Once again, the United Kingdom Financial Conduct Authority has implemented new caps on the leveraging of contracts-for-difference. The caps now vary from 2:1 to 30:1. However, those wanting higher leverages can engage with a Cyprus-based exchange. The Cyprus Securities and Exchange Commission announced two months ago that they’d be implementing multiple classes for leveraging assets. The maximum leverage through CySEC Leverage Regulations is 50:1. Subsequently, a unique environment for leveraging is being created across the European Union.
It’s always come as a surprise that regulators have focused so integrally on the retail market in forex trading, with these individuals accounting for only 5.5% of the total market. Somehow, the level of attention towards retail traders hasn’t slowed down. Most would believe that these leverage caps are built-in as safety measures, an action created for the defence of traders. However, anybody educated in finance knows that these regulations are designed to stop retail clients from trading with large markets.
There is an odd loophole being created in the retail leveraging space. Those clients that have large net incomes or accumulated liquid assets can trade at the 50:1 leverage cap. However, those with lower incomes will be forced to the limited leverage of 2:1 to 30:1. Subsequently, this could cause for the valuation of multiple government currencies to drop significantly. This occurred in 2015 when the Swiss National Bank removed the 1.20 Francs per Euro Peg. It forced the coin to drop by 30% and resulted in many negative balances for traders in the forex space. Financiers and large banking institutions have kept their guards up since this event, with decisions being made determined on the potential risk involved.
Liquidity over Leveraging
There has been a substantial push in market liquidity since the European Securities Markets Authority released the first product intervention measures in 2018. Countless retail clients moved to offshore exchanges or began trading with market liquidity. This is because regulators haven’t placed any limitations or restrictions on this method of trading. Most anticipate that there won’t be a push for regulation for market liquidity.
The Goldman Sachs Chief Market Economist, Charlie Himmelberg, has noted his concerns regarding the thinness of liquidity provision. He stated: “When that happens, it leaves a greater share of liquidity provision up to human traders, which would be fine if there was still a deep bench with spare risk-taking capacity. But that bench has thinned over the last ten years.”
Even with the concerns that Himmelberg has expressed, it’s challenging for individuals to argue the point that heightened leverages are harmful to capital. Risk has always been prevalent in financial markets and has often proven beneficial for economies. Retail investors would argue that leveraging is better than liquidity and that the risk involved is considerably less. Unfortunately, Regulators and Large Banking Institutions don’t feel the same way.
The Double Standards
There is another significant risk to the online financial markets that regulators ignore, that being Negative Balance Protection Methodologies. These are applied to leveraged transactions and used by AAFX Brokerages. This method enables these brokers to provide leverage rates from 1:1000 to 1:2000, which is far more detrimental than the 50:1 Leverage that became a target for all regulators in Europe. Those familiar with financial markets know why these regulations are being implemented. It’s because AAFX Brokerages are more connected to regulated markets, enabling firms like Goldman Sachs or JPMorgan to have insight.
Regulators refusal to allow for higher leverages has come under substantial criticism for years. Investors, traders and retail clients have all expressed their desire for higher leverages. These clients want access to the silverware and not just the plastic cutlery. The chance to have available leverage at the 50:1 rate means that retail clients could turn their small deposits into substantial sums of money. Millionaires could be created out of regular citizens in Europe, which is something that the FCA and ESMA both fear. An example of this is not allowing for traders to have multiple positions open simultaneously, which can diversify accounts. Most believe this is a strategy implemented by regulators to keep the forex markets in the crypto space small.
Most regulatory authorities don’t realize that the majority of traders won’t regularly use these high leverages. It’s a statistical improbability for retail clients to continuously open position after position on a 50:1 leveraging value. It’s the concept of being forced out of these leveraging limit that has disrupted the market space. The Financial Conduct Authority has limited the marketspace so dramatically, that even prior supporters have turned into opposers. This includes the likes of Warren Buffet and Berkshire Hathaway, who have both expressed their concerns over the forced limitations.
It would be hard for prior supporters not to pick up on the fact that regulators are trying to force standard retail clients out from the market space. If they weren’t, the consistent lower volumes for leveraging wouldn’t be imposed. One of the most famous quotes from Warren Buffet, one of the world’s wealthiest individuals, reads: “When you combine ignorance and leverage, you get some pretty interesting results.”
Billionaire Hedge Fund Manager, Stanley Druckenmiller, also spoke on the issues facing the market. He stated: “Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage.”