest report, although a quarterly report, by BIS from December 2018 and things seem to be turning around as you can see from the image above. It is clear that average daily turnover decreased from 2014 to 2016, but then it began picking back up in the coming years. That means that liquidity has increased in the arenas and there are more traders willing to participate. The most likely reason for the aversion between 2014 and 2016 was the bankruptcy of various major brokers that could have made the arena seem unstable. Additionally, geopolitical moves like the Swiss National Bank abandoning the euro really destabilised the arena as the Swiss franc is one of the most heavily traded currencies.

What is interesting to note is that the implementation of unattractive regulations in the arena did not negatively affect liquidity as many had expected. You would think that many traders would pull out of the retail forex arena, but the opposite seems to be happening. As we shall see in the next sections, the conclusions from this move have had some unanticipated results, and again the brokers are having to adjust their business to the new reality.

Rise of cryptocurrencies

All through 2017 and 2018, cryptocurrencies were the dominating issue around the world. They were a completely new concept in finance and they drew a lot of debate and hype. It didnít take long before speculators saw their value as a trading instrument because of their massive potential for huge profits. Consequently, forex brokers too had to include them as part of their offerings to their clients. Although not considered to be actual assets in many countries, coins have gradually become accepted as a form of payment and as a speculative tool. The good news is that many financial regulators like the CFTC and SEC have deemed them as recognizable assets, giving coins a firm leg to stand on.

Today, coins no longer appear in news headlines either because of a sharp rise in value or otherwise, but they have quieted down. The result has been a culling of worthless coins as only the most useful ones remain. Upon checking a coin monitoring website like CoinArenaCap, you can see that the number of coins is still rising, but most of the new coins are being launched as utility tokens through ICOs. We no longer interpret coins as a quick investment tool but an actual instrument, and this is changing how brokers are providing for their trade and using them as tools for transfer of value.

How are forex brokers adapting to the new environment?

Now that we know the main changes that have been occurring in the currency trading arena, we can begin to see how brokers are reacting to them. Of course, they are not going to tell us this outright, and it is up to us to read between the lines and deduce what is happening.

Targeting a different kind of trader

In the god old days about three years ago (it seems so far back now), everything was easy about the forex arena. Although the US arena was not very active for retail traders, the rest of the world enjoyed a very inviting arena. Laws were pretty lax in most regions of the country, and even in places where the laws were a tad more restrictive, it wasnít the same as what we see today. Taking the example of a region like the UK, the FCA only made things difficult for the brokers with high capital requirements and such. For the brokers, these measures could be easily countered by the large swath of willing traders who were attracted by the lucrative trading conditions like high leverage and trading bonuses. A utopia, it was.

This is no longer possible since the laws were changed to make them less attractive than before. The regulators changed the law to protect uninformed people from being defrauded, and they ended up pushing most retail traders out of the industry. Nevertheless, the brokers still had to survive, and to do so they started looking at high net worth traders and institutions to work with. These are the kinds of traders who value quality over quantity. That is to say, they choose their brokers based on the quality of service and not on the amount of leverage or bonuses offered. The good thing about this kind of broker is that they can deposit large amounts of money, enough to cover the deficit that arose after the retail traders left. Sometimes, they may even exceed the previous capital deposited. These are also the traders and institutions that use sophisticated trading algorithms to trade, which means thousands and even millions of trades per day. For a broker earning money from spreads on each trade, itís easy to see why any broker would prefer such a trader over you or me.

One more thing, the high net worth traders are more informed and better traders. You may have noticed that brokers now have to reveal the percentage of their traders that win, right? Well, that was another measure put in place by the new regulations. As the forex arena was decentralised, there was no way of knowing how many traders actually made money, notwithstanding that a lot of people made some wild guesses. ESMA put this matter to rest by demanding all agents indicate clearly how many of their traders lose money. Obviously, no one wants to work with the broker who has a high number of losers, whether itís their fault or not. To protect their reputations, brokers elected to sign up more professional traders so their statistics would go up. By selecting these kinds of traders, they could compete against rivals and earn more clients.

The trend among brokers today, therefore, is to become picky about the clients they sign up. They still donít turn away individual traders with low capital, but your leverage will remain limited to the cap. As the law allows, more informed traders can be given a higher leverage, and the agents grant this privilege to those traders they deem Ďworthyí. They are usually either professional traders, institutions or consistently profitable individuals. In this way, they can preserve their reputation without losing any revenue.

Reaching unexplored territories

The US, Europe, Japan and Hong Kong have long been the major financial hubs in the world. Like bees to honey, agents were attracted to these locations because they had the highest number of traders they could sign up. Add to that, it is usually important to be close to the source when making trades because distance does have an effect on the speed of execution. Even if a broker did not have headquarters in each of the above locations, they ensured they at least had a server for their clients. This trend too is changing as the focus of the FX arena becomes more widespread than it was before. Previously unexploited regions like Asia and Africa are becoming more active in their participation and cannot be ignored anymore.

Coupled with the restrictive laws in the US and Europe, these former hubs are also more hostile for retail forex trading. While agents cannot completely ignore these hotspots, they can certainly acquire headquarters in developing nations to complement their business. This became evident when the ESMA regulations came into effect and agents advised their clients to transfer their capital to different domains. A broker can have a domain registered in the UK and another in Cyprus where the laws are less strict. In so doing, they not only keep their clients, but also make European residents more attracted to the offshore domains with their features and offers. Itís no wonder, therefore, that we are seeing more and more forex events being hosted in countries such as Singapore and the like, where the industry is booming. For the agents, it is crucial to look outside the conventional borders and reach new areas in search for more clients previously not exposed to the industry.

Constantly changing

The currency trading industry has become so treacherous that you constantly have to keep moving, changing and adapting to the circumstances. Neither politics nor peopleís behaviours can be predicted anymore because the society is now more connected and sharing of ideas is prevalent. This is why we keep seeing unexpected events occur around the world, which makes the world unpredictable. For a brokerage business trying to survive, the key is to always be ready to change and never become paralysed. forex agents showed us how good they are at this last year when the laws came into power because they simply created new avenues for attracting customers. As for the other unexpected changes that happen regularly, those cannot really be remedied.

The good news is that, in this unpredictable world, people too are getting more interested in new ideas, which is why the retail sector of the forex arena is growing. No longer are people limited to conventional jobs or investment tools, but new and exciting ones. This means that there are a lot of interested individuals just waiting to be signed up. For a broker, this is excellent news as there is no shortage of clients to be signed up. The only problem is that competition too becomes fierce among companies as they try to lure and snatch clients from rivals. But with increasing liquidity, it is possible to provide excellent services to all clients without compromising on anything. In short, the arena is very large to accommodate everyone.

Whatís more is that itís still growing with addition of new trading instruments. More currencies are being regarded as tradeable when they were previously not, such as the Chinese renminbi discussed earlier. Then there are the cryptocurrencies too, of which there are hundreds, just waiting to be included into the brokerís list of offerings. Itís a good time to be a broker today despite the hurdles, and all it takes is a willingness to take chances to stand out above the rest.


"Anything worth having is worth going for - all the way." - J.R. Ewing

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