Retail foreign exchange trading: Difference between revisions
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'''Retail foreign exchange trading''' is a small segment of the larger [[foreign exchange market]] where individuals [[Speculation|speculate]] on the exchange rate between different currencies. This segment has developed with the advent of dedicated [[electronic trading platform]]s and the internet, which allows individuals to access the global currency markets. {{As of| 2016}}, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).<ref name=BIS>[http://www.bis.org/publ/rpfx16fx.pdf Triennial Central Bank Survey] (April 2016), Bank for International Settlements</ref> |
'''Retail foreign exchange trading''' is a small segment of the larger [[foreign exchange market]] where individuals [[Speculation|speculate]] on the exchange rate between different currencies. This segment has developed with the advent of dedicated [[electronic trading platform]]s and the internet, which allows individuals to access the global currency markets. {{As of| 2016}}, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).<ref name=BIS>[http://www.bis.org/publ/rpfx16fx.pdf Triennial Central Bank Survey] (April 2016), Bank for International Settlements</ref> |
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Prior to the development of forex trading platforms in the late 1990s, forex trading was restricted to large financial institutions. |
Prior to the development of forex trading platforms in the late 1990s, forex trading was restricted to large financial institutions. It was the development of the internet, trading software, and forex brokers allowing trading on [[margin (finance)|margin]], that started the growth of retail trading. Today, [[Trader (finance)|traders]] are able to trade [[Spot price|spot currencies]] with [[market maker]]s on margin. This means they need to put down only a small percentage of the trade size and can buy and sell currencies in seconds. |
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== Regulation == |
== Regulation == |
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=== United States === |
=== United States === |
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In the United States, the [[Commodity Futures Trading Commission]] (CFTC) limited leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others.<ref>{{cite web |title=Final Rule Regarding Retail Foreign Exchange Transactions |url=https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/forexfinalrulefactsheet.pdf |website=cftc.gov}}</ref> Major currencies include the Australian dollar, the British pound, the Canadian dollar, the Danish Krone, the euro, the Japanese yen, the New Zealand dollar, the Norwegian Krone, the Swedish Krona, the Swiss franc and the US dollar. The National Futures Association (NFA) is authorized to periodically review the list of major currencies, in light of changes in volatility.<ref |
In the United States, the [[Commodity Futures Trading Commission]] (CFTC) limited leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others.<ref name="cftc1">{{cite web |title=Final Rule Regarding Retail Foreign Exchange Transactions |url=https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/forexfinalrulefactsheet.pdf |website=cftc.gov}}</ref> Major currencies include the Australian dollar, the British pound, the Canadian dollar, the Danish Krone, the euro, the Japanese yen, the New Zealand dollar, the Norwegian Krone, the Swedish Krona, the Swiss franc and the US dollar. The National Futures Association (NFA) is authorized to periodically review the list of major currencies, in light of changes in volatility.<ref name="cftc1"/> |
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The initial version of the CFTC's 2010 regulations proposed lowering leverage limits to 10:1.<ref |
The initial version of the CFTC's 2010 regulations proposed lowering leverage limits to 10:1.<ref name="cftc1"/> But the CFTC adopted the higher 50:1 and 20:1 leverage limits described following criticism from Forex market participants. No such restrictions existed prior to 2010, when these rules came into effect. |
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=== European Union === |
=== European Union === |
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In Europe, the [[European Securities and Markets Authority]] (ESMA) caped the amount of leverage that brokers and CFD providers could offer retail investors. These limits, which came into effect in 2018, vary between 30:1 and just 2:1, depending on the asset class.<ref>{{ |
In Europe, the [[European Securities and Markets Authority]] (ESMA) caped the amount of leverage that brokers and CFD providers could offer retail investors. These limits, which came into effect in 2018, vary between 30:1 and just 2:1, depending on the asset class.<ref>{{CELEX|id=32018X1031(01)|text=European Securities and Markets Authority Decision (EU) 2018/1636 of 23 October 2018 renewing and amending the temporary restriction in Decision (EU) 2018/796 on the marketing, distribution or sale of contracts for differences to retail clients}}. No longer in force, Date of end of validity: 31/01/2019.</ref> More volatile asset classes, like crypto-currencies, tend to attract lower limits. |
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ESMA’s limits on leverage are as follows: |
ESMA’s limits on leverage are as follows: |
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=== Japan === |
=== Japan === |
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In Japan, the [[Financial Services Agency]] (FSA) restricted leverage available to retail traders across foreign exchange transactions as early as 2010. Maximum leverage was capped at 50:1 in August 2010, and was subsequently reduced to 25:1 in August 2011.<ref>{{cite web |title=Margin Regulations |url=https://www.ffaj.or.jp/en/regulation/customers/ |website=www.ffaj.or.jp |access-date=13 September 2022}}</ref> In early 2000s, housewives of [[Japan]] collectively called [[Mrs Watanabe]], started in currency trading to improve their financial situation.{{ |
In Japan, the [[Financial Services Agency]] (FSA) restricted leverage available to retail traders across foreign exchange transactions as early as 2010. Maximum leverage was capped at 50:1 in August 2010, and was subsequently reduced to 25:1 in August 2011.<ref>{{cite web |title=Margin Regulations |url=https://www.ffaj.or.jp/en/regulation/customers/ |website=www.ffaj.or.jp |access-date=13 September 2022}}</ref> In early 2000s, housewives of [[Japan]] collectively called [[Mrs Watanabe]], started in currency trading to improve their financial situation.{{citation needed|date=October 2023}} |
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=== Australia === |
=== Australia === |
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==External links== |
==External links== |
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* [http://www.cftc.gov/ConsumerProtection/FraudAwarenessPrevention/CFTCFraudAdvisories/fraudadv_forex US Commodity Futures Trading Commission Forex Fraud Advisory] |
* [http://www.cftc.gov/ConsumerProtection/FraudAwarenessPrevention/CFTCFraudAdvisories/fraudadv_forex US Commodity Futures Trading Commission Forex Fraud Advisory] |
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* {{Curlie|Business/Investing/Commodities_and_Futures/Forex/Resources|Forex Resources}} |
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{{Online brokerages}} |
{{Online brokerages}} |
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{{Authority control}} |
{{Authority control}} |
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[[Category:Foreign exchange market]] |
[[Category:Foreign exchange market]] |
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[[Category:Online brokerages]] |
[[Category:Online brokerages]] |
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Latest revision as of 04:18, 12 December 2024
 | This article needs additional citations for verification. (January 2021) |
| Foreign exchange |
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| Exchange rates |
| Markets |
| Assets |
| Historical agreements |
| See also |
Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. As of 2016[update], it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market ($282 billion in daily trading turnover).[1]
Prior to the development of forex trading platforms in the late 1990s, forex trading was restricted to large financial institutions. It was the development of the internet, trading software, and forex brokers allowing trading on margin, that started the growth of retail trading. Today, traders are able to trade spot currencies with market makers on margin. This means they need to put down only a small percentage of the trade size and can buy and sell currencies in seconds.
Regulation
[edit]Starting in 2010, financial regulators in developed markets have introduced measures to limit the amount of leverage that retail investors can take on, particularly across foreign exchange transactions. These restrictions sought to limit speculation and protect retail investors against unexpected losses.
United States
[edit]In the United States, the Commodity Futures Trading Commission (CFTC) limited leverage available to retail forex traders to 50:1 on major currency pairs and 20:1 for all others.[2] Major currencies include the Australian dollar, the British pound, the Canadian dollar, the Danish Krone, the euro, the Japanese yen, the New Zealand dollar, the Norwegian Krone, the Swedish Krona, the Swiss franc and the US dollar. The National Futures Association (NFA) is authorized to periodically review the list of major currencies, in light of changes in volatility.[2]
The initial version of the CFTC's 2010 regulations proposed lowering leverage limits to 10:1.[2] But the CFTC adopted the higher 50:1 and 20:1 leverage limits described following criticism from Forex market participants. No such restrictions existed prior to 2010, when these rules came into effect.
European Union
[edit]In Europe, the European Securities and Markets Authority (ESMA) caped the amount of leverage that brokers and CFD providers could offer retail investors. These limits, which came into effect in 2018, vary between 30:1 and just 2:1, depending on the asset class.[3] More volatile asset classes, like crypto-currencies, tend to attract lower limits.
ESMA’s limits on leverage are as follows:
- 30:1 for major currency pairs;
- 20:1 for non-major currency pairs, gold and major equity indices;
- 10:1 for commodities other than gold and non-major equity indices;
- 5:1 for individual equities and other reference values;
- 2:1 for crypto-currencies.
ESMA's major currency pairs comprise any two of the following currencies: the US dollar, the euro, the Japanese yen, the pound sterling, the Canadian dollar or the Swiss franc.[4] All other currencies are deemed non-major.
ESMA's major indices are any of the following equity indices: FTSE 100, CAC 40, DAX30, DJIA, S&P 500, NASDAQ, NASDAQ 100, Nikkei 225, ASX 200, EURO STOXX 50.[5] All other indices are deemed non-major.
United Kingdom
[edit]The UK's Financial Conduct Authority (FCA) followed ESMA's restrictions on leverage in 2019.[6] This means that ESMA's measures outlined above became part of UK domestic law when the UK left the EU. These measures remain in place to this day.
Japan
[edit]In Japan, the Financial Services Agency (FSA) restricted leverage available to retail traders across foreign exchange transactions as early as 2010. Maximum leverage was capped at 50:1 in August 2010, and was subsequently reduced to 25:1 in August 2011.[7] In early 2000s, housewives of Japan collectively called Mrs Watanabe, started in currency trading to improve their financial situation.[citation needed]
Australia
[edit]In Australia, the Australian Securities & Investments Commission (ASIC) introduced a product intervention order in March 2021 that included leverage limits that brokers and CFD providers could offer retail investors. This included limiting currency leverage to a maximum of 30:1.[8]
Fraud
[edit]Retail forex trading has been promoted by some as an easy way to make profits and has thus been the focus for a number of foreign exchange frauds.[9] In response, financial regulators in a number of countries have introduced restrictions or provided warnings about this type of trading as well as legal actions against perpetrators.[10] However, due to the decentralized nature of currency trading and the easy global access to the internet, a number of brokers are based in less restrictive jurisdictions.
See also
[edit]References
[edit]- ^ Triennial Central Bank Survey (April 2016), Bank for International Settlements
- ^ a b c "Final Rule Regarding Retail Foreign Exchange Transactions" (PDF). cftc.gov.
- ^ European Securities and Markets Authority Decision (EU) 2018/1636 of 23 October 2018 renewing and amending the temporary restriction in Decision (EU) 2018/796 on the marketing, distribution or sale of contracts for differences to retail clients. No longer in force, Date of end of validity: 31/01/2019.
- ^ "ESMA FAQs" (PDF). www.esma.europa.eu. Retrieved 13 September 2022.
- ^ "ESMA FAQs" (PDF). www.esma.europa.eu. Retrieved 13 September 2022.
- ^ "FCA statement on onshoring ESMA's temporary intervention measures on retail CFD and binary options products". www.fca.org.uk. 20 February 2019. Retrieved 13 September 2022.
- ^ "Margin Regulations". www.ffaj.or.jp. Retrieved 13 September 2022.
- ^ "Authorities drop a massive bomb on CFDs in Australia, limiting how they are sold and executed". Finance Feeds. October 23, 2020.
- ^ Karmin, Craig (2008-01-12). "How a Money Trader went Bad; Bets on Currency Prices Become 'Fraud du Jour' Amid Regulatory Holes". The Wall Street Journal. Dow Jones and Company. p. B1. Retrieved 2008-01-12.
- ^ "COMMODITY SOFTWARE VENDOR CHARGED WITH VIOLATING CFTC ORDER". CTFC.gov. Retrieved 13 December 2013.
External links
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