Author Paul Holmes
OANDA has been very active in championing certain causes of late, as many on the edge of the industry hoping to profit from an introducer broker relationship with OANDA will testify. Their answer to potential introducers is clear, brief and relevant; OANDA does not enter into IB (introducer broker) relationships as in their considered opinion the cost of forex firms continually rewarding introducer brokers is ultimately borne by the retail customer. In short the spread will need to be ‘manipulated’ to reward the IB. Their further suggestion therefore is that any supposed ECN/NDD/STP broker, that engages in IB reward schemes, must be ‘gaming’ the client.
Now OANDA has turned its attention to another issue in retail industry that deserves far more scrutiny, particularly given how retail clients can fall foul of any potential benefit when using it, leverage. OANADA believe they have data proving that 50:1 leverage is the statistical ideal which is why they refuse to increase the available leverage beyond this ceiling.
OANDA has never offered clients leverage higher than 50:1. They are claiming that this is not simply an arbitrary number that they magically chose as an ideal, but that after engaging in intensive market data analysis they have empirical evidence that proves anything higher than 50:1 leverage is unnecessary and potentially detrimental, both to clients and to their own fiscal wellbeing.
Their opinion comes after a recent article in the FT calling for UK regulators to step in and regulate “excessive” trading leverage offered by forex brokers to their retail clients. The writer suggested brokers were “skinning their clients” by offering leverage amounts as high as 500:1 to people who didn’t understand how leverage works in financial markets.
Leverage: A double-edged sword
OANDA accept that leverage is an essential and valuable tool in forex trading. However, they’ve gone to lengths in various tutorials and communiqués to stress how it must be used correctly to have a beneficial effect, as leverage increases the probability that normal market volatility can wipe out positions, even if the client predicts the correct market direction.
Despite being permitted to offer considerably higher leverage to European clients, OANDA believe that they are remaining true to their core principle of providing a fair and honest market for retail forex traders. They reject the approach of brokers that in their opinion;
“Simply churn through clients in an attempt to scoop as much of their money as possible before they go bust. To us that is not a credible, long-term business plan. Worse, it damages the reputation of the entire forex industry. OANDA has always encouraged a prudent, risk-adverse approach to foreign exchange trading. We believe that tempting clients into over-leveraged positions is a disservice that causes unnecessary risk.
“Our principles have made us an easy target for other brokers who center entire marketing campaigns on the fallacy that trading at 100:1 or higher is a “benefit”. But we firmly believe that you can treat clients in an open, honest manner and still be profitable.”
OANDA is going to change its approach towards IBs soon enough
regarding FT article and ‘skinning clients’ see what I think: http://forexmagnates.com/financial-illiteracy-leading-financial-newspapers-style/
lastly, high leverage is often offered on stocks, options etc, forex is no exception and while many clients lose because of high leverage in forex this is also why they trade it in the first place it and they have the same in other instruments