Retail FX Broker / Dealers Backdoor on the New NFA Regulation
| 01 June 2009
When the new NFA regulation on offsetting transactions came out and was effective last May 15, 2009; most broker / dealers seems to be missing the point why such ruling was issued at this time for foreign exchange trading. The reactions were mixed amongst traders and investors.
What more for the up coming First In First Out ruling better known as FIFO which will also be regulated by the NFA. For most who have used these strategies seemed to be convinced that it provides a way to limit the loses of a position and gives the traders enough time to come up with a better strategy in the market. On the other hand, some traders seeminly are blinded to the fact that at the end, can only result to an evitable loss and sometimes even greater loss from the original price locked in. This is not the case that should be presented to the investor turned FX trader.
There are always two sides of looking at this situation. Although for the inexperienced traders who fail to see, that executing this plan maybe a matter of better judgement than to cut the losses and simply use the fresh new capital investment for a new position that may otherwise recoupe the earlier losses. This is a matter of strategy, a trading judgement and an appropriate orientation on which best suits the interest of the investor / trader should always be in consideration.
This information should be well presented to the investors trading the FX market. Brokers / dealers who offer some incentives by asking the investors to open a secondary account to offset the NFA regualtion is really not a solution in circumventing the ruling. This is only to the advantage of the brokers and not the clients' best interest. For some offshore and registered FX dealer firms like those registered with the Financial Services Authority ( FSA ) in the UK are not confined to this regulation. They still provide hedging / offsetting transactions as a way for traders to continue this strategy.
That is why at this point in time, FX clients should be given a better orientation about the real dealings in the FX market than what it is now. On the other hand, for those matured traders who uses this strategy which are more versatile in combining a hedge and average trading may sometimes be successful. Although there is still no guarantee that it will always work. That is also the reason that account size does matter. Whether the account be broken into two or simply using one account and make use of a better leverage and tolerance levels to fit the trading style and requirements of the investor.
Based upon trading experience from the past three decades with interbank Foreign exhange trading, a better market orientation not only on strategy, but having the right information provided to the investors involved in this market should be directly emphasized. That there are several ways of trading the FX market not only on the spot / US dollar based trading but also to have direct access to Currency based transactions, cross-rate trading and knowing how the co-relationship between spot and Futures market works. These are just some of the secondary markets where hedging principles can also be applied. With proper due diligence, the investors can readily be able to do directly by themselves contrary to some others opinion. It is in the level of sophistication, training and a certain degree of having the investors be well informed what is actually available to them in the market.
Offsetting Transactions
With the latest NFA Compliance Rule 2-43 approved by the Commodity Futures Trading Commission it now clear that offsetting transactions in the foreign exchange market will not be allowed by May 15, 2009. To our opinion it should not have been permitted to do this activity in the beginning. Some may or may not have noticed the gravity of what this type of strategy can do to an account and trader who has never realize the possible harm resulting from this. As early as 1980s this has been applied in the early commodities and forex trading in Asia especially in Hong Kong where the concept of open hedging was being implemented. From the gathered information some professional traders both in Forex and Commodities who had been practicing this strategy said that it simply delayed the acceptance of a loosing position. But others have been successful at this style of trading however most were not. The odds are still against it for what has been the result from those days.
In the US Commodity Futures Exchange this type of offsetting positions particular on the same contract month is prohibited. So the arbitrage hedging and forward spread was the normal strategy to do. Hedging strategies vary to some degree and style of the trader or manager who handles most of these accounts for the clients. A certain higher degree of orientation should be provided to these clients but it is also up to the investors initiative to do their due diligence and find out what are open for them if they decide to trade for themselves. Leaving the accounts at the hands of their chosen portfolio manager / trader may not really be ideal. With so much funds lost in this market and made, it is only proper to have these clients make more reference to trades made thru the interbank market directly rather than going through the intermediary brokers / dealers and their counter party banks.
That is why at Megatrade101; the right and more direct approach to information and source is vital for the clients who decides to get involved in this highly speculative form of investment. Experience will always be the best teacher. And to share what is conceivably the right way of information sharing is only proper especially for those who have paid their so called tuition fees in the market and this author is no exception. But for having survived and benefited from this market literally and financially then one has been doing something right to stay alive and well after 25 years of trades. How would one measure the sigma level during this total number of years? Obviously one has to segregate and proportionately divide between total trades both winning and loosing over the period covered. As for this excellent move by the governing commissions of the industry to make such a regulation is in a timely manner.
The initial trades that Megatrade101 has encountered with some of the trading platforms that incorporate offsetting transactions as a strategy in the trading systems were noticed and noted. This would have been addressed had the NFA ruling didn’t come out. There are other ways, steps and procedures that can be made to enable the investors / managers and traders do what is right and would have at least a net positive result in any trading done in these markets. A certain level of comfort in trading has to be achieved if one has to be in line with the market industry level.
