Retail investors in U.S. retreat from currency trading

Tue Jan 22, 2013 1:06pm EST

* U.S. retail FX accounts fall to below 90,000 in 4th qtr
    * Subdued trading, regulations could force more brokers out

    By Wanfeng Zhou
    NEW YORK, Jan 22 (Reuters) - Retail currency trading, which
had grown in popularity over the past decade, has cooled off in
the United States in recent months as prolonged low market
volatility and strict regulations dampened enthusiasm.
    The number of active U.S. retail foreign exchange traders --
those who traded or had an open position during a particular
period -- fell to 89,577 in the fourth quarter of last year,
according to Forex Magnates. That marked a 20 percent drop from
about 110,000 two years ago, the forex news and trading research
firm said.
    Forex brokers have been abandoning the U.S. market of late,
with at least three quitting in the last six months and more
expected to go. 
    Analysts say brokers have grown reluctant to comply with
tough U.S. regulations that govern retail forex trading, and
have decided instead to focus on retail customers in regions
with less strict rules or the unregulated institutional market.
    "U.S. regulations are extremely tough, making it difficult
both for brokers and traders to keep operating in this market,"
said Michael Greenberg, CEO of Forex Magnates.
    "Eighteen brokers were accepting U.S. traders two years ago.
Now there are only 11," he said. "It doesn't take a genius to
predict that two years from now there will be only a handful of
U.S. forex brokers left...if (any) at all."
    The U.S. Commodities Futures Traders Commission, in 2010,
when it passed tougher regulations, said retail foreign exchange
was the area the agency oversees where the most retail fraud
occurred. Some firms run advertisements that tout high returns
with little risk. Industry data shows that more than half to 75
percent of accounts lose money.
    The CFTC reduced the amount of borrowed money retail
investors can use and stipulated a capital requirement for
retail currency brokers of $20 million.
    Trading volume has declined. At FXCM, retail
trading volume fell 5 percent to $3.6 trillion in 2012. Gain
Capital, which has yet to release full-year figures,
reported year-on-year declines in retail volumes for all of the
first three quarters in 2012.
    U.S. brokers also saw a drop in retail forex funds, with the
total amount of retail forex obligations falling to $742 million
in November from $982 million in August, CFTC data showed.
    Alfonso Esparza, senior currency strategist at forex broker
Oanda in Toronto, said the U.S. retail currency market has been
consolidating since 2008. Meanwhile, interest in retail forex
trading has picked up rapidly in London, China and the Middle
East, analysts said.
    In December, Grand Rapids, Michigan-headquartered GFT shut
its retail forex brokerage in the United States to focus on
institutional business. Advanced Markets LLC, in Charlotte,
North Carolina, and New York-based Forex Club also exited the
U.S. retail currency market last year.
    Some brokers, such as Oanda and FXCM, said they remain
committed to the U.S. market. FXCM said the exit of smaller
players will help the firm gain market share.
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