There are a multitude of online FX brokerages that offer eye-watering levels of leverage to retail clients.
FXGlory, for example, offers retail traders leverage of up to 3000:1, while a number of its competitors offer an only slightly more modest 2000:1 including AAFX Trading, Exness, FBS, and Forex-Metal.
Leverage of 1000:1 is available from more than a dozen providers, and for traders willing to make do with multiples in the mere hundreds there are countless providers available.
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In the aftermath of the Swiss National Bank's decision to end its peg to the euro, in which the resulting volatility wiped out many investors – particularly those with large levels of leverage – as well as, in some cases, the brokers serving them, regulators are increasingly turning their attention to leverage.
In particular, in Europe, Australia and elsewhere, questions are being asked about whether a leverage cap should be put in place, as it is in the US.
Euromoney approached all the brokers named above to ask their views about the risks associated with leverage, and the implications of a cap, if one were to be imposed. Only one responded.
Muhammad Atif, director at AAFX Trading, which offers up to 2000x leverage to retail clients, acknowledges regulatory concern over leverage levels.
“The risk associated with the high leverage is very high,” he says, insisting AAFX encourages its customers to limit the leverage they use, suggesting around 500x as a manageable level, despite allowing them to take four times as much.
“However we believe that the forex market is different.”
Atif is concerned attempts to limit leverage could undermine the investment case for FX generally among a significant section of retail traders – at least among those he sees trading on his platform.
“If you cap the leverage, it will hurt the FX Industry very badly,” says Atif. “The main attraction of the FX industry is the leverage.”
The implication is that a limit on leverage would drive retail traders away and might end up driving down liquidity.
Atif also frames the attack on leverage as an attack on returns, a move that will ultimately hurt the public it is supposed to protect by leaving them out of pocket – not in the occasional market blow-up but in their everyday trading.
“It would be less profit with low risk,” he says.
Ultimately, in a free market there will always be suppliers willing to meet demand, and there is certainly demand for leverage.
“The majority of our clients want high leverage like 1:1000 or 1:2000,” says Atif.
While there are traders looking for those kinds of returns, and willing to ignore the risks associated with them, it is naïve to expect brokers to shun that demand, without regulatory redress.
If there was a level playing field, it might be easier for the community to accept a cap of leverage around the 50:1 level adopted by the US, as they wouldn't be inviting their clients to move to their competitors.
The Commodity Futures Trading Commission is considering tighter regulations on how FX brokers handle transactions that originate overseas, where retail leverage limits are less onerous than the US.
Given the complex cross-border nature of FX flows, from the perspective of the end-user, broker and clearer, some, albeit self-interested, brokers argue US efforts to impose rules on retail foreign-currency dealers be workable in practice and a leverage cap, in general, is unlikely to reduce systemic risks.
“We don't believe that 50:1 would make FX traders safer,” says Atif.
He lays the blame for the blow-ups, like the one triggered by the SNB, elsewhere, saying: “We need to understand that the investor doesn't lose money because of the leverage, but because of the manipulation in the market. We need to stop that, or at least minimize it.”
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Ken Veksler of Accumen Management, a boutique asset management and FX consultancy, says: "Any perception that limiting the size of available leverage to retail investors and speculators is going to have a direct and adverse effect on overall market liquidity is laughable.
"Ultimately if anything, such leverage limitations are likely to shore up and reduce counterparty risk, which in of itself is the greatest current risk to liquidity in FX."
He adds: "Banks and prime brokers are going to be far more inclined to conduct business with brokers [retail and otherwise] if they believe that the flow they’ll be seeing isn’t 'toxic', such as it may be presently perceived to be from those brokers or institutions offering irrationally high/excessive leverage."
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Unless there is a global deal on leverage that is enforced, brokers will continue to set up shop in the most permissive jurisdictions to offer clients the chance to make a quick buck.
Veksler concludes: "FX should never be made to be boring. However, it should be made to be more selectively available to professional and qualified counterparts and participants.
"If you’re seeking the excitement of a casino, then perhaps a casino is exactly where you should find yourself, rather than the FX market."