The removal of the Swiss franc peg to the euro last week by the Swiss National Bank caused huge losses to retail forex traders and brokers. It is unlikely that after this event retail forex trading will be the same and it is highly possible that this will mark a change in business models that will involve a substantial decrease of trading leverage.
Actually, this may be the positive side of an event that caused significant losses to retail forex traders who were speculating on the central bank maintaining the peg and were shorting the Swiss franc. It is a painful way of bringing back to reality an industry that offers leverage of 400:1 or even higher to unsuspected retail traders who do not realize that profiting from the forex market is a nearly impossible scheme, especially when the leverage is high.
Messages are being posted in trading forums by desperate retail forex traders asking for help because they have lost multiples of their equity and now their accounts are up for collection. Some people may have to sell their homes or get loans to pay for the losses. Even large forex brokerages face extinction and at least one such firm has resorted to a loan at a high interest rate to stay in business.
The retail forex business must return to reality and the first step towards that is by limiting leverage to no more than 10x. Of course, this will become an unprofitable business model for many firms that counted on the high leverage to profit from unskilled and uninformed clients by taking the opposite side of the trade. However, the consolidation in this industry is necessary to reduce risks. The business model of offering 50:1, 100:1 or 400:1 leverage is no longer viable as the act of Swiss National Bank showed. Central Banks are the owners of currency and the ultimate rulers of the forex market and can at anytime inflict maximum damage to speculators if things get out of control. For central banks, any losses are just accounting losses but for speculators they are real losses.
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Disclosure: no relevant positions.
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