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Categorized | Banks, Currencies, Financial

UK day-trading practices under scrutiny

Posted on February 28, 2014

For a forex trader, Andrew Argent has a surprising view of retail foreign exchange trading. “I would say there is a 97 per cent failure rate,” the former plumber turned day-trader says.

Sitting on a black sofa in the Essex-based venue he founded in 2012, Mr Argent recounts how he used to tell aspiring day-traders that if they could not sustain themselves for at least a year, they should not join his private-member club.

Number crunch

Number crunch

    “I have seen people using a credit card to pay for a £20,000 one-year trading course and then having to sell their house because they lost too much money,” he says speaking from his small trading floor in Brentwood, a 37-minute train journey from London’s City centre, the global heart of forex trading.

    A dimly lit part of the trading world, forex has been thrust into the spotlight by global regulatory investigations into banks’ alleged manipulation of benchmark currency prices.

    Retail trading has not been part of these probes but a – completely unconnected – fine this week against online foreign exchange group FXCM has highlighted a small corner of the forex market where several hundred thousand amateur traders in the UK are lured by promises of quick riches.

    Britain’s markets watchdog fined US-based FXCM £4m for failing to pass on profits generated from price movements in the time between placing and execution of an order. It also forced FXCM to compensate its UK retail customers with £6m for profits that have been withheld.

    The fine – which relates to activity until 2010 and which FXCM calls a legacy issue – shines a light on the practices of a spread betting sector that some insiders claim is systematically making profits to the detriment of their clients.

    US data underpins this allegation. Only about one-third of retail forex traders in the US made a profit during the third quarter of last year, according to numbers reported by brokers to the Commodity Futures Trading Commission.

    The numbers follow a consistent pattern over many years. Industry insiders estimate that in the less regulated UK market more than two-thirds of traders will regularly lose out.

    Britain’s markets watchdog fined US-based FXCM £4m for failing to pass on profits generated from price movements in the time between placing and execution of an order

    One reason for the high loss rate is the spread. The difference between the buying and selling price of a currency already reduces the probability of making money in a market where punters typically make many quick intraday bets on currency swings.

    Most retail brokers stack the odds even more against the forex trader by gathering a host of information about the trader’s sophistication and trading style. Depending on their likely performance, they will either be placed into different brackets or “books”.

    The “a-book” minority are usually profitable traders and the broker hedges their orders. The majority, however, is being placed into the “b-book” where the broker makes the opposite bet to the punter.

    “If you systematically hedge trades placed on your platform you want the trader to make money. But if you hold on to the opposite side of a trade, you want them to lose money as you will make every dollar they lose,” says Antony Broadbent, former chief executive of Oanda Europe, a forex trading firm. He adds that this could motivate brokers to manipulate prices or trigger “stop-losses” that automatically lock in a loss when the price falls too far.

    Brendan Callan, chief executive of FXCM Europe, says that, unlike much of the rest of the sector, his firm is transparent and gives the trader a choice of the book he wants to be in. “At many other firms, clients are not made aware of what book they are falling into. This is an atrocity.”

    A number of firms, such as Vantage FX, even state in their UK client agreement that ‘we do not owe you any obligation of best execution and do not agree to obtain the best possible price for you’

    Potential losses are amplified as brokers in the UK – unlike in many other jurisdictions such as Hong Kong or the US – are allowed to offer as much leverage as they like. Some firms give up to 500 times leverage, which can quickly wipe out a trade if the price drops even a little bit.

    The FCA is now scrutinising 40 banks, brokers and asset managers to see if they are applying the best execution rules properly in a thematic review that is expected to be finished by the end of the second quarter.

    But a number of firms, such as Vantage FX, even state in their UK client agreement that “we do not owe you any obligation of best execution and do not agree to obtain the best possible price for you”. A Vantage FX spokesman said these were “lawyers’ words really” which were in the client agreement because a partner firm based in Australia is executing the orders.

    Mr Argent, who also is a property owner and catering entrepreneur, says he is day-trading more as a hobby and virtually all of his members – ranging from landlords to underground night shift workers – have different forms of income.

    Yet, against the odds, a tiny number manage to outsmart their brokers. A broker was once wondering why there were so many technical failures with lossmaking trades of a highly successful Chinese trader. They ultimately found out that he always placed his trades on a computer connected to an archaic modem while at the same time watching currency prices on another computer with a high-speed connection. If the price moved against him, he would simply unplug the modem.