The latest IPO prospectus for Gain Capital, a retail currency trading brokerage, reminds us again just how awfully disadvantaged retail currency traders are.
The word surely needs to get out more, since as it stands Gain Capital has grown its customer trading volume by an absurd 88% per year on average from 2004 – 2008.
FTAlphaville nicely highlights the most shocking aspect of the whole business – these companies are essentially trading against you as a counterparty.
They don’t even appear too concerned about hedging currency exposure given that their business model offers ‘near-certain’ returns trading against their customers.
FTAlphaville: Here’s how it works. Our Madcap Speculator (MS), having been lured by an advert or other promotion, puts up $500 to “play the dollar.” He thinks the dollar is going to 1.75 versus the Euro — and he may well be right, given that we’ve already moved from 1.25 to 1.50 in the past six months or so.
FXhustle.com offers the Madcap Speculator 200x leverage on his initial margin deposit of $500. That allows the client to go long the euro and short the dollar to the tune of $100,000.
Now, either because he’s cautious or because FXhustle have insisted he do so, our MS places a stop loss on his trade — limiting his total possible losses to $1,000.
Which is where FXhustle becomes the near-certain winner and Madcap Speculator becomes the likely loser.
MS might be right about dollar/euro going to $1.75, but even if it does, we can be absolutely certain that it will NOT do so in a straight line. And, because he’s levered 200 times, our little speculator cannot sustain much volatility without being stopped out.
FXhustle, on the other hand, acting as MS’s counterparty, can endure much greater price divergence — even without having a view on the future of the dollar.
In its role as counterparty, the firm is taking bets from tens of thousands of customers across dozens of currency pairs. It can maintain a neutral market position while banking the spread between wholesale FX rates and the quotes it offers the Speculators of this world. But it then sweeps up as soon as a client hits a stop loss — which the volatility in FX markets, together with excess leverage, makes a certainty.
With a simple algorithm covering market volatility and the leveraged state of clients, FXhustle can make near-certain returns — in just the same way that a casino takes a pre-defined cut at the roulette wheel.