Sunday, March 12, 2017

Most retail traders lose money: regulators

The Central Bank of Ireland, the financial regulatory authority for the Irish Republic, has issued a consultation paper on some topics that concern retail investors, mainly as they relate to trading Contracts of Difference (CFDs). The regulators have put forward the possibility of banning trading in CFDs altogether, although it is probably more likely that they will stop short of that and put in place safeguards for retail investors in Ireland that are more stringent than at present.

One of the things that bothers the Central Bank is the use of leverage. They make the very valid point that allowing clients to purchase instruments with a total value approaching 50 times their initial deposit is setting those clients up for failure in most cases. That some brokers allow leverage of up to 400 times the initial deposit means that customers who take anything close to maximum advantage of this are almost certain to lose.

According to the consultation paper, the Central Bank of Ireland, the Autorité  des Marchés Financier (AMF, the French regulator) and the Financial Conduct Authority in the UK have all done research that shows that anything between 80% and 89% of retail investors lost money in 2014, 2015 and 2016.

Here at EthicaHFT, we are very careful about the use of leverage. The absolute maximum we can go to during the week the 100 times equity. At weekends this reduces to 30 times so, as we hold positions over the weekend, our maximum is 30 at all times. In practice, we rarely make use of more than 15% to 20% of that lower leverage allowance.

Among other things, the Central Bank of Ireland is considering making it a compulsory requirement that traders cannot have more than 25 time their initial deposit as leverage. That is fine with us.

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