The retail currency market has long been used for reserves, but has recently been threatened by FINRA, the largest independent securities regulator in the United States. Since the internet retail forex boom, many forex brokers have offered their clients a 50/1 – 400/1 upgrade to their accounts. FINRA claims that the proposed change will protect investors from excessive market risk.
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However, this proposal suggests that traders are not using leverage properly. Having the ability to take advantage is not the same as abusing positions, and this is the non-recognition of the FINRA proposal; Instead, leverage allows a trader to manage risk accurately in relation to the size of their positions.
For example, if a trader wanted to risk only 1% of his total capital per position, he would use the leverage to determine the amount they wanted to risk per pip based on the size of the stop loss. Having the ability to profit allows a trader to dynamically adjust the size of their stops to maintain the current levels of market volatility while maintaining a stable position risk, regardless of whether they risk 10 caterpillars or 1000 caterpillars.
On the contrary, the lack of such a lever can negatively affect traders who use appropriate risk management. Reducing leverage means that you will have a less favorable margin for active positions, even if you take the same amount of risk in both scenarios. This means that if the use traders were reduced, such traders would face the challenge of margin by taking a consistent position risk.
The most unpleasant part is that FINRA does not just want to limit its impact – they clearly intend to eliminate it in practice. It would be more understandable if FINRA simply wanted to bring currency restrictions to the level of commodity futures. However, according to the proposal, forex brokers will be able to offer only 1.5: 1 leverage. Everyone who trades in the forex markets knows that this will effectively put an end to retail forex trading in the United States, because very few people can trade properly under such a mandate. FCMs in the United States would go out of business, and traders in the United States would deposit their money in control brokers.
FINRA’s proposal, unfortunately, appeals to the lowest common denominator: people who overuse positions with inappropriate stop-loss. Thus, they harmed all traders who traded with proper risk management and used it as a necessary and responsible tool.
For anyone who is worried about this, you can relax comfortably for the moment. Thankfully, FINRA has no specific regulatory authority over the forex markets; this will be the domain of both the NFA and the CFTA, whose regulatory capacity is significantly expanded in forex. In addition, it would not be in the interests of the NFA and the CFTA to support this proposal, given the obvious mismatch it would create with currency futures: they have worked long and hard to gain more control over the domestic forex market. If regulators had the upper hand, they would have lost the ability to effectively regulate such activities (not even the membership fee they receive from Forex CTAs).