Forex
LONDON (Reuters) - The number of private individuals trading currencies is rising dramatically, but regulators, concerned that new participants are not aware of market risks, are looking at ways to protect retail investors.
Twenty four-hour trading, a clear FX market trend in recent years, and easy market access via the Internet and even mobile phones has spurred investment from individuals.
They are unperturbed by the fact that many day traders got their fingers burnt in the wake of the dot com boom at the beginning of the decade.
"This market is active 24 hours-a-day and that drives customers. The comparison would be to Las Vegas lights -- they never shut down," said Paul Belogour, managing director of foreign exchange and trading at IFX Markets based in Boston.
Foreign exchange was once dominated by bank traders executing trades on behalf of corporate clients. Individual investors, typically baby-boomer retirees at ease with managing their own money, are now getting in on the act.
IFX Markets Inc, a subsidiary of London-listed electronic trading platform IFX, said its FX customer base doubled last year, with daily turnover of between $600 million and $1 billion and an average account size of $7,000.
Denmark-based Saxobank, which makes most of its money from its online trading platform, said its largely European client base had increased by a "triple digit" rate in 2005, with an average account size of $50,000.
Credit Suisse said its 7 percent increase in income from private banking in 2005 was driven by largely by a rise in client foreign exchange trading.
Volumes
Belogour at IFX estimates that retail currency trading volumes could total $25 to $50 billion a day, a tiny fraction of the $1.9 trillion-a-day currency market but not far off the $60 billion average daily turnover on the New York Stock Exchange.
"If you look at retail trading platforms, significant trading volumes are being put through. It's a new market and a new clientele. I think they are having an impact on volume," said Roger Hawes, global head of spot FX trading at Royal Bank of Scotland.
Foreign exchange offers lower trading costs than many other markets, with platforms making money from the spread on offer rather than charging commission or fees.
Eric Michelsen, vice chief executive officer at Saxobank said the currency market, while still volatile, was less risky than the stock market, where it can be difficult to unload smaller shares and exit trading positions overnight.
"Equity markets open and close everyday. Things can happen overnight and open at a totally different level. In the FX market you can place orders that are monitored 24 hours a day," he said.
Risks
Unlike equities or fixed income, FX trading does not take place in one location or exchange. It moves across borders and around the globe with the clock and, as such, is much less regulated than other financial markets.
In the United States, the National Futures Association last month unveiled an online learning programme about the currency market in an effort to protect investors from fraud.
"Retail forex trading has increased dramatically over the past few years," said NFA senior vice president Karen Wuertz in a statement.
"Unfortunately, the amount of forex fraud has also increased dramatically and the need for investor awareness and education is critical," she added.
Since 2001, the U.S. Commodity Futures Trading Commission has filed over 80 civil actions in U.S. federal courts against hundreds of firms, owners and employees for defrauding over 23,000 customers who lost $300 million in forex schemes.
According to Godfried De Vidts, President of the Financial Markets Association, an umbrella body for FX traders, the European Commission is also looking at ways to protect investors.
"Banks have a duty to protect their customers and they should make sure customers understand what they are doing. Now if people go online, on non-bank portals, how is this control being done?" De Vidts said.
The degree of leverage, or credit, offered by FX trading platforms has also raised eyebrows among regulators.
Platforms typically allow investors to leverage their investment by up to 100 times, meaning that US$100,000 of foreign currency can be traded with only US$1,000 in the account, a much higher degree than typically offered to people trading equities online.
In Japan, where buying foreign currencies is particularly popular due to the near-zero interest rate offered on yen deposits, the Financial Services Agency has introduced rules to regulate FX margin trading.
"Leverage is a problem. Foreign exchange markets can be very quiet for a while and then things can get very violent and who is going to pick up the damage?" said De Vidts.
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