Photo: Flickr / orphanjones
WSJ’s Stephen Bernard has a fascinating report in today’s paper about retail traders financing their currency trading with credit cards.The practice has become worrying enough to warrant attention from the National Futures association, which will discuss a ban on using credit cards to fund trading accounts on Wednesday.
Bernard spoke with a salesman in Tennessee using credit cards to fund currency trades:
One investor is Carl Young, a wireless-communications salesman in Knoxville, Tenn. Mr. Young recently used a credit card to fund his accounts with FXDD and Gain Capital Holdings Inc.’s Forex.com, when he was expecting a big paycheck from his work.
He said he would probably trade less if he couldn’t use credit cards.
“If I know I have [money] coming to me next month, guaranteed, I want to use it now,” Mr. Young said. He said he made profits from the trades he completed before receiving his paycheck, then paid off the credit card in full. “It’s a convenience.”
It’s hard to determine how much retail trading is being funded on cards, but Bernard says according to industry experts, a card ban could cause some retail forex brokerages to close completely and would likely mean “millions of dollars less flowing to customer accounts in the U.S.”
Société Générale FX strategist Sebastien Galy recently opined that a good portion of the hidden leverage in the system is now concentrated at the retail investor level, though he was referring to fixed income markets.
This seems like a pretty wild example of the retail investor levering up, especially given the typically volatile nature of currency trading.
However, it may not be that uncommon, and certainly doesn’t seem like anything new. Hedge fund manager John Burbank got his start doing the same thing in the 1990s.
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