The FOREX revolution and the thinning of the herd

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When wikipedia’d the thinning of the heard re-directs to culling with the following definition “Culling is the process of removing animals from a group based on specific criteria”. Of course everyone who is trading FOREX would be aware of what the word culling means, but in order to portray my thoughts on whats going on in the industry right now I feel it necessary to emphasise on such a graphic and violent word.

The retail FOREX market has forever been evolving. It started off a long time ago (I am unable to put an exact time on it so far, for me it was 8 years ago), with retail traders calling into bucketshops to place bets on currency in order to turn a profit. Back then, it was so easy for brokers and traders to make money from the retail clients, firstly the cost of trading was high, and secondly its so easy to manipulate a price in your favour as the evidence of the market is not there for the client to see. This method was profitable for all brokers involved because of the way the market works.

Step ahead 8 years and we are now in the ECN revolution. Where every broker and his dog is trying to keep up with the technological revolution. But what does ECN actually mean to the market that was once so easy to profit from? Well, it means your overheads increase, and your margins decrease. Somewhere in the oversaturation of retail FOREX companies, the competition for clients has decreased the cost of trading so much that marketing gimmicks of “costless’’ trading has arisen. We have brokers in the industry offering zero (0) pip spreads on all pairs and no commission “on a true ECN market”. Brokers claiming ECN with pip spreads that do not match the liquidity market, commission-less ECN trading and the movement towards the extinction of the Market maker model (at least that’s what people would like us to believe).

Why is this all happening?

There is an honest movement in the ECN environment. There are a handful of brokers who have actually established the correct relationship and IT setup in the market that has allowed for a true ECN model. But the majority of companies are marketing their ECN model purely as a means of keeping up with the rest in the market. I guess you’re wondering now why I would name this blog “The FOREX revolution and the thinning of the herd”. The relevance I am trying to explain is that those companies desperately clinging onto the revolution of the retail FOREX market are destined for culling. Its’ quite easy for me to say that being the Director of a large FOREX organisation, but truth be known it’s important for clients and potential clients to be aware of what is actually going on.

There was an interview of mine done at the London Stock Exchange where I have briefly addressed issues regarding FOREX brokers in the current market. You can see this interview here .

With the ECN model being the future of the FOREX market, and the smaller brokers not being BIG enough to sustain the model, WHEN will the culling begin? Is this the lead-up to a more legitimate and developed market? Are we heading towards centralisation? One things for sure 2012 is going to be another rollercoaster ride for the FOREX market and the companies who operate within it.

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