Forex Trading & the Casual Investor

Forex Magnates recently caught up with Muhammad Rasoul, the new CPO at Gain Capital. We discussed his plans there as the CPO, what brought him there from GFT, the future of Gain Capital, and thoughts on the overall Forex and trading industry. As mentioned in the previous interview article, with so many interesting topics being discussed, we planned to publish additional segments as part of an overall industry discussion posts.

One interesting topic that was discussed was whether there was a place for the casual investor within Forex trading like in equities? With stocks, the buy and hold customer can invest in mutual funds, buy that 25 shares in Apple or Google, save for the future with their 401K, and have an overall passive experience. Is that something that can exist within the Forex industry, or do clients have to be active traders?

Muhammad Rasoul explained that while active traders have been the typical clients, there has always been a tiny minority that has been interested in taking a buy and sell position based on overall economic trends. For the most part though, these clients and their trading volumes make up a miniscule portion of the industry. One new area that Rasoul mentioned was catering to the casual investor was the “copy” traders entering the market. By virtue of the rise of companies offering these products and constant announcements from brokers applying the technology, it’s safe to say that “copy” traders are seeing success. In fact, in July we wrote about the success Invast Securities was having with Tradency and that they hoped to eventually have more mirror traders then manual ones. Rasoul added that the problem is finding strategies that can actually produce over the long term.

But are copy traders really a product that can be embraced by the casual investor. They require clients to research and choose strategies, submit allocation amounts, and apply ongoing supervision to strategies. Specifically, the allocation methods are complicated. Customers need to determine whether they want to copy trades in relation to the size of the master trader’s positions or based on a preset consistent size (for example, all copied trades will be 0.1 lots). Also, unlike mutual funds, there is little information available about the master traders.

Therefore, putting copy traders aside, what other products can be marketed to the casual investor? With Forex trading awareness growing, will we begin to see a rise of mutual fund types of offerings from established firms? Would a product using little leverage and conducting low volume turnover even be interesting to Forex firms to market?

My opinion is that due to the global financial crisis and ongoing EU financial problems, there is greater demand for currency based products. But, while a casual investor in the US may be interested in buying 20,000 AUDUSD to shield themselves from a weaker dollar, taking on leverage may not be appealing. On the other hand, for most brokers, servicing a client that only trades 100,000 in volume may not be worth the time. Therefore, perhaps a possible approach would be the creation of currency based mutual funds that are managed by Forex traders with established track records, and are marketed by Forex brokers. From the client’s perspective, the product would be nearly completely passive, have low fees and would trade with minimal leverage. On the broker side, the fund would present an opportunity to collect an ongoing revenue stream from low volume clients.

Currently, there are quite a few mutual fund companies offering currency based funds. However, to my knowledge, there are no Forex brokers that are involved with the marketing of these products.

So, should such funds be included at Forex brokers? Would they open up new revenue streams, or would they simply cannibalize existing business? Also, what other products could be created for the casual investor which would be worth the time of brokers to sell?

Interested in hearing ideas in the comments.