When I started writing this blog in the Spring of 2009 I put forward the proposition that thanks to the advent of the internet and online retail forex brokers it had become possible for anyone possessing an entrepreneurial spirit, and prepared to put in the required effort over a number of years, to learn how to turn $1000 that they were willing and able to lose into a business that could support their family and themselves. I didn't say it was easy, but I did suggest it was possible. All that is about to change. It never was easy, and it looks like it's going to get ten times more difficult, for US citizens at least.
Immediately after creating this website I found myself blogging about a whole series of regulatory changes imposed upon US retail forex brokers following the inauguration of Barack Obama as President. In my view these changes had their roots on the Democratic party campaign trail, when Mr. Obama railed against the economic ills he and his advisors perceived to be caused by speculators in the energy markets. According to an article published on June 23, 2008 in the New York Times Mr. Obama said in a campaign statement that:
My plan fully closes the Enron loophole and restores common-sense regulation.
Since then of course we have all felt the effects of the "credit crunch", speculators in the housing and financial markets have come under the scrutiny of the Obama administration, and the cunning plan has been revised several times. Whilst closing the Enron loophole might make sense, the overall end result doesn't look a whole lot like "common-sense regulation" to me, I'm afraid.
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The recent introduction by Alpari UK of "interbank spreads" on their MetaTrader 4 demo accounts has given us the perfect opportunity to demonstrate one of the potential problems you might encounter using the MetaTrader 4 strategy tester to evaluate a forex trading strategy you have developed for yourself, or even bought off a virtual shelf. Our regular readers will know that we have performed numerous live tests and backtests on the Forex MegaDroid "robot". Today is a Saturday, so I had a few minutes spare to run yet another backtest on the Droid. I started the simulation on March 30th 2009, the date the Forex MegaDroid team launched their creation amid great fanfare, and finished it yesterday evening. Here's what the Alpari UK MetaTrader 4 demo strategy tester showed me:
Forex MegaDroid weekend backtest on Alpari UK demo account
The bottom line? A net loss of $492.91 following a drawdown of 60.28%. Not very impressive, I'm sure you'll agree!
Here's the equity curve from another backtest that I performed yesterday evening, using exactly the same settings on exactly the same account:
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Here at the Trading Gurus we are constantly monitoring the quotes from a wide range of brokers. Yesterday alarm bells started ringing to tell us that the spreads on one of our MetaTrader 4 demo accounts at Alpari UK had suddenly reduced to previously unheard of levels. Spreads as low as 0.4 pips on GBP/USD for example, and once (briefly!) even zero on EUR/USD.
This morning I telephoned Alpari UK and spoke to George Tchetvertakov, their head of market research. He told me that the reason for the sudden reduction in spreads was that the standard Alpari UK MetaTrader 4 demo account was now showing quotes typical of those available on the Alpari Pro account, which as from this week can be accessed using the MetaTrader 4 platform as well as the new Alpari Direct platform.
According to the Alpari news release:
With the addition of MetaTrader 4 on the Pro account, Alpari (UK) clients now have access to the most trader-friendly platform with the most professional terms.
- Institutional-level liquidity from 10+ top-tier banks
- Non-Dealing Desk execution – no re-quotes
- Tight spreads from 0 pips
- Ultra-fast Straight-Through Processing
- Floating leverage up to 1:100
- MT4 EA-compatible including Scalping EAs
What the news release doesn't point out is that these "professional terms" currently include a minimum opening deposit of $20,000, and a minimum trade size of 3 full lots. That's not a misprint. That is 30 times the minimum trade size on Alpari's Direct Pro and MT4 Classic accounts, and 300 times the minimum trade size on an Alpari Micro account! To get those juicy looking spreads you also have to pay commission of $30/million, the same as if you were to use the Direct platform.
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Last week Swiss forex broker Dukascopy announced that they are reducing the minimum lot size for their ECN retail accounts. According to the news section of their website:
Dukascopy (Suisse) SA announces the reduction of minimal lot size. Starting from 8th of January 2010, traders can use mini lots from 0.001 equal to 1000 units of a primary currency amount.
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London Capital Group Holdings plc are behind a considerable number of UK spread betting brokers, including Capital Spreads, ProSpreads, Dealing Desk and even Saxo Bank Financial Spreads. At the beginning of this week they issued their third profit warning. According to the Financial Times:
Just 18 months ago, LCG had appeared to have benefited from the credit crunch as investors seized upon the volatile markets as an opportunity to place bets. But in recent months the range-bound nature of the market meant punters had been able to make small bets with limited risk of large losses. There are less people closing out their losing positions, which is how spread-betting companies make much of their money.”
We commented recently on the possible side effects of falling volatility in the currency markets for traders. Looks as though the brokers are suffering too, in the UK at least.
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The latest edition of the Economist magazine has just landed on my doormat. The cover story is a 14 page special report on "Stopping Climate Change". I'll read that with interest later, but the first thing I turned to was one of several articles which mentioned Dubai's debt crisis. This one was entitled "The Repercussions of Dubai", and covers international reaction to the Dubai World announcement that it wanted to stop repaying its debts until "May 30th 2010 at the earliest".
The Economist suggests that:
The reaction may have been exaggerated by the timing of the announcement, on the eve of a four-day religious holiday, and a lack of liquidity in markets. Wall Street was closed for the Thanksgiving holiday. Events in Dubai may simply have given traders an excuse to square their books ahead of the year-end, something many were already planning given the robust stockmarket rally since March.
Not a big problem then? The currency markets certainly seem to have reacted more strongly to yesterday's unexpectedly good Non-Farm Payroll numbers than to the announcement that came out of Dubai while US dealing rooms were closed for Thanksgiving. By now you may be wondering what on Earth this has to do with computerised trading systems, so I'll try and explain.
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MetaTrader 5 entered public beta testing quite some time ago now. For almost as long information about the product has been disseminated via the existing MetaTrader 4 web sites. Now MetaQuotes has finally got around to putting some content on a couple of MetaTrader 5 specific sites. MetaTrader5.com currently consists of a single page only, but it does at least provide a convenient location from which to download the latest beta version of MT5. The home page also displays the date when beta testing of the product is currently scheduled to end:
MetaTrader 5 is at the stage of public beta testing till the 1st of February, 2010.
Fortunately MQL5.com contains considerably more content. This site provides information for programmers who want to use the new MQL5 language to create their own trading systems and indicators. The MQL5 reference manual is now available online, although some parts of the English language version still contain bits of Russian! One such section is the description of the broken OnTrade() function. I keep pestering MetaQuotes about the issue, and I moved my campaign over to the new MQL5 forum when it burst into life. At long last I've finally managed to extract an answer from a MetaQuotes representative about when they might get around to fixing it:
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The BBC reports this morning that Lord Myners, the UK "City minister" and former head of fund manager Gartmore, has his doubts about the development of high-frequency trading (or HFT for short). He told the BBC that:
I have been increasingly troubled that we seem to find ourselves in a situation in which shares are to be bought and sold rather than being part of an ownership relationship between investor and a company. The danger is that nobody really seems to think of themselves as owners.
It has gone too far, it has now lost its supporting function for the provision of capital to business and has become a game to be played.
Lord Myners seems to be echoing the thoughts of Mary Schapiro, Chairman of the US Securities and Exchange Commission. Last week Ms. Schapiro addressed the SIFMA Annual Conference in New York on the topic of "The Road to Investor Confidence". She mentioned a whole raft of issues the SEC were looking at as they:
Refocus on our core mission of protecting investors. That was our mission 75 years ago when we were founded and it's still our mission today.
On the specific topic of high frequency trading the SEC chairman had this to say:
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As we reported back at the beginning of August forex broker GFT published on their website a document entitled "Get the Facts" which pointed out that their DealBook platform didn't require changing to comply with the recently introduced NFA hedging and FIFO rules. Amongst other things they stated then that:
We are aware that some forex dealers are attempting to circumvent the new rule by asking customers to move their accounts to divisions in the UK where the NFA has no jurisdiction. However, we believe you should be wary of this practice because the NFA rule is designed to offer better protection for traders.
GFT will never ask you to move your account to avoid regulation. We are proud to be fully compliant with all NFA regulations and we are committed to integrity in everything we do.
Now they seem to have changed their mind somewhat on that point. GFT recently announced that as from Sunday, Nov. 29, 2009 customers of "the U.S. entity Global Futures & Forex, Ltd. (dba GFT)" would be subject to the new NFA regulations on maximum leverage.
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Following on from its "no hedging" and first-in first-out rule changes, the National Futures Association in the United States will shortly impose further restrictions on the activities of its Forex Dealer Members (FDMs). In notice Notice I-09-18 dated September 24, 2009 the NFA informed brokers that:
As of November 30, 2009, the alternative [net capital] requirement is $20 million plus 5% of the amount of customer liabilities over $10 million.
and that:
Beginning on November 30, 2009, all FDMs must collect a customer security deposit of at least 1% for the currencies listed in Section 12 and at least 4% for all other currencies.
FXCM LLC are members of the NFA, and whilst (unlike some other brokers) they should have no problems with meeting the new net capital requirements, they were the first US broker to inform their customers about the reduced leverage they will be able to employ after the end of next month.
This is all part of the ongoing saga in which the US forex industry battles it out with their regulators. In a new development however, I have received an email from FXCM Ltd. informing me that the margin requirements in my UK based spread bet account will also be increasing on Sunday, November 22nd. FXCM UK tell me that:
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