E-mini Trading Versus Forex Trading: A Shocking Lack Of Transparency

E-mini Trading Versus Forex Trading: A Shocking Lack Of Transparency
Forex trading has gained a large following in recent years as a popular day trading vehicle. It’s not unusual to observe a barrage of Forex firms touting their services on just about any financial news publication. As a longtime institutional stock trader and commodities trader I am often shocked at some of the outrageous claims and advertising techniques this industry utilizes. This type of advertising and verbiage is simply not allowed by the SEC or the CFTC. The Forex industry, on the other hand, is lightly regulated and offers no centralized exchanges like the securities industry in the United States and has virtually no regulation on advertising technique and claims.

From the onset I want to point out that the United States stock and futures exchanges have their share of hucksters and fraudulent activity. You need only peruse the current SEC and CFTC enforcement actions to get an idea of the amount of illegal activities that occur in our highly regulated exchange based trading structure.

On the other hand, the lightly regulated Forex industry has been in recent years the target of both the SEC and the CFTC, with good reason. Exchange traded securities provide potential traders with a high level of transparency and information in regards to the equity product or series they intend to trade. Variables like a leverage, registration of broker-dealers, and capital adequacy requirements are just a few necessary requirements that would go a long way toward establishing much-needed transparency in the Forex industry. Further, and from a personal standpoint, I believe a centralized exchange for Forex trading would be optimal for the industry.

By means of comparison, the futures industry and stock trading exchanges have rigid leverage, registration and capital adequacy requirements. In addition, e-mini trading is all conducted through well-regulated and orderly exchanges that feature reliable data feeds that provide real-time information on volume, trading entities, and pricing to all participants. This transparency in the futures industry is a sharp contrast to the murky Forex industry which is dominated by individual banking interests. Quite simply, there is a shocking lack of transparency in the Forex industry. In an orderly market, all participants ought to have access to accurate real-time information and standardized trading contracts.

Another concern of the SEC and CFTC is the leverage requirements in the Forex industry. The current United States industry standard for leverage and a Forex industry is 100:1. The most recent regulation proposes lowering the leverage standard to 10:1, which is a departure from the current leverage standard that is a quantum leap in scope. For a variety of reasons, Forex traders have been, by and large, fiercely critical of these regulations. Since the CFTC can only regulate firms in the United States, offshore firms would still be able to offer the absurdly high leverage requirements the Forex industry has enjoyed. The obvious result of this new regulation would be a mass migration of Forex traders from United States based firms to offshore firms that would not fall under the proposed US Forex reforms. There is, however, regulation under consideration that is very similar to offshore betting operations; in short, it is unlawful for US citizens to patronize offshore betting firms in order to circumvent current US law regarding betting. The proposed regulation for patronizing offshore Forex trading operations is very similar to the limitations of US citizens circumventing United States Forex regulation. In short, Forex traders based in the United States would be required to trade through domestic Forex trading operations.

In short, I don’t trade Forex because of the lack of transparency and a centralized exchange. In my opinion, there is simply too much potential for manipulation of bid/ask quotes, front running, and outright fraud. Currently the Forex industry leads security related scams by a wide margin, even though it is a small portion of the total day trading aggregate.

To summarize, the Forex industry has great potential to become a legitimate and profitable day trading option. In my opinion, the industry must institute strict regulation before its legitimacy can be truly realized. I think that in time all of the above addressed the problems will be rectified, but until there is true transparency in the Forex industry I believe I will abstain from participating. We have identified problems like over leverage, lack of registration, and the absence of a centralized exchange as problem areas in the Forex industry. Until these problems are addressed, I don’t think the Forex industry will reach its full potential.

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