The Disappearing US Forex Market

The two leading US-based Forex trading firms, FXCM and Gain Capital (, have each reported Q3 results which showed nice growth in international expansion rates, overall trading volumes, revenues and net profit. Not bad in what has been a very topsy-turvy financial market across the globe.

However, lost in some of the numbers was the fact that trading volumes in their home market, the US, have dwindled to their lowest levels in years.

Sources: FXCM, Gain Capital.

As per the chart above, US trading volumes in Q3-2011 were down 26% at FXCM and 83% (!!) at Gain Capital from 2010 average levels. And this at a time when overall global trading volumes were up nicely during Q3. FXCM and Gain both reported healthy volume gains outside the US. Other firms outside the US, such as FxPro and Swissquote, also reported increasing Q3 trading levels. Volumes in the Forex industry typically move in tandem with volatility, and Q3 had lots of it in both the equity and currency markets – caused by S&P’s downgrading of the US, the Greece-Europe crisis, the Swiss National Bank’s effective revaluation of the Swiss Franc, ……

These figures are even more puzzling given that there was a lot less competition in the US Forex market this year than last. Continuing consolidation (such as Gain Capital’s April 2011 acquisition of Deutsche Bank’s entrant in this market, dbFX), alongside new rules disallowing foreign commercial banks (which prior to July 2011 had been exempted from NFA/CFTC registration) from offering Forex trading services to US customers should have led to a nice rise in trading among US clients for the handful of remaining domestic Forex firms, led by FXCM and Gain Capital.

Why the large drop in US volumes? In our opinion, there is a very simple answer – over-regulation.

Legendary real estate guru and billionaire investor Sam Zell was quoted last week on CNBC as saying that “the regulatory agencies (ed: in the US) have… scared the heck out of the business community.” And nowhere is that more true than in the world of retail Forex trading.

Over the past three years, a combination of new rules and regulations put in place by the NFA and CFTC (which regulate the futures and Forex industry in the US) as well as certain portions of the The Dodd-Frank Act have effectively reduced the choice US traders have – in terms of with whom they can trade, what they can trade, and how they can trade. These new rules have included:

  • reducing allowed leverage traders can use to 50:1 on Forex “major” pairs, and 20:1 on all other Forex pairs (by comparison, European and Far East traders can use 200:1 leverage, and sometimes more).
  • disallowing leveraged commodities trading.
  • requiring very restrictive registration of introducing brokers (“IBs”), even those which do not hold client funds – IBs typically account for up to 50% of new client flow at Forex trading firms.
  • increasing minimum capital required by Forex trading firms to $20 million – in most European jurisdictions it is under EUR 1 million, increasing as client funds held increase.
  • removing the exception which had allowed properly licensed and capitalized foreign commercial banks from taking US clients.
  • preventing traders from using a favored technique called “hedged positions” – i.e., opening identical but opposite positions, and waiting for the market to move before closing one position and keeping the other one open.

(For more details on Forex regulation see the LeapRate-Dow Jones Forex Industry Report for 2011).

Basically, in an attempt to “properly” regulate the industry and protect consumers, US regulatory authorities have effectively (and probably unintentionally) killed the domestic industry, forcing the domestic trading firms such as FXCM and Gain Capital to look abroad for expansion (and sheer survival), leaving US traders with greatly reduced choice and reduced competition.

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