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Why ONE-THIRD of U.S. Forex Dealers Just Got Wiped Out!
by Stalion on Tue Jan 15, 2008 6:27 am
Good Day Currency Traders!
Last October, I warned you that roughly 1/3 of all foreign exchange firms would soon lose their businesses because of coming regulatory changes. And now it's happened - 10 out of 34 forex firms were just wiped out by new regulations.
The National Futures Association (NFA), which regulates U.S. forex and commodity firms, just raised the capital that forex firms must have to stay in business. The new requirements force all U.S. Forex firms to set aside US$5 million to protect the firm's own solvency and their clients' assets.
Honestly, US$5 million should be pocket change to a market making operation. But as I'd forewarned you, many of these small firms were operating with very little extra capital. That's pretty scary!
Once Upon a Time Anyone Could
Become a Forex Dealer
How have these small firms gotten away with that for so long? When the currency markets first became available to individual investors, a firm wasn't forced to have a lot of capital to become a forex dealer/market making firm. In fact, the requirements were so easy in the industry that almost anyone could have been a market maker.
But now that the industry has grown, the requirements have to be "stepped up" for your protection.
These new requirements were nothing for the few large forex firms. These mega-firms have a war chest of US$20 million or more tucked away. In fact, some of these firms like Oanda and FXCM have US$50 to US$150 million in "excess net capital."
On Friday, January 11th, the NFA announced that 4 more (un-named) firms had closed their doors, so now a total of 10 firms have shut down. That wouldn't be too bad if there were hundreds of firms operating in the United States. However, there were only 34 firms originally before the regulations. Now that 10 have closed their doors, there are 24 left.
It wouldn't surprise me if a few more closed their doors. After that, we should be done. Already, a third of the industry has been wiped off the map.
The Downside of Being with these Small Firms
However, these small firms that couldn't make the cut have to transfer those accounts over to other firms that continue to make the cut. If you have the misfortune of being at one of these small firms, you won't get a choice of which forex dealer your account moves over to.
You'll generally experience quite a delay in your trading while the transfer process takes place. Then you'll have to learn a new market maker, their software, their policies, etc. What a pain!
So going forward, stick to the bigger firms with US$20 million in "excess net capital."
Find Out How Much Capital Your Forex Broker Has
How can you find out who's got that much set aside? Click here to go to the NFA's site (http://www.cftc.gov/marketreports/financialdataforfcms/index.htm)and see the latest month's report in PDF or Excel format. Then look in the "Excess Net Capital" column when you find your firm.
Only trade with the biggest and the best in this young industry. Don't be fooled or lured away to a small firm for the sake of some "bells or whistles." They "major on the minors" because they don't have assets to back them. So they have to have some sort of "bait" to get you to come over to them. Don't be fooled! Stick with only the biggest and you'll never regret it.
If I see other "growth pains" coming in the industry, I'll be sure to alert you. Until then, happy trading!
Sean Hyman, Currency Director
--------------------------------------------------------------------------------
Making 'Cents' of the Headlines
The Aussie Dollar Gets a Huge Boost
What Happened:
Apparently, inflation is back in style in Australia.
Yesterday, the TD Securities Melbourne Institute (TDMI) Inflation Gauge, which measures 1,000 goods and services, came out in Australia. It shows that inflation is powering ahead. Inflation climbed 0.6% versus 0.3% previously. So this now puts the annual inflation over the Australian central bank's "comfort level" (aka "target number") of 2% to 3%. The latest reading came in at 3.7%.
What I Say:
Inflation is riding high, employment is still holding up and their unemployment rate is expected to tick down a notch. So their labor market is tight which is good news for the Aussie economy.
The high level of inflation will push the Aussie dollar higher in the near term. Also when you couple this with America being in "rate cut" mode, it will propel the AUD higher against the USD for sure.
Another great benefit that the Aussie has going for it is "all-time high" gold prices at US$911 an ounce this morning. Wow!
Since Australia is the world's 2nd largest miner/exporter of gold, this helps their economy's profitability. After all, they're pulling it out of the ground for the same fixed cost, yet able to get so much more for it in the market now.
The Aussie Powers Ahead on Strong Inflation Data
So given all of this, the Aussie central bank will probably have to raise interest rates in February. Keep in mind that the euro and Aussie are the only two major currencies that could still lift rates higher. This keeps both of them well supported at the moment.
The top of the comfort level for Europe is 3%, yet their annual inflation is coming in at 3.1% right now on a year over year basis. Australia's comfort level is the same 3%, yet their inflation rate is 3.7% now on a year over year basis.
So if I had to bet on just one country raising rates right now...it would be Australia.
These central banks have to get their inflation under control and raising interest rates is one of the most effective tools they have at their disposal.
Therefore, in the near term, the EUR/USD and AUD/USD should hold their high, lofty levels.
Last October, I warned you that roughly 1/3 of all foreign exchange firms would soon lose their businesses because of coming regulatory changes. And now it's happened - 10 out of 34 forex firms were just wiped out by new regulations.
The National Futures Association (NFA), which regulates U.S. forex and commodity firms, just raised the capital that forex firms must have to stay in business. The new requirements force all U.S. Forex firms to set aside US$5 million to protect the firm's own solvency and their clients' assets.
Honestly, US$5 million should be pocket change to a market making operation. But as I'd forewarned you, many of these small firms were operating with very little extra capital. That's pretty scary!
Once Upon a Time Anyone Could
Become a Forex Dealer
How have these small firms gotten away with that for so long? When the currency markets first became available to individual investors, a firm wasn't forced to have a lot of capital to become a forex dealer/market making firm. In fact, the requirements were so easy in the industry that almost anyone could have been a market maker.
But now that the industry has grown, the requirements have to be "stepped up" for your protection.
These new requirements were nothing for the few large forex firms. These mega-firms have a war chest of US$20 million or more tucked away. In fact, some of these firms like Oanda and FXCM have US$50 to US$150 million in "excess net capital."
On Friday, January 11th, the NFA announced that 4 more (un-named) firms had closed their doors, so now a total of 10 firms have shut down. That wouldn't be too bad if there were hundreds of firms operating in the United States. However, there were only 34 firms originally before the regulations. Now that 10 have closed their doors, there are 24 left.
It wouldn't surprise me if a few more closed their doors. After that, we should be done. Already, a third of the industry has been wiped off the map.
The Downside of Being with these Small Firms
However, these small firms that couldn't make the cut have to transfer those accounts over to other firms that continue to make the cut. If you have the misfortune of being at one of these small firms, you won't get a choice of which forex dealer your account moves over to.
You'll generally experience quite a delay in your trading while the transfer process takes place. Then you'll have to learn a new market maker, their software, their policies, etc. What a pain!
So going forward, stick to the bigger firms with US$20 million in "excess net capital."
Find Out How Much Capital Your Forex Broker Has
How can you find out who's got that much set aside? Click here to go to the NFA's site (http://www.cftc.gov/marketreports/financialdataforfcms/index.htm)and see the latest month's report in PDF or Excel format. Then look in the "Excess Net Capital" column when you find your firm.
Only trade with the biggest and the best in this young industry. Don't be fooled or lured away to a small firm for the sake of some "bells or whistles." They "major on the minors" because they don't have assets to back them. So they have to have some sort of "bait" to get you to come over to them. Don't be fooled! Stick with only the biggest and you'll never regret it.
If I see other "growth pains" coming in the industry, I'll be sure to alert you. Until then, happy trading!
Sean Hyman, Currency Director
--------------------------------------------------------------------------------
Making 'Cents' of the Headlines
The Aussie Dollar Gets a Huge Boost
What Happened:
Apparently, inflation is back in style in Australia.
Yesterday, the TD Securities Melbourne Institute (TDMI) Inflation Gauge, which measures 1,000 goods and services, came out in Australia. It shows that inflation is powering ahead. Inflation climbed 0.6% versus 0.3% previously. So this now puts the annual inflation over the Australian central bank's "comfort level" (aka "target number") of 2% to 3%. The latest reading came in at 3.7%.
What I Say:
Inflation is riding high, employment is still holding up and their unemployment rate is expected to tick down a notch. So their labor market is tight which is good news for the Aussie economy.
The high level of inflation will push the Aussie dollar higher in the near term. Also when you couple this with America being in "rate cut" mode, it will propel the AUD higher against the USD for sure.
Another great benefit that the Aussie has going for it is "all-time high" gold prices at US$911 an ounce this morning. Wow!
Since Australia is the world's 2nd largest miner/exporter of gold, this helps their economy's profitability. After all, they're pulling it out of the ground for the same fixed cost, yet able to get so much more for it in the market now.
The Aussie Powers Ahead on Strong Inflation Data
So given all of this, the Aussie central bank will probably have to raise interest rates in February. Keep in mind that the euro and Aussie are the only two major currencies that could still lift rates higher. This keeps both of them well supported at the moment.
The top of the comfort level for Europe is 3%, yet their annual inflation is coming in at 3.1% right now on a year over year basis. Australia's comfort level is the same 3%, yet their inflation rate is 3.7% now on a year over year basis.
So if I had to bet on just one country raising rates right now...it would be Australia.
These central banks have to get their inflation under control and raising interest rates is one of the most effective tools they have at their disposal.
Therefore, in the near term, the EUR/USD and AUD/USD should hold their high, lofty levels.
