Different view on FXCM: Jonathan Baumgart
“Even in a pure STP / agency model, some counterparty must handle the hot potato known as risk”, says Jonathan Baumgart.
The full impact of what happened at one of the major retail FX brokers – FXCM, which has been sanctioned by US authorities and prohibited from the US market, has yet to be known.
As opinions pile with regards to the consequences for the US FX market and the entire Forex industry, FinanceFeeds has turned to Jonathan Baumgart, CEO, MoneyMatters.pl & Atomiq Consulting, to share his insight on this topic. Having spent nearly five years at FXCM as a Sales Associate, as well as launching the firm’s Berlin office, Mr Baumgart provides an expert opinion about the US market and a different view on the FXCM ruling.
What happened at FXCM?
“I’ve read many comments on finance sites about the FXCM ruling and find that the retail community often misunderstands what happened here”, Mr Baumgart explained.
“FXCM failed to disclose how it was handling risk, misleading traders to think they were dealing with a pure agency model. The thing is, even in a pure STP / agency model, some counterparty must handle the hot potato known as risk. The liquidity partner / counterparty of an agency broker must also employ risk management practices which could result in situations such as slippage or difficulties trading around news events, these are both scenarios traders don’t like to encounter but are unavoidable if you are trading any financial instrument”, he said.
“Although by no means an excuse, FXCM is an example of the extreme measures and risks a broker in the US took to try to make the business work under strict regulatory rules” – Jonathan Baumgart, CEO, MoneyMatters.pl & Atomiq Consulting.
The impact on the FX industry
As many foresee a raft of negative consequences from the FXCM ruling, including a hit on the image of the FX industry worldwide, FinanceFeeds asked Mr Baumgart about his opinion on the impact from FXCM’s exit from the US market and the regulatory ruling.
“Although this news will have ripple effects for FXCM’s non-US client base and be another stumbling block for credibility after SNB, the only impact I see in America is a further consolidation of an already tightly consolidated market”, Mr Baumgart said.
“How many other G10 countries in the world have only 2 brokers to choose from?” – Jonathan Baumgart, CEO, MoneyMatters.pl & Atomiq Consulting.
He then elaborated on the factors for the US FX market being in such a situation.
“The main reason the US industry looks like this is due to regulatory changes. Since the beginning of this decade the industry has consolidated due to extremely prohibitive capital requirements (nearly 20 times greater than Europe), increased margin per trade and product restrictions which forbid CFD or metals trading”, he said.
The Dodd-Frank Act
“As far as the future of the US industry goes, it’s a wait and see approach based on Trump’s signal to “do a big number” on Dodd-Frank. His vague comment leaves us on our toes. Will this promise include retail FX? Could capital requirements and other rules related to margin change? Should regulations change under the Trump administration then this would breathe new life into what is at the moment a defunct industry”, concluded Mr Baumgart.