Wikinvest Wire

CFTC to rein in currency traders

Saturday, March 06, 2010

The CFTC (Commodities Futures Trading Commission) is apparently intent on reining in the amount of leverage available to those who trade in the FOREX markets and, according to this story($) in today's Wall Street Journal, someone in Michigan is none-too-pleased.

An attempt by regulators to protect investors from volatile global currency markets has triggered an uproar among lawmakers, currency dealers and thousands of small traders.

The Commodity Futures Trading Commission has proposed rules that would reduce the amount of borrowed funds that retail investors can use when investing in the U.S. foreign-exchange market to as much as 10-to-1, from the existing 100-to-1 for major currencies.
Todd Lambrix, a currency day trader in Flint, Mich., is one of the many small investors opposing the CFTC plan. Mr. Lambrix has $5,000 in his currency account and often uses 100-to-1 leverage to trade currencies. Three years into trading foreign exchange, he said, he has learned how to control risk by setting enough technical limits that automatically close out trades. Last year, he broke even. "What right do you have to tell me that I can't spend my money on things I choose?" he said.
Indeed! In fact, why have any government limits on leverage at all?

If some FOREX trading company wants to allow Mr. Lambrix to have 1,000-to-1 leverage or, for that matter, 1,000,000,000-to-1, aside from the possibility that a million Mr. Lambrixes might destabilize international currency markets, why should the government stop him?

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Dan said...

Those rules should be left to the respective exchanges on which they trade except for where scarce commodities are concerned.

bevo said...

I have no problems with a lack of regulation provided none of these jackholes hit me up for free money.

For Todd Lambrix, I want him to lose all his assets including car and house should his trading decisions prove unwise.

If I am on the hook for Todd Lambrix's losses, if I am going to give him money to keep house when his trading decisions prove unwise, then I absolutely get to set the rules.

That's a lesson the jackholes on Wall Street have either ignored or not learn. It's a lesson that the Todd Lambrixs of the world do not seem to care about.

Anonymous said...

100 to 1 leverage means that 99% of the money at risk belongs to someone else. There is a reason that 50% leverage for stocks was put in place after the 29 fiasco. 90% leverage drove the banks out of business en massee, which helped lead to the Great Depression.

The problem arises because of taxpayer guarantees of banks, and de factor guarantees of shadow banks. If AIG et al were allowed to go out of business, and take the rest of the derivative writers with them (virtually all of the major banks, hedge funds, and brokerage houses in 2008), then there would be no need for any government limits on leverage. If the taxpayer has to guarantee these ridiculous leveraged loans, then the taxpayer has a right to limit his risk.

Either let all of the leveraged players go out of business, or limit leverage on taxpayer guaranteed loans/institutions.

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