Forex can grow in a recession. Can it under regulation?

On the heels of the Commodity Futures Trading Commisions's (CFTC) release of the long awaited regulations that will govern the spot forex market, today we see this is a beast that seems to only grow.  Earlier, the Bank of International Settlements (BIS) released the results of their triennial survey of the forex market.  The study found that the average daily turnover in forex had grown by 20% in just the last three years to an astonishing $4 trillion.  No other market can even come close.  What's more, that growth happened in the midst of a global recession, in case anybody forgot.

While there are a number of reasons this market has grown so large, arguably the factor that had the most influence was leverage.  Being able to take a (relatively) small amount of money and use it to control a much larger obviously helped to level the playing field and let more traders in.  Already, we had seen limitations placed on the amount of leverage traders could use capping it at 100:1.  The latest regulations from the CFTC halves this requiring 50:1 for major currency pairs, and lowers the leverage for exotics to 20:1.

Obviously it is way to early to tell what all the implication of the CFTC's new regulations will be, but one that seems inevitable is a shrinking in forex.  If traders have to put up twice as much money to make a trade, its going to shrink the number of traders able to enter the market and decrease the number of trades others can take on.  Consequently, the potential exists to see liquidity become a problem, especially in the more exotic pairs.

Of course, the market already showed it could grow after limits were placed once, and that it can even thrive in the midst of a global recession.  Maybe this will be little more than a bump, especially as more international players enter the field.

What is your take on the new CFTC regulations? How are they going to affect forex? Are they too restrictive or do they not go far enough?

About the Author
Michael McFarlin

Michael McFarlin joined Futures in 2010 after graduating summa cum laude from Trinity International University, where he majored in English/Communication. With the launch of the new web platform, Michael serves as web editor for the site and will continue to work on the magazine, where he focuses on the Markets and Trading 101 features. He also served as a member of the Wisconsin National Guard from 2007 to 2010. mmcfarlin@futuresmag.com

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