From humble beginnings in the late 90’s with just a few innovative players, the number of retail forex brokerage firms has continued to grow and grow every year. It is hard to come up with an exact figure regarding how many forex brokers are operating in 2017, but they appear to popping up faster than turnover is growing, which means shares of the proverbial pie are getting smaller. So how bad is the glut and which brokers will survive?
How bad is the glut?
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The Finance Magnates directory currently has 368 forex brokers listed, but this figure seems far too conservative. The myfxbook broker reviews section has 50 pages, featuring 20 brokers per page (and roughly double that on the first page). Brokers that have ceased to operate are removed from the review pages by myfxbook intermittently, but we’re not sure how regularly this process occurs. If we make a conservative guesstimate and average out the 368 listed at Finance Magnates and the 1000+ listed at myfxbook, we’re looking at more than 850 brokers in fierce competition.
Total daily forex turnover appears to have peaked in 2013; though the value of outstanding OTC forex derivative contracts has been growing at approximately 2% per annum and hit a new all-time high of $86 trillion at the end of June 2016, it is likely that annual growth in the number of retail forex brokers actively competing is outstripping this. So which brokers will survive and who will be extinguished?
Long live true ECN forex brokers
Brokers who operate on a true ECN model and are already well established, are least likely to fall victim to competition from disruptive start-ups and newcomers to the industry. If traders are already getting a great deal from their broker, they are unlikely to switch on a whim. Well established names have the purchasing power to get better pricing deals from their LPs and pass these savings on to the retail client. It is very hard for a new company with comparably limited capital and infantile volume to compete on this level from the get-go.
On the other hand, a well capitalized start up could plausibly run their operation at a loss while they try to gain market share.
Disruptor’s and true innovators
Though it will be very hard for generic newcomers to take market-share from ECN heavy weights, true innovators, who bring original ideas to the market will always succeed. Start-ups with diversified incomes streams can arguably succeed with a relatively small share of the market.
Brokers operating in conducive regulatory environments
Proper regulation of forex markets is a never-ending balancing act. Too little regulation and unscrupulous players thrive and damage the industry’s reputation as a whole. Too much regulation and local industry is strangled and loses its competitive edge. Australia and the UK are extremely popular amongst both brokers and traders – ASIC and the FCA seem to have found a fair middle ground that protects traders, whilst still offering brokers a relatively low-cost, conducive business environment.
Cyprus has been an extremely popular location for brokers, but an EU wide shift to more stringent regulation could damage the nation’s status a broker favorite. Recent moves by CySec have made life incredibly difficult for true ecn brokers: all CySec brokers now have to offer negative balance protection. If you are a market-maker, profiting of client losses, then clearing a negative balance is a simple pen stroke, but for true ECN brokers; cleared negative balances actually have to be paid to the counter-party by the broker.
Despite Brexit, UK regulated brokers are not immune to regulatory changes across the channel either: the FCA is currently consulting about reducing leverage for experienced and inexperienced traders to 50:1 and 25:1 respectively. Though these changes are probably good idea for inexperienced traders, leverage reductions to this extent would arguably render many scalping strategies impossible. Experienced, professional traders should really be able to operate with some level of freedom. Brexit itself is another issue, with the UK becoming a less popular location if brokers lose their EU passporting rights.
Brokers operating in over-regulated oligarchies
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Most would agree that the US is far too tough a place to do business and that their regulatory framework has gone too far. You can count the forex brokers operating in the US on one hand in 2017. This lack of competition is extremely bad for the consumer, but for brokers that already operate in this regulatory oligarchy, things are unlikely to change. Though US companies have lost their hold on global volume, there is enough demand and volume locally to keep things chugging along and a lack of meaningful competition is always great for business.
The death of the fakes and scammers
We won’t name names, but one of the most well known brokers in the US has recently been forced to shut its doors at home. On top of damage done to its reputation following the CHF debacle, it is very unlikely this particular brand recovers from this most recent shame. Though only the US entity is directly affected, its global offices are now well and truly tarnished.
With so much competition in the retail brokerage industry, all brokers operating on unscrupulous models and using underhanded tactics are on the way out. When a broker cancels a trader’s profits or refuses a withdrawal, they are very quickly named-and-shamed on forums and social media. Though they may be extremely profitable in the short-term, scam models like this simply cannot hold up in the information age.
The customer’s always right
With so much competition around, top notch service is a must. Traders can move to a new broker in a matter of hours and have their funds moved across within a few days. Poor service will simply not fly in this highly competitive environment – it’s a trader’s market.
Though there is a glut of competition in the retail forex industry, this is a good thing for the majority of participants. The demise of unscrupulous operators is a positive for the industry as a whole, brokers who treat their clients with respect have nothing to worry about and retail traders will continue to benefit from competitive pricing and service.
Article provided by Vantage FX, Regulated Australian Forex Broker.