Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

Will Forex Trading Be Illegal in Future? Last Law Decisions

Author: Martin Moni
Martin Moni
All publications of the author

Considering some of the recent changes to Forex trading laws, it’s understandable why traders may be getting worried. A lot of countries have been placing tougher restrictions around the industry, and naturally some are concerned this might signal the end. The FX market may be huge, but a lot of industries have become obsolete and extinct too. For any Forex trader who depends on the industry or has big dreams of major success, it’s worth considering this possibility and how it may affect you. (These are the: Top 5 Forex Traders Who Became Millionaires)

What’s happening to the FX arena?

Of all financial markets, the FX arena is the biggest in terms of liquidity. According to the Bank for International Settlements (BIS), the market achieved an average daily turnover of $5.1 trillion in 2016. Considering that this turnover was achieved at a time when the FX industry was facing problems, we were expecting this number to rise on the next release of the BIS report.

Remember this was the time several Forex brokers went bankrupt following the Swiss National Bank’s (SNB) decision to de-peg the Swiss franc from the euro. The impact of the decision was immediate and catastrophic. Within minutes, the franc was up by 30% against the euro and other major currencies, causing huge losses to anyone holding short positions on the franc. When the dust settled, even brokers with excellent reviews like FXCM reviews had filed for bankruptcy. (All you need to know about the: Bankruptcy of Forex brokers)

Ripples from the decision were felt for the rest of 2015, reducing the daily turnover in the market. Most likely, this dip in turnover through 2015 contributed to the decline of daily average turnover in the FX arena from the previous record of $5.4 trillion in 2013. Since then, the industry has continued to suffer and the hope for a resurgence is diminishing. Following the events of 2015, the FX arena experienced a bit of a recovery until ESMA announced its plan to change their regulations in 2016, and the hopes were dashed. (Find out: Why ESMA Regulator Bans Forex Bonuses)

MiFID regulated Forex brokers began to feel the pinch even before MiFID II regulations came into effect in January 2018. As early as 2017, UK and EU based brokers were already seeing a decrease in revenue. Meanwhile, brokers in other locations such as Australia have reported an increase in European clients throughout 2018. This goes to show that many clients fled the European-regulated brokers for greener pastures elsewhere. Consequently, these offshore brokers began to enjoy better profit margins and client bases compared to their European counterparts. (You should be aware of the: New Forex Brokers Regulations in Russia in 2019)

Today, many Forex brokers are now losing money after European regulators began imposing stricter laws on the industry. Just today, FXCM UK announced £5 in losses for the financial year ended 31st December 2018. This was a rise of 867.3% in losses up from the £521,484 loss they made in the 2017 financial year. This is just one of the many FCA regulated brokers who have seen a sharp decline in profits during the 2018 financial year. IG Group reviews are expecting their net trading revenue to decrease by 17% from £569 million to £475 million while profits go from £281 million down to £190 million. The story is the same with all other European brokers, who have been forced to re-evaluate their business models or face extinction.

In addition to the changes in regulation, volatility has also been very low across the currency markets. BIS reported that retail trade volume in 2018 was $1.104 trillion while that of 2017 was $1.672 trillion, a 34% drop. Therefore, there was much less trading going on day to day in the Forex market in 2018, and there have yet to be any signs of a change this year. Volatility generally goes higher when investors are expecting changes in interest rates in future. These interest rates decisions by central banks usually determine the course of long-term trends and not just intra-day ones. (This are the: Friday Forex Trading Tips For Day Traders)

Volatility in 2018 decreased because the ECB announced that they were not going to raise interest rates all year lowering euro volatility as evident on EUR/USD live charts. Nevertheless, investors were hoping that 2019 would be the year, but apparently it’s not. Once again, the ECB has been forced to keep their interest rates low after the IMF downgraded their economic growth forecast. Add to this the Brexit talks, trade wars and European elections all probably mean that this probably won’t change any time soon. (These are the: Main central bank meetings)

As a result, volatility will probably remain low in 2019, sparking more concern about the future of the industry as a whole. Those traders who are well aware of these facts are very worried the FX market is in a rut. Perhaps the most disturbing cause of the problem has been the changes in regulation. Volatility has been known to wane, but laws are very hard to reverse once they are active. For this reason, we need to discuss these laws that have had such a negative effect and why the authorities thought they were a good idea. (Know more about: Growth Of The Forex Market In Africa And Other Developing Countries)

Changes in Forex exchanging laws

Ever since Forex trading became open after currencies were made free-floating in the 1970s, the laws regarding the trade have remained largely the same… until recently. In fact, one might even say the market was by and large unregulated as it operated over the counter and across borders without a unifying agency. Only the individual, local Forex regulators stood between the traders and total chaos. And even then the market was prone to manipulation by the most influential parties mainly consisting of investment banks. (Forex Rigging And Manipulation: How The Major Investors Pull It Off)

The real wake-up call came in 2008 through the financial crisis, at which point the regulators knew they could no longer trust financial companies to their own devices. Japan was the first country to place caps on leverage. From August 2010, leverage was capped at 50:1 and thereafter lowered to 25:1 as from August 2011. The US followed in a similar fashion by reducing leverage to a maximum of 50:1 and 20:1 for major and minor/exotic currency pairs respectively. In both countries, the FX market shrunk significantly because of leverage caps and the huge capital requirements required for individual traders to participate. Now Japan is considering a further reduction of leverage down to just 10:1, but this law has not yet been passed. (Legalization of Forex Trading in the US: Facts and Trends)

European authorities also knew they couldn’t let financial institution run riot either, but their response was slower and measured but just as devastating. New Forex regulations were first proposed in 2014 and came into effect in 2018 encapsulated under MiFID II. After the US’ regulatory changes, the EU had become the next best option for brokers and traders alike, but no longer. ESMA placed a leverage cap at 30:1 for major currency pairs such as GBP/USD live charts and 20:1 for non-major pairs. That was even lower than leverage in the US! (Do you wonder: Can You Actually Get Your Money Back From A Fraudulent Broker?)

Once again, brokers and traders had to find a safe heaven, which they found in Australia’s ASIC and Cyprus’ CySEC. You see, both the traders’ and brokers’ interests are aligned most of the time. Brokers want to work under a reputable regulator to set themselves apart from scam brokers and prove they are legitimate. While traders feel safer working with regulated brokers. And although there are financial regulators in all countries, it counts most when a regulator is reputable. (These are the: Main Features of Canadian, US, Australian and UK Forex Industries)

The problem now is that the remaining reputable regulators also want to go the way of their predecessors in capping leverage. CySEC has already published its proposed new regulations capping leverage at 50:1 for Forex brokers for professionals and 20:1 for what they call the ‘grey area target market’. Over in Australia, their parliament passed a law that would allow ASIC to impose tougher regulations on the Forex market, starting by banning non-citizens from signing up with Australian brokers. The top Australian brokerages have been getting excellent reviews thanks to the strict regulatory framework as visible on Pepperstone reviews. The final changes are yet to be imposed, but you can bet they are well on the line. (Investor Tips 2019: What To Include In Your Portfolio)

It would seem Japan kicked off the falling dominos and the rest of the regulators have been falling in line. Now they are going to place the lowest leverage caps ever in the market. Soon enough, this may become the norm and traders will be more or less unable to trade at the levels of leverage they were once able to. This is what really has traders worried and could threaten the industry. Because inasmuch as retail Forex trading doesn’t account for much of the daily trading volume of the entire market, it still does account for a huge percentage of the total – 33% as shown below. If this market was to diminish, then the entire market would be in trouble. (How and When Do You Know You’re Ready for The Big Live Account Leagues?)

Why have regulators made these changes?

As mentioned earlier, the Forex market is very difficult to regulate because it is decentralized, over-the-counter and cross-border. Without any single regulator to oversee the market, it has become the wild west of the financial markets. Big investors are able to manipulate prices by taking advantage of archaic structures such as the 4PM fix while scammers are rampant. These cases have been on the rise recently because more people than ever are participating in the market. Increased access to the internet, financial services and portable devices have made it possible for almost anyone to trade the market, which is exactly what happened. With the promise of quick and massive profits, many more people entered the market, leading to the problems we see nowadays. (These are the: Top 10 Most Outrageous Forex Market Scammers)

Over the years, ESMA and other regulators have been receiving ever increasing number of complaints from traders. Most of these are from traders who were ripped off by scammers, but the regulator wanted to curb such practices in a different way. Instead of policing the brokers, they wanted to make the industry less attractive for new traders. According to research, a lot of new traders lose all their money within the first few weeks of trading. This happens mainly because they lack the skills to trade profitably but also because brokers tend to downplay the risks involved, especially when using high leverage. This is why ESMA decided to both lower leverage and mandate brokers to indicate the win/loss ratio. (In case: You Wanted To Know How Many Traders Lose, Now You Know)

Clearly, regulators had good intentions when proposing the aforementioned changes in Forex regulation. The impact of the changes, though, has been double-edged.

How new regulations have affected the industry

As you would expect, restrictive regulations have slowed down the industry’s performance and revenue. For starters, volatility has fallen below the 20th percentile for a period of over 20 weeks, which is not surprising. As mentioned, trading turnover decreased by 34% from $1.672 trillion in 2017 to $1.104 trillion in 2018. Companies that provide Forex trading services thrive when volatility is high because institutional money is invested in the market. At the moment, though, very little is, and the situation is being compounded by the departure of retail clients. (Will Institutional Investors and Sharks Invest Massively in Bitcoin in 2019?)

Regarding the intent of the legislature, the reports so far still aren’t definitive. In fact, ESMA reported that the number of profitable retail clients actually decreased slightly rather than increase as they intended in the first month of the legislation. According to ESMA, this resulted from the poor performance of digital currencies in 2018 as compared to 2017. There haven’t been more reports from ESMA, but we believe the numbers aren’t good or else they would have already announced them. (This is the: aelf (ELF) Network Long-Term Forecast)

ESMA hoped that by making laws tough, new traders would abstain and not lose their money. Instead, these traders chose to trade with offshore CFD trading brokers who had better trading conditions. These brokers are often less safe to deal with as offshore regulation isn’t as strict as Europe’s. To avoid losing clients, European brokers have also been observed ‘asking’ their clients to sign up with their non-EU entities if they want better conditions. According to MiFID, EU regulated brokers cannot advise their clients to do so directly, but they have still found a way around this hurdle. They send their clients an email informing them that they can get better trading terms on their offshore entities, but that they can’t advise them to do so. These emails basically urge clients to move their capital offshore without directly asking them to do so. The problem is so rampant that even ESMA has asked the European Commission to revise the MiFID directive addressing this reverse solicitation. (Forex Trading in Singapore: Laws and popular FX brokers)

For the brokers, the negative effects they have been experiencing have forced them to restructure their companies. No longer do ESMA-regulated brokers depend on low-capital traders but on institutional investors. These clients never got high leverage to begin with, neither do they need it. A broker gains their revenue from spreads, and these institutional traders definitely give them enough of that. (These are the: Global Trends of Forex Brokers’ Business in 2019)

Does this signal the end of an era?

On the contrary, stretches of low volatility such as we are in now have preceded times of great volatility. From the graph below, we can see that every period of low volatility was followed by a spike in volatility. An example is prior to the 2008 financial crisis we all know about, or last year before investors panicked and dumped a lot of their US securities for fear of a bubble. If history repeats itself (as it usually does) the current levels of low volatility may be a signal of something dramatic about to happen. This means that the industry is not about to end, but is rather at the dawn of a new era. Indeed, this should be the time when traders take advantage of the markets to make enormous profits and record earnings. (Follow the lead of these: Top 5 Forex Traders Who Became Millionaires)

Besides, there may be other contributory causes to the low volatility levels we’re seeing right now apart from the changes in regulation. Mounting tension between the US and China may be exacerbating the problems in the market as investors are waiting to see what happens. Whichever way the two superpowers decide to go will have a major impact on the markets and present wonderful trading opportunities. Generally, no one likes to risk capital when markets are volatile and unpredictable, which is our current situation. Once things come down, the markets will likely resume their prior volatility levels with a vengeance. (Here is: Everything You Need To Know About Trading In Gold Markets)

What’s the future of the Forex arena?

On some level, it even seems like an attack on the industry and that regulators want to limit the market as much as possible, but this isn’t the case. To begin with, this is one of those cases where something is too big to fail. A $5.3 trillion market is unlikely to fall completely; despite the hurdles it faces in the meantime. (Forex in USA: Myth or Reality?)

But the arena will definitely look very different in a few years. Perhaps it will be nearly impossible to create a centralized market for FX trades, but there might be a way for brokers to report their trades in future. MiFID II already proposed several ways of doing this, and it is not improbable to achieve. (Trading Stocks in Forex Brokers: Commissions, Swaps, Spreads Research)

Indeed, the Forex market today resembles the old stock market a bit, where the market was threatened by bucket shops. Back then, stock trading was very risky because there was no simple way of relaying orders to the exchange, but this problem was fixed by technology. It’s thus not too difficult to imagine newer technology unifying the FX market and making it centralized. (Learn: Why Professional Traders Prefer Trading Stocks Rather Than Forex)


In case you’re wondering how some traders manage to outdo the others illegally, watch this short clip:

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.