Forex trading can be a lucrative way to earn money online, and this has been a known fact. The Forex market, the largest financial market in the world with over $6 trillion daily FX trading volume, has gained a huge following in recent years. After all, who wouldn’t get interested in making money on a market that’s open 24 hours, allowing people to choose the most convenient times for them to trade?
A huge number of people from all over the world continue to try their luck in making it big in online trading Forex. However, up until this day, the losers outnumber the winners. We’ve said it before, and we’ll say it again – only 90% of traders lose and only 10% make it. Why? There are many factors as to why this number still stands – lack of trading knowledge, unrefined trading strategies, and emotional trading. In addition to these, some Forex brokers‘ malpractices are also seen as one of the reasons.
Forex Regulators to the Rescue to Protect Traders
Because Forex is such a huge market, it has become a challenge for financial authorities and agencies to oversee the growing Forex trading activities. Each country has their own regulating bodies that monitor the entire financial system. In Australia, the Australian Securities and Investments Commission or ASIC acts as the main regulator that enforces financial rules and laws to protect Australian traders and investors. Meanwhile, in the U.S., there’s the National Futures Association and the Commodity Futures Trading Commission which strictly screens Forex companies that intend to enter the US financial markets. These agencies have one goal in mind – to prevent customer abuse.
European Securities and Markets Authority Rules
In Europe, the European Securities and Markets Authority (ESMA) is responsible for the improvement of the continent’s financial system. ESMA, in particular, made noise in 2018 when it imposed new rules which affected retail Forex, CFD, and binary options trading. The move was part of the regulator’s efforts to protect European traders and investors from incurring big losses.
Here were the 5 ESMA rules that impacted not just traders, but also Forex companies:
- The maximum leverage for currency pairs EUR/USD, GBP/USD, USD/JPY is 1:30: This was bad news for traders because as we all know, they rely on leverage to boost their trading capital. A bigger capital means a higher trading volume, thus, bigger potential profits. For brokers, the limited leverage affected their earnings as well. Take note that the higher the trading volume, the bigger earnings they could get through transaction fees.
- The maximum leverage for major indices and gold is 1:20: Again, this worked against traders, especially small time traders. With a leverage this low, their trading power was limited, therefore, potential profits were limited as well.
- Binary options trading is not allowed: This particular rule largely affected binary options companies. The marketing of binary options on all forms of media was banned by ESMA. Basically, under the rule, binary options could not be sold within the European Union.
- Brokers should close clients’ open positions when their account balance is at 50% of the margin: This resulted in a drop in trading volume because traders traded less with less margin. Their trading habits had really changed because of this rule. Also, again, low trading volume meant low profits for brokers.
- Forex Brokers are not allowed to offer bonuses: With Forex bonuses removed, brokers struggled with attracting new clients. Bonuses have become such a huge part of the Forex economy, and a lot of traders, especially the new ones, have greatly benefited from it. Such offerings allow traders to increase their trading capacity.
ESMA Rules Impact on Forex Brokers
Because of the rules mentioned above, Forex brokers have seen a significant decline in the number of active clients and trading volume, which affected their earnings. Furthermore, it had been a struggle for them to market their trading services and products because of the restriction in leverage, and margin.
Lastly, brokers had to come up with other ways, aside from offering bonuses, to lure clients into trading with them. This was a big challenge considering the tight competition among Forex brokers.