From the September 01, 2011 issue of Futures Magazine • Subscribe!

Forex Trader's Bill Of Rights

Excerpt from September's Q&A with Michael Stumm

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.

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