ILQ's Client Funds Increase for 12th Consecutive Month

I was recently browsing the CFTC database for fun (I don’t get out much) and I stumbled across some interesting data. Every FX broker that is registered with the CFTC and NFA has to report the amount of customer funds they hold. As far as I know, it’s just the customer funds that are held at banks in the U.S. and not their total amount. (If I’m wrong or someone has access to worldwide numbers, please let me know)

I decided that it would be interesting to take the data for the larger brokers in the market and compare them to see how they have been performing. I chose: Oanda, FXCM, Gain Capital(forex.com), Global Futures, Tradestation(interbankfx), MB Trading, and Institutional Liquidity(ILQ). There are other brokers, but I wanted to keep it simple.

I first measured the quantity of customer funds for the respective months and then their monthly percentage of change. My starting point was October 2010 as it was the first occurrence of the “Total Amount of Retail Forex Obligation” category. My ending point is April 2012 because that was the last report issued by the CFTC and my crystal ball has thus far proven ineffective in revealing May’s report.

I think it’s important to note that these numbers are not an accurate indication of overall profitability or financial health for several reasons. First, they do not account for the costs of operating a business. Second, it’s impossible to gauge how much revenue is being derived from the customer funds held at brokerages because you don’t know: how much trading is actually taking place on average per unit of funds, the average amount of revenue generated per unit traded (due to spreads and commission varying), and how much revenue they gain from alternative sources (widgets that customers pay x dollars per month for. There are other reasons as well; but I digress…

These numbers are simply a measure of the quantity of customer funds held in the United States by these respective brokers. As most U.S. customers are restricted to accessing domestic brokers, these metrics can be loosely used to gauge competition.

You can view the complete data source here: http://www.cftc.gov/MarketReports/FinancialDataforFCMs/index.htm

The excel file can be currently found here: http://www.forexfactory.com/showthread.php?t=368685



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Where Should You Open Your Forex Account?

There are three main reasons traders cite as to why they would prefer to open a forex account outside of the United States. Outside of the United States: 200:1 or more leverage is available, hedging is permitted, and FIFO accounting rules are not required. Let’s address these one at a time:

1. Our argument against the use of excessive leverage is clear: profitable traders don’t need more than 50:1 leverage. Traders using more than 50:1 leverage are susceptible to wild swings in their account balance and will most likely blow up their account.

2. Under our solution, the customer's trading experience in terms of hedging does not change. In order to abide by the CFTC no hedging rule, the counter party offsets the positions as they receive the orders. When orders are placed on the MT 4 platform, the hedging feature remains available. For example, if you buy and sell a contract on the MT4 software, you will notice your positions are hedged on the interface, however, the orders that have been sent to the counter party have been offset with each other. Your net position remains the same on the MT4 and the back office. When you close your hedge positions on the MT4 software, the new buy and sell orders placed will be offset with each other by the counter party and again your net positions on the MT4 and the back office remain the same.

3. In order to abide by the CFTC FIFO rule, the counter party offsets the positions on a First In First Out basis. On the MetaTrader 4 platform you have the ability to close the positions as you see fit. For example, if you buy a contract and buy another contract at a later time and you decide to close your most recent buy position, you can simply close this position on the MT4 interface, however, the order that is sent to the counter party will be offset with the FIFO rule in place. Your net position remains the same on the MT4 and the back office.

Now, considering that the three cited reasons can be easily addressed, let’s talk about the one main reason in favor of opening your forex account in the United States. This single reason for opening a forex account in the United States overwhelming trumps any reason(s) for not doing so.
Where you deposit your money is incredibly important. You need to know that it’s safe and that the brokers holding it are the most regulated and under the heaviest scrutiny in the forex industry. Trading is hard enough as it is, why expose your funds to unnecessary risk?

The United States is the most heavily regulated Forex industry in the world. All brokers must register with the Commodity Futures Trading Commission and are members of the National Futures Association.

Brokers have daily, monthly, and quarterly operational reporting requirements, detailing customer funds on deposit, # of retail and ECP forex customers that are active, whether they are US or foreign domiciled, and the percentage of non discretionary accounts that were profitable vs non-profitable - among other things. Unaudited financial statements are filed monthly and audited financial statements are filed annually. Failure to comply with these NFA requirements can result in severe disciplinary actions as well as substantial fines and penalties.

The complete regulatory history of all NFA brokers as well as key personnel is available online at http://www.nfa.futures.org/basicnet. Simply search by name or NFA ID# if you know it.

How much do you know about your broker?

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1.20 EUR/CHF Floor

There has been market talk (unconfirmed speculation) that 90%-95% of retail forex traders holding a EUR/CHF position are currently long. Coincidentally, those are roughly the same percentage of retail forex traders who can't maintain long term profitability. Yes, I know it's impossible to identify the exact percentage of people blowing money in their parent's basements; but I digress.

While hedge funds and other small speculators are shorting the Swiss Franc against the euro; commercials are long the Franc. Interestingly, the commercials are currently long the franc by roughly the same amount that speculators are short it. As commercials are generally on the right side at major market movements, I've established a small long Franc position (Selling EUR/CHF.) Keep in mind, if you speculate, you are essentially speculating on government intervention. That kind of speculation is extremely risky, because even if your bias is correct, your timing has to be right as well. Rarely do things go exactly as people expect them too. The following are the insights of a former UBS Analyst. 

There are six possibilities for the outcome of the situation that George Dorgan has outlined here: http://georgedorgan.livejournal.com/    

"1. They are planning capital controls, negative interest or similar. We have ruled this out, here. This would not be a night action like the rumor implies.

2. The SNB removes the floor completely and let the franc freely float. Already the OECD suggested the floor is appropriate as long as the Swiss economy has problems, but otherwise it would be simple protectionism.

3. They take the pressure out of the printing press and lower the EUR/CHF to 1.10. This was already implicitly coming via currency reserves as explained here.

4. They take the pressure out of the printing press and to stipulate a floor against a currency basket. For sake of easiness the central bank would prefer a EUR/USD combined floor, e.g. at 1.10/0.90. For us the second biggest possibility.

5. They announce a crawling peg, e.g. 2-3% devaluation per year (along inflation difference) on EUR/CHF allowed.

6. Nothing happens. Just rumors. They just get prepared to print early tomorrow when Swiss GDP comes out. Due to current public opinion and the latest SNB statements, that they defend the 1.20 floor, still the most probable option. 

In these statements, Jordan, however, indicated in several questions that money printing was dangerous because the SNB fears a real estate bubble. To make the franc more expensive at least for foreigners would be a solution, a SNB job."

As the political, social, and economic chaos continues in Europe, the pressure on the SNB's floor is increasing. I think there's a good chance that the floor will be lowered or the franc will be allowed to float freely. Remember, the artificial floor at 1.20 was designed to protect the economy. The unexpectedly good Swiss GDP numbers that came out this morning may give them further cause to consider lowering the floor. Swiss GDP YoY: Previous=2.0%, Forecasted=0.7%, Actual=2.0%.

Michael Weissman



BeamFX is an guaranteed introducing broker of ILQ. Join us in our free live trade room Mon. - Fri. 7:45 - 10:45 AM EST.

China - Boom or Bust?

There have been a series of articles done by FT Alphaville highlighting a troubling economic situation developing in China.

1. Why China’s RMB exodus IS the story

2. China’s ’1 per cent’ risk

3. China is facing “the strongest outflow pressures for some time”

I think the massive economic issues in China are largely being ignored due to all of the attention currently focused on the crisis in Europe. I think the team at alphaville has legitimate reasons to worry. However, as my boss is fond of telling me, having a macro economic bias and trading that bias are two completely separate things. We have to wait for speculator's attention to shift from Europe & the U.S. to China. Once that attention really starts to shift and speculators smell blood in the water, they will attack.

Michael Weissman


BeamFX is an guaranteed introducing broker of ILQ. Join us in our free live trade room Mon. - Fri. 7:45 - 10:45 AM EST.