NFA clarifies retail forex brokers' account profitability calculation methods

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1. Trader said:
   But, and please allow me to inject contrary opinion here, when I go out to shop for Forex brokers, I definitely want to know how fair of a trading environment they are offering.

   And all other things being equal, if a broker has more profitable traders then the likelyhood is higher that I get fair execution from that trader’s system.

   If I want my money to lie “dormant” quarter after quarter, there are much better options out there to park money.

   My guess is that most of the “dormant” accounts are accounts with a tiny balance – one that the owner does not feel is worth the trouble transferring out.

   In that sense Oanda’s stats may be somewhat over-stated and trying to find a metric that measures active trading performance (versus passive investment performance) is actually more meaningful.

   But yes, paying interest is meaningful – I just don’t see why it should be *more* meaningful than the “active traders” metric, in informing the Forex trading community …

   An additional argument is common sense: do you truly believe, seeing the stats of other, interest-free brokers, that close to 50% of traders at Oanda are turning a profit? If not, why should the “metric” say so? Just to “force” brokers to introduce a small (and rather insignificant) interest rate? Seems a bit counter-productive to me – a broker performance metric should tell me what is important: how much money are traders losing there, not what is less important (how 1% interest money are mostly small dormant accounts collecting) …

   So I’m not sure your criticism of the NFA is valid in this case. I understand where you are coming from (getting interest introduced at more FX brokers), but why should the fudging of stats be the vehicle for that (very worthwhile) goal be?

   January 27th, 2011 at 9:39 am
2. Steve James said:
   This makes so much more sense. Oanda is so sketchy. They built their entire website around these false numbers and now will have to take it back. Meanwhile, probably a few thousand people opened an account with them because of it, and they will now discover the truth.

   January 27th, 2011 at 11:15 am
3. Steve James said:
   If you think about it, any of these brokers could just open a bunch of “live” accounts in their corporate name and place a trade in all of them that ends up profitable by a penny to skew these numbers. There’s nothing preventing all sorts of games from being played. I think we can all see the reality. About 25-30% of accounts are profitable in any given quarter, and that’s about the way people trade and maybe a little bit reflected in how the brokers treat them. Reality is that trading isn’t something most people ever figure out and that’s just a function of people being emotional. Choose your broker over their model not over numbers that they tweak to mislead you.

   January 27th, 2011 at 11:22 am
4. Michael Greenberg said:
   I agree on some points, that’s why I wrote on every profitability post that i suspect brokers aren’t using same methodology and hence numbers are hard to compare. But I do think that Oanda are doing a good deed but paying interest, unlike all other brokers, and this NFA ruling cancels this advantage out. Perhaps interest is overrated, but if it’s something traders can earn, then why not?

   January 27th, 2011 at 1:28 pm
5. Michael Greenberg said:
   actually according to Q3 to Q4 comparison they ended up having less accounts in Q4…

   January 27th, 2011 at 1:29 pm
6. Michael Greenberg said:
   I rather these metrics showed accounts performance over longer period of times – for instance over 6 months and not 3. I bet the number of ‘profitable’ traders would be significantly lower than on a quarterly basis because it can take a trader more than 3 months to get wiped out. I would also have brokers show percentage of accounts over a quarter or a year which got completely wiped out – this would show the metrics you are really interested in.

   Another thing i’d like to understand by the way: do brokers include just free margin or do they including floating P&L as well? There are large number of clients who may have a positive balance but have a negative P&L on their open deals – I bet brokers ignore this fact.

   January 27th, 2011 at 1:44 pm
7. Steve James said:
   I agree that the longer timeframe would be more useful. Most brokers have a lot of open accounts that don’t trade in a quarter. I think the reality is that they add new customers that trade for a while. The thing is, traders aren’t generally profitable ON AVERAGE in any asset class. Most people find a way eventually to blow themselves up in stocks, futures, options, you name it. It’s because they get greedy or get emotional and don’t follow a system that works. There are plenty of people that think that trading with stops is wrong, and yet statistically, almost 100% of people that trade without a stop in a leveraged market will blow up completely at some point, just a matter of when. The thing is…most of this isn’t necessarily the brokers fault. I don’t think these numbers are that useful in telling us which brokers are good and which are bad. I think it’s clear that the Oanda numbers are misleading, but doesn’t mean they are a bad or good broker. What we all care about is execution. A more interesting number would be if they had to publish (if they can even track this) the percentage of orders that get filled within a pip or two of the price at the time the order was entered. That would be useful information, although even that doesn’t tell the whole story. Look at the new MB offering, for example. Now if you get filled on a Limit, you get paid, that’s pretty powerful and hard to measure because it doesn’t mean the same for every trader. I think in the end, it’s more important to have a broad conversation about what the brokers offer and what that means and not try to pinpoint anything on one number because any broker can manipulate a number to their advantage given time. I have to say that I have accounts at four different brokers, but if this new MB thing works as billed, I will likely be moving more money their way because 50% of my trades are Limit orders, and I’ve done the math on what it would have added to my profit over the last year and it is substantial to me. But I’m waiting a few weeks to hear if it really works and make sure they don’t play any games with it.

   January 27th, 2011 at 2:19 pm
8. Michael Greenberg said:
   “The thing is, traders aren’t generally profitable ON AVERAGE in any asset class.” True, but because of the market making nature of the forex market people tend to be less profitable in forex. Or at least that’s the common belief. I do agree that no parameter will ever convey the right story. Traders themselves over time know which is the better broker.

   January 27th, 2011 at 2:42 pm
9. Asaf said:
   Micheal,

   The concept of market making was not invented in Forex and in fact there are plenty of market makers in Equities and Futures that collect billions every year from other market participants.

   The difference in Forex is that the brokers also act as the “exchange” and as the “market makers” and therefore have all the controls in house to increase their profitability while reducing the profitability of traders.

   At the end of the day, like you’ve said, the traders know who are the better brokers in this business.

   – Asaf.

   January 27th, 2011 at 3:18 pm
10. Trader said:
    IMO the main reason people blow up on Forex is plain old fashioned leverage, not MM machinations.

    Just do the numbers: the EUR/USD does 100+ pip swings on a daily basis. With 1:100 leverage that’s deadly 100%+ volatility in a day.

    Imagine if the S&P did 100% swings in value on a daily basis, how many investors would be wiped out on their first few days of trading?

    So with Forex traders are simply facing the music of the markets faster, and in periods of their trader learning curve when they are the least experienced and the most likely to lose money.

    And *that* is why there are so many MM bucket shops: Forex traders are just not around for a long time, on average. So why not fudge execution a bit (Virtual Dealer and similar techniques) so that they lose the money at the MM, not on the real market?

    The victims will blame themselves for the bad position and will fatally over-leverage themselves anyway, so Forex MM is the perfect white-collar crime.

    January 28th, 2011 at 8:15 am