COVID-19 blues turning to black for foreign exchange brokers

With volatility, comes opportunity.

The financial markets have collectively suffered severe tilts to the disadvantage of millions of stock, property, commodity and bond investors. However, not all market participants are suffering.

Foreign exchange brokers are experiencing a rising tide whereby the vast majority are reaping extraordinary revenues, courtesy of higher market volatility from the current COVID-19 pandemic.

More so than most, retail foreign exchange brokers such as FXCM, IG, AxiCorp and Gain Capital are benefiting from the vast amount of new traders, as well as, more risk-taking.

Euronext, the company that operates the biggest pan-European exchange, set a record for foreign exchange trading on March 9, by clearing over $54 billion in trading volume in a single day. On a monthly basis, Euronext reported a record $839 billion in trading volume in March this year, up 80% from $464 billion in February. Compared to March last year, the exchange saw a whopping 90% improvement.

Elsewhere in the institutional market, another exchange, the Chicago Board Options Exchange, is also flying high. Average daily spot foreign exchange volumes were up 57% in March compared to February.

Other liquidity providers such as FXSpotStream and Integral have also reported new peaks for trading activity with all their platforms setting fresh records. As is said in trading circles, volality is king.

According to Integral’s CEO, Harpal Sandhu, two assets, in particular, were most popular amongst Integral clients in March: Euro currency pairs and gold were first and second most traded across its platforms.

“March proved to be a significant month for Integral, having marked both record ADV and a one-month record high of over $1.2 trillion traded on the network,” said Mr Sandhu.

The growth in trading activity is even helping publicly listed brokers maintain performance with respect to their share prices, despite the broader downward pressure on all stocks in all sectors and industries.

As an example, NASDAQ-listed Interactive Brokers saw its share price rising from all-time lows of $35 per share in March to close at $44.79 earlier this week – not a strange feat of levitation but simply an example of a business that currently has its tills ringing.

In Japan, the country’s largest retail broker, GMO Click, has set record volumes in each month since the COVID-19 pandemic made its debut in January.

The broker posted a 27% monthly growth in foreign exchange margin trading volumes in February and then bettered its monthly tally by recording an eye-watering $1.84 trillion in trading volume in March. Last month’s total represented a 152% increase compared to the previous month.

In a public statement, the company declared that its March 2020 trading volume was its best monthly result since at mid-2014 – a time of severe uncertainty regarding economic conditions in the EU and China while the Fed was considering lifting interest rates for the first time in 6 years.

Leveraging for a song

With business never looking this good, several brokers have taken steps to maintain their poise and balance by reducing leverage and temper the risk-taking that is typically boosted by higher volatility. Retail brokers in particular — given their propensity to trade directly against their clients in a strategy industry insiders have dubbed “B-booking” — are stepping back from their typical 100:1 leverage offerings and opting to blunt the edge of their clients’ risk appetite.

Admiral Markets, Dukascopy and IG Markets have all lowered the leverage made available to clients for margin trading.

Admiral Markets set a ratio of 50:1 as its new margin condition on CFD trading while Dukascopy went further by lowering leverage to 30:1.

Meanwhile, IG increased the range of minimum margin rates on new positions on indices, foreign exchange, gold, silver and oil. The broker also raised minimum margin for indices to 5%, FX/gold to 3% and oil to 15%.

Double-edged sword

With volatility, comes opportunity.

However, investors must not see the current volatile trading environment as a sure thing to make money. Volatility can decimate a portfolio even quicker than it can build a profitable one.

If looking at the market in general, all asset classes are currently experiencing higher trading volumes and price tilts not seen since the 2008 financial crisis. On a macroeconomic scale, the COVID-19 impact on individuals and businesses is expected to be more severe than the Great Depression in the 1930s.

With unemployment rates set to hit 25-50% in some countries, economic hardship is already welcoming new market participants with intentions of generating returns in falling markets. However, this requires leverage, and therefore, potentially unsustainable risk-taking.

Times of uncertainty and volatility always attracts new investors and the current COVID-19 pandemic is no exception. The virus is serving as a powerful catalyst and spurring both retail and institutional brokerages to new performance highs. However, the sting in the tail could well be felt by over-zealous investors that are more drawn to expansionary dollar signs than prudent risk management.

George Tchetvertakov

George Tchetvertakov has vast experience in the foreign exchange area. He works for companies like Alpari, one of the top forex firms in the UK, and for Moneycorp, one of the industry leaders in money transfers, among others. Nowadays he is a freelance writer who writes for us, as well as large publications and several publicly traded companies.

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