Francesc Riverola,
Hi everyone
As you already know, new NFA requirements are changing - for good? - the US Retail Forex Industry. First it was the higher capital requirements that lead to a quick concentration process. Now it is the already famous Rule 2-43(b) that does not allow hedging and puts in danger stop and limit orders on open positions as this conflicts with their FIFO - first-in, first-out - new policy.
Our compliance officer Mr. John Putman put together a questionnaire that I sent to the top US executives of our industry.
Here you have the view of Gary Tilkin, president & CEO, GFT.
I want to thank Gary for his great collaboration and quick response as the questionnaire was sent out just yesterday
Francesc
Questionnaire
1. The new NFA rule eliminates the ability of traders to hedge open trades; there has been a lot of discussion about how retail traders may respond to the new rule. How much of your current business do you feel may be lost to off-shore retail brokers?
GFT has never offered its customers the option to “hedge” open positions with a counter position in the same currency pair. This is not logical or the standard in the way that FX or any market is traded. To have two counter positions in a financial product is really no position, and there really is zero financial benefit in allowing a retail customer to engage in this type of trading behavior.
2. Do you think properly educated clients regarding hedging could reduce losses to over-seas brokers?
GFT has for years explained to customers the reasons why “hedging” as it is mislabeled in FX makes no financial sense and why customers should be concerned about how their accounts can be affected negatively by using this trading method. Unfortunately, we do not feel that education is a solution, especially since some customers will simply not want to come to terms with a financial loss or are unable to mathematically grasp the profits and losses associated with trading multiple strategies in the same account. As such, we believe there will still be a strong demand for this functionality.
3. Do you feel the FIFO rule could negatively affect other strategies or multiple strategies executed in the same account? What else would you caution your traders to be aware of with regards to the new rule?
The FIFO system has been used in many markets for decades and trading strategies also have been deployed in these markets for just as long. We do not see any negative impact on trading via automated trading strategies by having to follow FIFO guidelines.
4. The NFA stated hedging provides no direct economic benefit and may result in higher transactional impact; have you seen any evidence to contradict that? Have you seen any evidence that indicates removing the ability to hedge will actually reduce a traders risk profile over time?
GFT would agree with this assessment. By and large traders pay twice the spread and twice the swaps for their transactions. There are exceptions, but in general customers are not aware of these costs and are more enthralled with the concept of postponing the realization of the financial loss of a position, which of course they are not, and continue to endorse the hedging methods.
5. In their report the NFA noted that in a hedge, interest roll-over should wash but typically doesn’t; how do you account for the discrepancy?
GFT does not offer this system of trading and as such cannot comment on this matter.
6. A simple work around to the current rule appears to be dual accounts at the same or even different brokers. Is there a downside to this approach traders should be aware of?
The downside is that if the trader is simply looking to negate a floating loss temporarily then this dual account method still defies common sense and logic. Until the trader can understand the concept of why this makes no sense this dual account is still a problem. If the trader is simply looking to trade long term and short term strategies and track them in separate accounts this makes sense to offer this feature. GFT leaves this up to the customer to determine and as such customers are able to open more than one account if they like.
7. Will your firm promote the dual-account strategy to keep clients and what can you do to help streamline the process for your current clients who implement hedging?
At this type we do not plan to promote any account setup option to encourage “hedging”.
I a hedge strategy to create a gridd. When the market moves up my long’s are soled at 20 pips profit and when the market goes down my sells are sold at 20 pips profit. Ofcourse this workes best if the interday trade is limited between 100 to 200 pips. And ofcourse this means also that the outerlimit of the gridd will get larger and larger the longer i keep the gridd open. So Every two weeks i close the gridd and take the loss for the outer edges. But the trades that acured in those two weeks more then compensate the losses.
If I only would build a gridd with long or short this would limited the transactions that can be closed so less profit. I can not see why hedging in this way would limit my profit. No hedging as I see it would limit y profit.
Signed,
Mark
The NFA is jsut trying to treat the citizens of this great nation like 2 year olds. UK has far better and much longer regulations for the currency market and they are not treating their citizens like they can’t do anything on their own. Hedging makes perfect sense if you use it right and having a stop and limimt on individual orders also makes perfect sense if you use it right and know what you are doing, however someone probably tryed to trade without the proper knwledge so the governement in it’s infinite wisdom (lol) decided that they had to interfere with everyone else and make ridiculous regulations. That’s all it is is the people who thing they have power to destroy the little guy and any chnace he has of making it big - well too bad off to the UK we go so they accomplished nothing but pissing off many Americans.
NFA Rule: 2-43 (b) seems to be a bit too much regulation by the government. If a person wants to flush his money down the toilet then they should be allowed to do so without it being illegal. It may not make sense but this is a country where individuals rights are appreciated. The government should make the pros and cons of hedging clear and get out of the way. If a person understands the effects of flushing his money down the toilet then he should be able to flush away to his heart’s content.
There are cases where the government should play a role. If companies are falsely marketing hedging to traders then the government should act. Of course if fraud is involved then the government should intervene. However, the government should not treat every trader like a 2 year old. Sophisticated investors can find some use in hedging at different times and for different reasons. Hedging may not be the wisest technique but it should not be illegal. Traders should have a choice.
Nice post Richard
The role of the NFA as per their website, http://www.nfa.futures.org, states “Investor confidence is crucial to the success of the futures markets, and the best way to gain investor confidence is to ensure that the highest levels of integrity are demanded of all market participants and intermediaries. National Futures assoc. (NFA) is the industrywide, self-regulatory organization for the U.S. futures industry.”
My interpretation - The NFA is NOT governmental, has no affliation to the goverment, is a SELF-REGULATORY body for the futures markets in the USA only.
Therefore, they SHOULD NOT be allowed to create rules or regulations that prevent, hinder or alter the the way a particular trader wishes to implement a strategy to trade THEIR account. Especially if it is not consistent with the world forex markets. Forex is a worldwide industry and the rights of the trader to implement whatever strategy they deem appropriate must be consistent for all participants in the industry WORLDWIDE. Anything short of that places the restricted trader at a disadvantage.
Richard in the post above said it & I agree… “Traders should have a choice”, but I would replace “should” with “MUST”… “TRADERS MUST HAVE THE CHOICE”.
I’m off to a less restrictive trading enviroment.
Good luck!