Hi everyone

Three days ago I made a post here talking about NFA’s new rule 2-43 (b) and its consequences on retail trading in the US.

NFA Rule: 2-43 (b) - Is US retail FX going to be ever the same?

Well, that post generated two very interesting responses from two high qualifyed traders as Dr. Sivaraman and Dirk Du Toit.

I want to reproduce here in this post their responses and I’ll look forward your comments

Francesc

Dr. Sankaran Sivaraman
Dear Francesc

thanks for exploring the NFA new rule.

In 2000 -2001 NFA imposed that the US brokers are not to provide hedging to US clients - and commented if a trader is using hedging he does not know how to trade.Then US brokers asked clients to open 2 accounts - but later they found that does not act as hedging because one account may be wippedout and the other account the client want to earn more but when the market reverses the client lose in that hedging account also.

Hence US brokers re-introduced hedging silently again in late 2003-early 2004 to get back the lost business.FXCM - Mr.Drew Niv knows well about this.Now a similar situation has come.It appears by removing the risk limiting facility to US traders,NFA wants the traders to do more scalping and swing trades rather than position trade - a way to increase the volume of trade - but it is similar to cutting the golden goose,the out come of it will be unexpected for them.To stimulate traders to take more trading,the market moves should give profit booking opportunities to traders frequently following some technica; or fundamental perceptions.if a traders loses money by taking a buy position or a sell position because of quick volatile moves - he tend to become cautious,hence most of the traders wait to see the out come of the data release and the market volume decreases.it appears similar to a situation - we avoid taking cash while travelling in purse because of risk of losing it and take travellers check or credit card.the miscrants developed a method to misuse the stolen credit card.if we develop a new method to avoid taking risk,the miscrants are to develop newer methods as well,it is their pervertat mind set to go for such innovations faster than the analyst who suggest the means of caution and safety.the best way to solve this problem is to punish the greedy who use uncommon method of earning rather than tighening the hands of traders who think that they can make some money from the market.

I wish to add questions:

1.Why hedging was re-introduced in 2003 and now found redundent?
2.can the traders watch the market all the time to take entry and exit- will it not MAKE THEM ADDICT TO TRADING?

3.there are many ifs and buts during trading - like disconnection of internet,freezing of the platform or the computer,gap moves during data release time- how the traders can limit the risk - avoid trading when such difficulties occur or accept such unfortunate situations as fate to lose money by no fault of them?

4.Why NFA is not viewing ‘hedging’ gives either way trading opportunities to traders? (if needed I am willing to explain to them various methods to use hedging to earn net profit from any market condition.)

Thanks for your initiatives taken objectively on behalf of the traders.

Regards
Dr.Sivaraman

Dirk Du Toit
If I may chip in here:

The NFA reacted in this case like in almost all other recent changes that are directed only at forex firms (FDMS) to abuse.

They learn about the abuse through client complaints and the following up of those complaints.

If you look at the explanations they gave for these rule changes it is clear that it had to do with abuse of leverage, carry and hedging and the potential (money managers mostly, but it can also be by just referring to the gross value of a track record of any trading system) to deceive customers about the net value of accounts due to discrepancies between net value (equity) and gross value (balance).

Take now for example the last potential problem - money managers deceiving clients. FX Solutions simply don’t allow hedging on their money manager platform (while they did on the individual account platform). So it is pretty easy to manage that issue without fiddling in everyone’s account and with their peculiar way to turn a profit.

I am a seasoned, multiple positions, low leveraged, take many small profits and few large losses (only if necessary), trader and there are significant advantages in being able to (i) hedge and (ii) offset positions in another order than FIFO.

But unfortunately everybody that trades like this seem now to be affected because some abused the retail investor’s lack of full knowledge / implications of how high leverage, hedging and carry and things like that really work.

The problem is the way the US regulator deems it necessary to try to save foolish / ignorant people from themselves and in that zealous effort don’t mind to impact on the rights of others (less foolish and ignorant) to decide for themselves.

Dr Sivaraman’s points about the NFA having an interest to increase the volume of trading is interesting and something along the same lines crossed my mind. It work against trading with multiple small positions over a wider price range and longer time in the market, which decreases the volume of trading over any period of time.

If you ask the question what this will mean for someone trading after 31 July if I understand the implication of FIFO only offsetting correct, then I can’t help to agree that what it will mean is that you will be forced to trade in the one way that undoubtedly is at the base of the 90% losers statistic, namely, one big trade at one “well timed” entry and exit price (based on intra day technical analysis) and positive “risk-reward ratios”.

That would be a sad state of affairs if the losing statistic increases in stead of decreases, and who sit and scoop profits from all those big, stop-loss flagged trades?