Choose an FX Platform Where Accountability is Transperant and Liquidity Proven

Forex Market Commentary  

FX trading vs Futures trading.

At least 75% of all retail FX trading platforms are capitalized at under $20 million and as far as I can fairly observe none of the current retail FX trading platforms today come as close to the capitalization, organization, sophistication and regulation of Man Financial who had both an enormous retail and wholesale/ institutional division and were a huge FCM (Futures Commission Merchant) and yet still went belly up in the aftermath of the Lehman Brothers collapse in 2011 with a huge derivatives exposure that the group couldn’t unwind. So where does that leave the small trader with accounts under $10,000. If I was a small trader I would be taking 3 steps back and asking myself some serious questions about the framework of an FX platform where all my hard long hours of research can vanish if my platform provider goes bankrupt in one huge sweep of a movement of several hundred pips against? Can this happen? Absolutely yes if you can cast you minds back to Man Financial who were a colossal regulated FCM.

FX trading platforms like their customers enjoy an enormous amount of leverage with the commercial banks in the Inter-bank market. Under current strict lending criteria one would expect a commercial bank to provide a trading line of credit to an FX platform at considerably less than 100:1 leverage. Although retail FX Platforms offer services of 100:1 leverage where a retail customer can take a position of face value $100,000 for as little as $1000, the same generosity cannot be said with the commercial banks who are more likely going to be offering facilities of 20:1 if not more likely 10:1 to the retail FX platform. On the basis of simple arithmetic that would equate to a line of credit made by the commercial bank to the retail FX platform from anywhere between $200,000,000 to $100,000,000 on the basis of a $20,000,000 deposit.

Taking the commercial bank line of credit the retail FX platform would thus program their quotation formula to range 5 – 10 pip above operating cost > commercial bank quotation, thus to make a dynamic moving spread to borrow cheap and sell higher to retail customers.

The formula for the retail FX platform would appear as follows:   

Under times of stress as per example of the SNB decoupling form the Euro currency last January 2015 the formula may break down with commercial banks making margin calls on the FX platform in cases of rapid and sudden movements of over 300 basis points in any direction which then distorts the ability of the FX platform to serve the bids and offers of its’ retail customers and then lead to a collapse of the entire formula as illiquid unbeknown to the retail customer.

The chief advantage of using an FX platform vs an FCM (Futures Commission Merchant) who offers regulated exchange futures contracts is a low operating cost for the retail customer and low position cost. The chief disadvantage of using an platform vs an FCM (Futures Commission Merchant) is the inability to hedge the long or short position with a put or call option. Due to strict governance under CFTC ( Commodity Futures Trade Commission – a US government regulatory agency) it is highly unlikely that an FCM (Futures Commission Merchant) will come into a situation where they would face a margin call or even liquidation due to far superior risk management accounting applied since the break down of the financial system in 2008.

Kindly weigh in all considerations when choosing your mode of trading in the currency markets.

Pieter Bergli - Trader X16

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Futures  and Options trading involves risks of losses. No representation is  being made that any reader and account will or is likely to achieve  profits or losses similar to those that are being discussed on this blog  http://forexeducationperspective.blogspot.com/. The past performance of  any trading system or methodology discussed is not necessarily  indicative of future results.

CFTC  RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN  LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO  NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN  EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT,  IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED  TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE  DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE  THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR  TO THOSE SHOWN.

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