In a short period, regulators in both Cyprus (CySec) and the UK (FCA) have made significant announcements that serve as blows to the retail foreign exchange industry.
Leverage will be limited to 50:1. In the UK, only experienced clients with more than a year of trading can get this leverage. Otherwise, it is only 25:1. In Cyprus, traders can apply for leverage higher than 50:1.
The second big move relates to bonuses. Forex bonuses are banned. Offering bonuses based on trade volume (or other means) served as a powerful marketing tool for brokers to acquire new clients.
There are more details about these two moves, which have sent shockwaves in the industry. Shares of major forex and CFD firms have plunged in London trading.
As always, markets tend to overreact to news and we could see stocks swinging back. But taking a step away from the immediate shock, this could have significant consequences.
Adapt or die
Curbing leverage and bonuses may weed out inexperienced traders that are tempted by bonus promises, then trade with high leverage and find their account liquidated within a short period of time. For brokers which rely on short-term profits from such short-term traders, this is undoubtedly a big blow. They will probably have to adapt or die.
What is the alternative? Acquiring traders by other means: providing reliable execution, good customer service, low spreads and a genuine will to retain clients for the longer run, making money on their trades rather than a quick hit on the traders’ initial deposits.
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