The retail forex market in the USA has been consolidating. Industry statistics from 2012 show there are now fewer brokers providing the required liquidity to the retail market, but the remaining brokers are generally growing their client account and asset totals. Several brokers have recently left the market completely.
Total client deposits are believed to have fallen slightly over the course of 2012, continuing the estimated 3% fall in 2011 in retail spot trading volume as reported by the Aite Group. It has been speculated that this was due at least partially to several external factors: a flat yet choppy market during 2012 in most of the major pairs, and relatively poor performances by popular trend-following strategies, as well as continuing high levels of consumer debt. Nevertheless, the consolidation of brokerages was out of proportion to the slight shrinkage in the market, so clearly there was something else at work.
US Forex Market Maturing
A maturing market is defined by an increasingly aware, critical, demanding and discerning client base. Most of the potential market has been aware of retail forex trading for at least a few years now, and has become familiar with the vast differences between brokers in terms of security, reliability and service. Horror stories about fly-by-night brokerages have been widely publicized. This sentiment has led to a "?flight to quality" by the client base, who increasingly prefer to deposit their funds with brokerages holding solid reputations worth protecting, rather than being tempted by enticing unknowns promising lower spreads and access to more exotic markets.
Tough Regulatory Environment
Client sentiment is one factor then, but some industry insiders feel that the increasingly harsh regulatory environment including tougher margin and capital requirements has been even more significant in forging the consolidation. Over the past year alone, Forex Club, GFT and FXSolutions have all exited the market completely. Advanced Markets are moving to an Australian regulatory environment. Moving over from spot to binary options provides no panacea: the SEC has been increasingly demanding of firms offering binary instruments. Banc de Binary have just announced they will no longer accept US persons as clients, and even brokers that fall into unregulated categorizations are aware they can still become subject to CFTC interference. Simply put, there are much easier and less complex markets outside the U.S.A.
Who's Left?
The end result of this squeeze has been to leave the US market with only four retail forex brokers, giving them a headwind with which to grow their assets, volumes and profitability over recent months. The undisputed industry leader remains FXCM, who increased their retail trading volume from June 2012 to June 2013 by over 25%, and their daily retail client trades by over 12% over a similar period. FXCM also increased their insitutional business metrics by smaller but still significant percentages.
FXCM's dominance over its closest rivals was emphasized by the recent Investment Trends April 2013 United States Foreign Exchange Report, which is the largest survey of traders in the US. The survey ranked FXCM first in the categories of Overall Client Satisfaction, Customer Service, and Online Educational Materials.
Gain Capital, FXCM's smaller rival and the object of its recently withdrawn acquisition bid, has also just posted some impressive results. Their retail trading volume has increased by more than 55% year on year to June 2013, total funded accounts increased by 30%, and total retail customer assets increased by over 48% over the same period.
FXCM and Gain Capital have also significantly grown the institutional side of their businesses over the past year.
What's Next?
Future developments are likely to depend to some extent upon the type of forex markets we have over the months and years to come. If the markets continue to get faster and less predictable, the maturing client base will become very attracted to whichever broker with a reliable reputation can offer the fastest execution and lowest spread. It may not be a true ECN service, but clients will want a broker than can deliver something very close to it. If the markets become less chaotic with slower and steadier trends, the evolution of the U.S. Retail industry will be slower.