Investors around the world haven't lost their appetite to trade in the post-financial-crisis era. But instead of playing the sharemarket, they fancy themselves as global currency traders. Australia has become a hot-bed of the industry by virtue of its trading culture, and as a safe jurisdiction for locally based players to market themselves to traders around the world.
Yet despite its rising popularity, some insiders are adamant the world of forex broking has been, and remains, a shifty business. Technology may have lowered trading costs but it has allowed many unsavoury practices to take place on a larger scale. The industry's dirtiest little secret is the extent of trading profits that brokers earn by directly taking on their muggiest punters. While some platforms act like true brokers others are more akin to bookmakers.
They're understood to split their trades into what is known in the industry as "A-books" and "B-books". The "A-book" describe the trades the broker receives that are passed on to the inter-bank market with the broker clipping a ticket.
And with brokers trading against their clients, they may possess the ability to tilt the game in their favour. The B-book does carry risks that a large savvy trader will bet big and win, which means the larger accounts are shifted to the A-book where the broker pays an inter-bank dealer a fee. But insiders are convinced it is an integral part of several of the brokers' business models that required them to constantly market for new clients.
As evidence of B-booking's prevalence, a cottage industry of trading analytics firms has sprouted up to help brokers identify which clients have even the faintest idea what they're doing. They're then shifted to the A-book. There are reasons why foreign exchange markets are particularly well suited to the retail brokerage model. And much of the logic played out in reverse last Thursday evening.
The FX markets never sleep, which means the sudden "gapping" in pricing that can blow up brokers and their clients in other markets is rare. That's why former Axi Trader executive and currency trading expert Quinn Perrot believes high leverage of up to times in certain currency pairs is not as dangerous as it sounds.
Such enormous losses, which exceeded client balances by many multiples, meant the big problems lay with brokers. Some either had a blowout in bad debts or closed out their client's trades at different levels to where they could hedge the exposures. The losses effectively blew up the largest and third-largest retail forex broker and inflicted multimillion-dollar losses for other players.
The melt-down of some offshore brokers has also raised the controversial issue of client segregation. Australia imposes tough restrictions on derivative brokers, but unlike other countries allows brokers to use client funds as collateral.
On this issue, local and international brokers are at loggerheads. Other brokers such as Pepperstone say they support client segregation but take exception to foreign firms lobbying for rule changes on their home turf. That and the Swiss events are reminders of a lesson even the largest players often forget: Have you been burnt by currency trading?
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