In our September issue we talk to Michael Stumm, co-founder of forex broker Oanda. Stumm and high school trading buddy Richard Olsen founded Oanda, which has brought institutional efficiencies to retail forex traders. In 2005 Oanda put together its, “Forex Trader’s Bill of Rights.”
Here we discuss with Stumm the importance and logic behind each of those rights.
FM: In 2005 your firm published a "Forex Trader's Bill of Rights" that enumerated your philosophy on markets. Why was it important? Have others incorporated these rights in their models or is it still unique to you?
MS: That was published six years ago and we are a little surprised that it is as valid today as it was back then. Things haven't changed that much. It has moved a little in the direction of the Forex Bill of Rights because the regulators have forced the hand of some of the brokers, but a lot of the points still are very valid. When we published it, the first few people we showed it to said, 'Oh man everyone else in this industry is going to get very angry, particularly the big banks.' For us, what was important was to disclose to the public some of the practices [at] forex firms and banks because a lot of clients don't know what is going on. It is such a non-transparent business. In that sense, even today we find very positive reaction to it when people read it, they say 'I didn't know this was occurring, this is outrageous.'
FM: Lets go over why each of them is so important: 1) The right to immediate, uncensored access to he marketplace.
MS: This has to do with the practice that when you trade and the market makers realize they won't make as much money on it or may lose money on it they immediately reject the trade. When you trade, that trade should be executed as quickly as possible and the slippage shouldn't be large. The trade shouldn't be delayed and you shouldn't be rejected; that all has to do with quality of execution.
FM: 2) The right to trade real spot?
MS: Typically there is a two-day settlement for fx trading and you have to wonder why; 30-40 years ago it made sense--you had to move paper, you had to send confirmation of the trade from one bank to another and that took two days. Two days was very efficient 50 years ago but today when you can send off a message and it is there in less than a second, it really doesn't make sense. We just wonder why that is still there. You should be able to trade [real] spot.
FM: 3) The right to know?
MS: This is again where different clients are treated differently. In most brokers and banks different clients get different prices depending on how much they can get away with. You can notice that by going to your bank and complaining about your spreads being too wide and threatening to walk away, they will lower the spreads on you. The same thing goes for information. Many of the banks have market insights, they have their ear to the ground, they know what is happening in the market; that is valuable information and so they will disclose that perhaps to their very best customers. Sometimes they will ask for extra money for that but why not make that information [available] to the trading public? You want everybody to be on equal footing and have a fair chance and if you only provide information on a limited basis, it is wrong. Everyone should have a fair chance with the markets. I am convinced that the retail clients are very good at what they do and they will do very well if they have equal access. Part of that is information.
What positions are our clients in? What are their open trades? What are the spreads that we provided? What are the orders that exist in the system? You see resistance levels when you look at where the orders are placed. All those things are interesting: are the clients primarily long or primarily short? That is information that is simple to give out, it costs you nothing to give out and it helps the trading public make more informed [trading] decisions.
FM: 4) The right to trade whenever you want? Is this basically providing 24-hour trading?
MS: Not just 24 but 24-7. In this day everything is automated. The world does not stand still over the weekend. The most recent example comes to mind with (President–Obama coming to a compromise on a debt ceiling with Congress. That happened on Friday just before midnight. That is news that affects the market but everyone is closed, except for Oanda, you can't act on that news. And there is other events that occur. A lot of these G8 meetings and G 20 meetings occur over the weekend and the news comes out yet people can't trade on it. In the Mideast Saturday and Sunday are not a weekend. It just doesn't make sense in this day and age that these markets are closed during certain periods of time.
FM: 5) The right to equal treatment?
MS: Treat everybody the same. Give the small person a chance and he or she will do very well. It is a simple philosophy.
FM: 6) The right to choose and manage risk?
MS: There is a lot of risk in currency trading and the ability to manage that risk is important. Unfortunately, on the retail side, because retail clients tend not to close off losing positions, they sometimes get into a margin call situation and when the margin call happens all their trades get closed. One tool that is beneficial is the fact that they can close off any portion of their open position as opposed to everything.
Another one is, in managing risk is you don't want to run with a very high leverage. This is where luckily in the United States now, the regulators lowered the available leverage to 50-1 on the majors and 20-1 on the minors and that is a good way to go. Unfortunately there are brokers in Europe and places like Cypress that encourage 200-1, 400-1, 1,000-1; there is no way you can make money if you are trading 1,000-1, because you can't manage the risk.
FM: I just got an e-mail from a firm offering spot gold at 500-1.
MS: It is outrageous. It is highway robbery. [Those are] exactly the bad apples I hope regulators come and clean up because they do a disservice to the entire industry. [However] offering spot gold and spot silver makes a lot of sense. In practice, gold and silver are offered with currencies from every major bank. The International Standards Organization lists gold and silver as currencies. We know why the Dodd-Frank bill outlawed spot trading in gold and silver—[it is because of] the lobbying effort by some of the exchanges that want to get that business, but in the rest of the world you can still [do] it and [they are] valuable instruments to hedge. I am a big proponent of allowing firms to trade (spot–gold and silver if they do it reasonably.
FM: 7) The right to understand cost?
MS: Make everything transparent. If you are paying an intermediary, like an IB, just let the client know how much they are paying. If you have different tiers of pricing tell the client: 'Here it is and here is why.' Don't have ridiculous hidden charges. A lot of brokers and banks exploit you on the swaps where people don't notice the [costs]. Every client should be able to understand exactly what the costs are, then they can make their decisions on when and how to trade and with whom.
FM: 8) The right to learn on your own?
MS: This has to do with transparency. We have a forum that is totally uncensored. If you go to our forum you will see every complaint that our customers ever have had. In some ways it is a gutsy move but we have found out that it has been beneficial.
FM: 9) The right to pay and receive interest?
MS: You would be surprised [at] how many brokers have you put in margin capital and it is sitting in an account and you don't get interest for it. Why not? That money is effectively sitting in some bank and that broker is getting interest for it. It is ok, but make it transparent. Let the broker say, 'We are making money from your deposit but we are not giving it to you.' If you want to be fair about it then provide interest.
If somebody has a position open for five minutes and it happens to cross over the end of day period they're effectively subsidizing all the day traders who traded intraday without crossing that time boundary; most of the trades are intraday and closed before end of day and it is not right.
The continuous interest is an interesting example. If you have a legacy system and want to introduce continuous interest it is very difficult. You have to go in and do surgery on all parts of your system, but if you are building a system from scratch it costs you nothing. It is very easy. That is one of the nice things [about] starting with a clean sheet of paper, you can just do it right.
FM: Is the Bill of Rights something unique to forex or is it something that could be applied across the board to exchanges and brokers?
MS: I think [it is universal]. It goes back to our engineering roots. The management is engineering and most of the employees are engineers. [They] are weird people, but one of their traits is they have high ethical standards and they just want to do it right. The Forex Trader's Bill of Rights is something we firmly believe in; we want to do the right thing. From a business point of view, if you don't do the right thing, you are not going to be as disruptive and you are not going to have a very good long-term outlook and we do think it applies to the wider industry in a much wider way.