Related topics: currencies, Federal Reserve, investments, dollar, gold
Retail investors have grown increasingly interested in trading foreign currencies, but until recently it wasn't possible to see whether they were succeeding. New disclosure requirements are shedding light on investor success -- and there's not much of it.
SmartMoney.com examined recent disclosures of the four biggest retail foreign-exchange brokerages that offer trading in the spot currency market. The brokerages account for a combined 95,000 accounts, and represent the majority of the retail foreign-exchange universe -- of the 16 companies registered with the National Futures Association, just five have as many as 10,000 accounts.
The data show that 35% of the forex accounts at the four biggest companies -- 33,000 in all -- made money in the fourth quarter of 2010.
Among the largest brokerages, Oanda had the highest winning percentage, with 43% of its 48,866 accounts making money. FXCM had the lowest, with 23% of its 18,000 investors profitable in the period.
Oanda suggested a number of reasons why its customers may have been more successful in the quarter: The brokerage pays interest on account balances, it does not assess inactivity fees and it believes its spreads are tighter. But CEO Michael Stumm acknowledged that he doesn't really know. "Maybe we just have better traders," he said.
FXCM spokeswoman Jacyln Sales said: "Until recently, the calculation methods used weren't uniform, and FXCM used a more conservative method than others. We think next quarter's numbers will be more reflective of the truer picture."
The new disclosure requirements are part of the Dodd-Frank financial reform legislation signed into law by President Barack Obama in July. Each quarter, dealers must disclose how many retail accounts they have, and how many of the accounts are profitable.
Rules implementing the legislation placed new limits on the amount of money a currency trader can borrow from a brokerage: The industry used to allow retail customers to leverage themselves as much as 200-to-1; the new limit is 50-to-1.
Critics say the low success rates prove that individual traders are at a huge disadvantage in round-the-clock, volatile currency markets. Currency "trades 24 hours a day, 7 days a week and most people sleep," said Mike Savage, the founder of the Savage Financial Group in East Stroudsburg, Penn.
The currency market is characterized by small, rapid price movements. Even if an individual trader could move fast enough to keep up, "the math just doesn't make sense" when transactions fees are taken into account, said Oliver Pursche of Gary Goldberg Financial Services. "It's probably not much different than sitting down at the blackjack table in Atlantic City or Vegas and expecting to beat the house."
