If LeapRate has anything to say about the forex scene in 2011, it’s that traders could face lower forex trading volumes in the year ahead. LeapRate, for those of you who don’t know, is an independent research and advisory firm that provides ratings for online trading and brokerages all around the world.
Basic understanding of market liquidity tells us that lower trading volume goes hand in hand with lower liquidity, which in turn, often results in a higher degree of volatility. Why is that? Well when trading volume and liquidity are low, it’s more difficult to buy and sell currencies without causing big price movements.
According to LeapRate, one factor that could cause forex trading volume to shrink is stricter market regulations. Recall that the CFTC capped leverage at a maximum of 50:1 and, at the same time, imposed a requirement to close offsetting positions to avoid hedging. Regulatory agencies all over the globe, particularly in Japan and Canada, are following suit and are becoming more iron-fisted in implementing their rules.
Aside from that, LeapRate predicts that the forex market will reach its saturation point as an effect of persistent advertising by online forex brokers. They also mentioned that the decreased volatility witnessed recently could discourage new traders from entering the scene. After all, who wants to trade in a market that’s barely moving?
But in this Ninja’s humble opinion, I don’t believe that we will see a significant decrease in trading volume in 2011.
While some regulations such as leverage limits may discourage small retail traders, let’s remember that retail traders only make a tiny percentage of total market players. Multinational companies and hedge funds play a larger role in driving market liquidity and will most likely continue to do so. Besides, these regulations exist mostly in the U.S., and traders will always have the option to jump across to offshore accounts.
And while volatility seemed to taper off despite the ongoing debt crisis, there always exists the possibility of a “black swan” event that could rock the markets. After the recent consolidation, a strong trend could once again trigger large swings in volatility.
Lastly, forex brokers are becoming more and more creative with their marketing strategies in order to gain new business. Some have sponsored sports teams (what up Aston Villa!), while there are those that continuously offer trading contests. Others, like FXCM, are opening offices across the world, in order to provide more services and reach out to a broader range of clients.
All in all, 2011 should be yet another banner year for the forex market. Be sure to sign up for our email updates, RSS feeds, Twitter, or check out our Facebook page by clicking on the buttons up top to stay in tune with the new developments cooking!