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Leverage in Jeopardy

  • #1
  • First Post: Feb 10, 2009 10:00am Feb 10, 2009 10:00am
See Attached...Voice your opinion to

Member firms and other interested parties can submit their comments using the
followingmethods:

Emailing comments to [email protected]

or


Mailing comments in hard copy to:
Marcia E. Asquith
Office of the Corporate Secretary
FINRA
1735 K Street, NW
Washington, DC 20006-1506
To help FINRA process and review commentsmore efficiently, parties should use only
onemethod to comment on the proposal.


Important Notes:

The only comments that FINRA will consider are those submitted
pursuant to themethods described above. All comments received in response to this


Notice

will bemade available to the public on the FINRAWeb site. Generally, FINRA
will post comments on its site one week after the end of the comment period.1


Before becoming effective, a proposed rule changemust be authorized for filing
with the SEC by the FINRA Board of Governors, and thenmust be approved by the

SEC, following publication for public comment in the Federal Register.2
Attached File(s)
File Type: pdf FINRA_09-06_SEC_proposal.pdf   76 KB | 811 downloads
  • #2
  • Feb 10, 2009 12:46pm Feb 10, 2009 12:46pm
i did not read it in detail but after a cursory glance it looks like futures exchanges are noticing a shift from their products to the spot market and are using their political muscle to nip that shit in the bud!
  • #3
  • Feb 10, 2009 1:09pm Feb 10, 2009 1:09pm
So am i correct in saying that if this were passed...that it would effectively eliminate "joe the trader" from trading forex?

Great just when i was getting good!!
  • #4
  • Feb 11, 2009 2:35am Feb 11, 2009 2:35am
Quoting earret
So am i correct in saying that if this were passed...that it would effectively eliminate "joe the trader" from trading forex?

Great just when i was getting good!!
I guess the powers to be want to protect you from you now.
  • #5
  • Feb 11, 2009 2:49am Feb 11, 2009 2:49am
Yes, there's another thread on this too...

http://www.forexfactory.com/showthread.php?t=149665
  • #6
  • Feb 11, 2009 9:02am Feb 11, 2009 9:02am
Quoting earret
So am i correct in saying that if this were passed...that it would effectively eliminate "joe the trader" from trading forex?

Great just when i was getting good!!
This leverage limitation is only for FINRA regulated firms, it doesn't apply to those firms regulated by the NFA.
"I say high, You say low, You say why, and I say I don't know..."
  • #7
  • Feb 11, 2009 10:24am Feb 11, 2009 10:24am
Yes and even if NFA enforces a 1:25 maximum this is more than enough.
There is no difference between 1:400 and 1:25 because everything is defined by your Risk Managment.
  • #8
  • Feb 11, 2009 11:13am Feb 11, 2009 11:13am
Simply incorrect. There are some strategies that rely on higher leverage. What made you say that, anyway?

Quoting Tjpld
Yes and even if NFA enforces a 1:25 maximum this is more than enough.
There is no difference between 1:400 and 1:25 because everything is defined by your Risk Managment.
  • #9
  • Feb 11, 2009 1:26pm Feb 11, 2009 1:26pm
I don't think Finra has any jurisdiction beyond the USA so if US brokers were no longer able to offer high leverage then you could could use a UK broker instead. In reality anyone trading with more than 8-1 to leverage is asking for trouble in the long run. Anyone who's been trading long enough knows this. I doubt that reducing leverage is really going to help your average newbie who will blow up his account anyway. It will just take him a little longer with less leverage which I guess isnt a bad thing.
  • #10
  • Feb 11, 2009 1:33pm Feb 11, 2009 1:33pm
Example:

10.000 USD Balance
3% Risk = 300 USD
Pips at Risk 100 Pips.
=> Lotsize 0.3 Standard Lots or 30.000 Units
Margin Requirement with 1:25 = 30.0000/25 = 1200 USD
See how that is easily possible with 10000 USD?

Now with 1:500 leverage it's 30.000/500 = 60 USD.
What is the risk? 3%!! Is there a difference between
1:500 and 1:25? NO! Why? Because the RISK is the same.

You could also risk 20% on 100 Pips of your account this
would require 8000 USD of margin.
Now please say 20% risk per trade is not enough and I'll laugh my ass off.
Show me one trade who trades for 5+ years who always risk 20% or more on his trades.
After just 3 losing trades you are down 50% on your account. Now that makes sense if you want to trade for a living.
Unless you can pay for your new car and house with losses of course.
  • #11
  • Feb 11, 2009 2:19pm Feb 11, 2009 2:19pm
Quote
I don't think Finra has any jurisdiction beyond the USA so if US brokers were no longer able to offer high leverage then you could could use a UK broker instead.

Yes, unfortunately many foreign brokers won't accept US traders.

Quote
In reality anyone trading with more than 8-1 to leverage is asking for trouble in the long run.

$10000 account. 100 pip stop loss. 1% account risk. That's $100 risk, or $1 per pip.

.0001 * $100000 = 10
.0001 * $10000 = 1
.0001 * $1000 = .10


That means assuing a 1% account risk at a 100 pip stop loss you can tade $1 per pip or a mini lot, aka a $10000 lot. That's a 1:1 leverage. That's also very very conservative trading.

Many people will trade 2% at a 50 pip stop loss, and can do so successfully. 2% is $200. $200/50 = $4 per pip, or $40000. That's 4:1 leverage.

So now what happens if I want to have multiple uncorrelated trades? The risk per trade is still quite safe, but the leverage limits squish it.

A 1.5:1 ratio, as proposed by FINRA, is ridiculous. A 10:1 or 20:1 would be quite fine for me personally, but then we start getting into principles. Why should anyone have any say over what leverage you want to trade with? If you want to risk blowing up your account then that's your right.

Quote
Anyone who's been trading long enough knows this. I doubt that reducing leverage is really going to help your average newbie who will blow up his account anyway. It will just take him a little longer with less leverage which I guess isnt a bad thing.

No, it will not help him at all. Infact it will hurt new traders rather than help them. Why?

Think about it. Most brokers have a minimum lot size of $1000. At 2:1 leverage you'd need $500 to control that trade. That means you need to deposit more than that in order to trade. Since most new traders will blow their first account, you can more or less write off the initial account as a learning experience. Whether that's $100, $500, $1000, or whatever.

Because bucket shops all have very efficient margin methods, it's hard to end up negative. The less leverage a person has, the more they have to throw away in order to learn. That's why forex is an ideal teaching platform. You can learn to trade with forex far cheaper than you can w/ stocks or futures.

A person can trade demo for 6 months, deposit $1000, and trade it with tiny lots for the next year. By the time they're done they'll have over a year of live trading experience for next to no cost. Anything that tries to make forex behave more like stocks do ends up hurting new traders by making the learning curve more expensive.

Quote
Now with 1:500 leverage it's 30.000/500 = 60 USD.
What is the risk? 3%!! Is there a difference between
1:500 and 1:25? NO! Why? Because the RISK is the same.

If the stoploss holds, yes. If the stoploss gets poor fill, or you get gapped, then your risk changes.

Quote
Now please say 20% risk per trade is not enough and I'll laugh my ass off.

With margin it's not the "per trade" risk as much as it is the cumulative risk for all open trades.
  • #12
  • Edited 2:33pm Feb 11, 2009 2:23pm | Edited 2:33pm
Quoting Rabid
Yes, unfortunately many foreign brokers won't accept US traders.



$10000 account. 100 pip stop loss. 1% account risk. That's $100 risk, or $1 per pip.

.0001 * $100000 = 10
.0001 * $10000...
I've thought about this along time too. (Multiple Trades). I've come to the conclusion that it would not make much sense increase the cumulative risk only because you want to trade more pairs. Your risk should stay let's say 3% now spread this across the trades. Otherwise you could just trade one pair with higher risk anyway.

I agree with you about the principle stuff. You are giving away abit of your freedom.

Quote
If the stoploss holds, yes. If the stoploss gets poor fill, or you get gapped, then your risk changes.
Right but that could happen with every leverage and since the amout on units traded is always the same the result of such an event would be the same with 1:25 or 1:500.

Also everyone should take a look in the institutional world. You will rarely find anyone using more than 1:33 leverage.
Of course it's harder to get higher leverage if you trade a 500 Mio USD Hedge Fund but another reason is because it just doesn't make sense.
  • #13
  • Feb 11, 2009 3:04pm Feb 11, 2009 3:04pm
Quote
I've thought about this along time too. (Multiple Trades). I've come to the conclusion that it would not make much sense increase the cumulative risk only because you want to trade more pairs. Your risk should stay let's say 3% now spread this across the trades. Otherwise you could just trade one pair with higher risk anyway.

Nod, certainly should plan out one's cumulative risk exposure. I never have more than 10% cumulative risk at any time, and rarely over 5%.

But sometimes taking multiple trades does benefit you. Take a look at the "triangle trade." Ie: 2 currencies against a base currency, and the 2 currencies as a cross. Like the GBPUSD, the EURUSD and the EURGBP.

At any point in time a large move in the dollar will force the 2 based currencies to change, but times when the dollar does not move still may provide an opportunity in the cross pair. By taking the right trade in all 3 pairs at once you "average out" the net behavior. As long as you have an edge to help determine what the net behavior will likely be, you can average out a single losing trade and simply play for strength or weakness.

Obviously there's an entire system there, and that's outside of the scope of this thread, but that's my point... some approaches actually benefit from trading multiple pairs. Limiting leverage to such a degree diminishes the kind of strategies we can use, and not in a good way.

Quote
Right but that could happen with every leverage and since the amout on units traded is always the same the result of such an event would be the same with 1:25 or 1:500.

Depends if you're talking account leverage or effective leverage. The account leverage will always take a backseat to your effective leverage. I guess the theory behind this is if you cap the max account leverage you cap the max effective leverage too, but people can do that on their own by reducing lot size. When I sent in my comment to the FINRA proposal I even said something to that effect in the first paragraph.

Quote
Also everyone should take a look in the institutional world. You will rarely find anyone using more than 1:33 leverage. Of course it's harder to get higher leverage if you trade a 500 Mio USD Hedge Fund but another reason is because it just doesn't make sense.

Very few surviving traders will ever use over 20:1. But the cap should come from the trader, not some almighty regulator on the hill. The key is education. Teach people how (and why) to control leverage rather than forcing them suck a 1.5:1 cap.

There's a combination of issues here. The desire to regulate, the role of an oversight organization, the arbitrary ultra-strict cap they've chosen, the seemingly useless role of FINRA in forex, the power of the US to regulate it's own industries in a global marketplace, just to name a few.

The problem is clear enough however: If FINRA's 1.5:1 cap becomes the rule, and that rule spreads to the NFA, then domestic US FOREX brokers are done and we'll all be moving our business overseas. That would be bad on so many levels.
  • #14
  • Feb 11, 2009 3:42pm Feb 11, 2009 3:42pm
Quoting earret
Great just when i was getting good!!
Exactly what I thought..
  • #15
  • Feb 11, 2009 3:43pm Feb 11, 2009 3:43pm
i was going to post this info... Email them & tell to stop this BS.

Again, email to [color=#810081][email protected][/color]
  • #16
  • Feb 17, 2009 6:17am Feb 17, 2009 6:17am
Quoting Tjpld
Yes and even if NFA enforces a 1:25 maximum this is more than enough.
There is no difference between 1:400 and 1:25 because everything is defined by your Risk Managment.
That is not true. The lower the leverage the more money you have to put up. The more money you put up the more you risk to lose. The theory that lower leverage is better never makes sense. For example a guy trading with 100 dollars and uses 400:1 leverage would need 1600 dollars to trade the same way at 25:1. His risk is much greater and his potential loss is much greater. Yet if he trades a 1.00 lot and losses 25 pips, he loses 25.00 dollars the same as the guy with 1600. The difference is the total potential loss is much greater for the guy with 1600. Plus if your broker ever goes out of business guess who loses more money.
  • #17
  • Edited 7:06am Feb 17, 2009 6:55am | Edited 7:06am
Hi,

Although I don't live in the US (UK resident), I cannot see this leverage proposal going anywhere. It would simply be opposed by too many regulatory bodies as well as the lobby for broking firms since they are almost entirely linked with retail broking.

Price stability in FX would completely change and what they call excessive speculation in that paper is nothing else but contributing positively to market stability. Retail FX customers are limited specifically by those high leverages in the way they can influence the market - when the margin is lost, they are either out of the game anyway or they have to refund.

We all know here that markets which have less contracts traded (or in other words less liquidity) are prone to more erratic moves and less price stability.

Take a stock for example which has not enough sellers at one point - the spikes involved in those type of market condition are far more extreme than in FX which is still the most liquid instrument by daily transaction and daily turnover all included. Eliminate the retail part of it and your volatility can shoot up in a second if just one big player has to place a rather large order in the market.

The second point is: this proposal looks like a "planned economy" to me. People might remember this type of economy from the former Soviet Union - communistic approach in other words. Control and dictation of who and how much can be traded - has nothing to do any longer with free market economy which is the building block of the free democratic world.

It will not happen in America. This is my firm belief.

regards
daytrading

P.S. I had a look in FINRA's alphabetical members list and could not find any of the bigger FX retail firms listed. Seems to be just one regulatory body that wants to stir things a little.
Enter Signature
  • #18
  • Feb 17, 2009 7:41am Feb 17, 2009 7:41am
I give it a 80% chance that it's not going through and everything stays the same. Plus leverage for Retail Brokers doesn't affect the market negatively, anyway. Our money will in most cases never see the market if we trade with an MT4 broker.
  • #19
  • Feb 18, 2009 2:13am Feb 18, 2009 2:13am
Quoting daytrading
Hi,

Although I don't live in the US (UK resident), I cannot see this leverage proposal going anywhere. It would simply be opposed by too many regulatory bodies as well as the lobby for broking firms since they are almost entirely linked with retail broking.

Price stability in FX would completely change and what they call excessive speculation in that paper is nothing else but contributing positively to market stability. Retail FX customers are limited specifically by those high leverages in the way they can influence the market - when the margin...
With the regard to how bankers and brokers are viewed the public would not care if they regulated them to the curb. I have read some articles on TheHill.com talking about changing margins. All the current thought believe that margins should only be for the big guys. The pols think we as average traders are too dumb to understand what we are doing.
  • #20
  • Feb 21, 2009 5:08pm Feb 21, 2009 5:08pm
I would say that everyone who reads this thread should keep note of the issue and check back to see when the SEC comment period arises. At which point a serious mobilisation should take place by as many traders as possible to submit extensive, reasoned, detailed arguments to the SEC against this ill thought-out proposed rule. The acceptance of such a rule by one regulator could open the floodgates.

I remember when the SEC opened a comment period regarding the Silver Users Association proposals against the registration of the first silver ETF. A massive mobilisation of arguments took shape against the SUA on the SEC comment page, and I think this made a significant contribution to the eventual SEC decision.

Keep watching the issue.
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