Subtitle: A simple plan to
boost the American financial markets and bring back unknown billions in US
Dollars, and to solidify the US Dollar as the only World Reserve Currency
SubSubTitle:(Several simple steps
to make money for America Inc. and create an environment for growth at the same
time)
Trump’s transition
team announced the repealing of Dodd-Frank (LOUD CHEERING). This ‘Dodd-Frank’ act is a cancer, it has
been eating away at the financial industry and the entire economy, like a
wrecking ball smashing what was left of the economy after the housing/credit crash.
One of the abused
children of this damage (there were many) was the Currency market, or
FOREX. We will here elaborate on key
points here for the Trump Administration which no doubt the market will agree
with.
Dodd-Frank is a
giant Octopus with 15,000 rules and 20,000 + pages – there’s probably not a
single human being on the planet who has read and understands the entire
‘law’. We will elaborate here on a very
specific part of Dodd-Frank, all that pertains to FOREX.
List of steps to take
to reform Dodd-Frank by reversing FOREX specific rules, that will boost
markets, increase profits, reduce volatility, save on costs & fees, and
bring money back to USA:
- 1) Delete the FIFO
rule. FOREX is not futures. There’s absolutely no utility to FIFO as it
pertains to FX. Some algorithmic traders
may have 100, 200, or 300 orders on an account.
Exiting positions in the exact manner that they were entered, in such
situation, is impossible. - 2) Increase the leverage. Increased leverage IS NOT correlated to
increased risk. The regulators force
members to say that an increase in leverage is an increase in risk. This is mathematically and logically
incorrect. Increase in leverage MAY
increase risk, however it is NOT CORRELATED.
For example, if your use of the leverage is for hedging purposes, in
this scenario, increased leverage DECREASES risk. There are few hedging possibilities for
multi-nationals in USA (such as vanilla options), Spot FX remains the only hedging
option for many small businesses. This
may be as simple as opening an Oanda account and taking opposite positions
against accounts receivable. In such a
scenario, the profit or loss from such a position is a wash against the real
business money flows, in which case, a high amount of leverage can be
useful. The decrease in leverage was a
knee-jerk reaction to quell the rampant fraud, but the real effect was simply
that back alley dicers as we call them in FX, simply moved their accounts to
London. The decrease in leverage has no
economic benefit, doesn’t serve any purpose other than forcing billions of
dollars outside of USA. The argument
that 500:1 leverage is for gamblers is very weak, these people don’t understand
FX. In the stock market it might be
ridiculous, however FX doesn’t move that much.
In a typical week the EUR/USD may move 1% or 2% – in extreme cases up to
5%, such as during Brexit when the GBP/USD moved 9%. Compared to any other market, this is very
small. The brightest example provided by
Google (GOOG) which is up 1,415.39% since IPO.
This is an impossibility in FX – if the EUR/USD is up 50% in a year, it
will likely be down 50% the next.
Currencies have a tendency to revert to the mean, and even when they
trend, the changes are slight on a percentage basis. For this reason, if a small degree of
leverage was used as in stocks, it would be impossible to ever turn a profit by
trading FX. And, incidentally, increased
leverage will support the Fed’s QE program as Liquidity Providers (LPs) extend
credit to US Dollar markets they are effectively creating credit. The current leverage policy on FX is contrary
to the Fed’s QE program. - 3) Delete the Hedging rule. The most ridiculous of all rules is the
so called ‘hedging’ rule that prohibits being long & short the same
currency on the same account. Regulators
claim it’s a good rule because if you are long and short you are effectively
flat, but it charges a fee (the spread) and thus, the rule saves money to
customers. This is warped and twisted
thinking, incoherent and not based on reality – similar to their statement that
“Foreign Futures is Forex” – no, Foreign Futures are Foreign Futures. FOREX is Foreign Exchange of currencies, or
spot trading, and NOT futures. FOREX is
always traded ‘off-exchange’ by the nature of what it is. FOREX
is a banking market, traded by interbank FOREX dealers – not on a futures
exchange like the CME. What traders
mostly complain about this rule – if someone wants to hedge, why not let
them? If the brokers EXPLAIN to
customers this flawed logic, that’s one thing – that’s acceptable. Make customers tick a box that they
understand the potential for unnecessary costs- but allow them to do it! Because practically, when trading FOREX, you
need hedging. This rule simply forced
many strategies to stop working completely, or move overseas. - 4) Bring back the PAMM. PAMM stands for Percent Allocation Management
Module. PAMM is the FOREX equivalent of
a futures ‘block account.’ The problem
is for Forex managers, trading many client accounts as one. It’s a simple solution – independent software
combines many small accounts into one ‘master’ account, which enables the
manager to trade one account vs. hundreds or thousands of individual accounts. - 5) Reduce the net-cap for RFEDS to a
reasonable $5 Million if they are STP (Agent only). FXCM, Oanda, and Gain Capital have a
Monopoly on retail FX. And, even though
FXCM has been under DOJ investigation, hundreds of client lawsuits, countless
fines from the CFTC, NFA, and other regulatory bodies, hundreds upon hundreds
of customer complaints; they continue to be one of the few options for retail
traders which practically, is no option.
The chances of making money at FXCM are slim to none, as they say in FX
you have 2 hopes; no hope and Bob Hope.
FXCM takes screwing the customer to a ‘new fangled art form’ - 6) Allow Broker Dealers to offer FX. The NFA is no more an FX regulator than
FINRA. FX should be regulated on a
banking level, perhaps by the Fed. It
was thought that currencies are financial commodities, and since FX futures
were already offered at the CME, the CFTC seemed to be the natural regulator
for FX. A currency is not a security,
but it does meet the definition of a security if you invest in it. Although the IRS considers investment in
foreign currency as debt under some rules; some investors will place their
funds in a currency with the intent of appreciation of capital. Or to put it differently, they are afraid of
the deterioration of value of their domestic functional currency. This was obvious before “Brexit” when lines
formed outside of banks from customers who wanted to exchange their British
Pounds for US Dollars, Euros, and Swiss Francs.
In any case, the securities business is in many aspects far more complex
than commodities. Securities brokers,
broker dealers, and other FINRA licensed organizations are also under far
greater scrutiny, have higher costs of compliance, have more compliance related
staff, etc. Why keep their noses out of
the feeding trough? - 1) Stop intimidating foreign brokers through
FATCA. There isn’t any law that
strictly prohibits a retail US Citizen from opening a foreign FX account. However, since many larger institutions in
general are afraid they will be “Swissed” hitman style by goons as described in
Confessions of an Economic Hitman, they simply do not allow US Citizens to open
accounts. US Citizens have become
persona non-grata in the FX world. US
Citizens can’t even visit their websites.
In order to allow the foreign brokers to fairly compete with new US
broker upstarts, this practice should be stopped. If the tax code is to be overhauled, visit
FATCA and specifically, make FATCA reporting easy and simple; most importantly
for institutions. TD Ameritrade doesn’t
whine and complain about issuing 1099s at the end of the year – it’s mostly
automated. It’s been “Turbo Taxed” by
accounting departments. It should be
just as easy for foreign institutions to report US citizen taxpayer
obligations. Oh and by the way – this will
also stop foreign non-reporting of income, which previously was a big black
hole!
Practically, the majority of rules apply only to retail
investors which in today’s environment, means 99% of the population. The rules don’t apply to the one percenters
or in FOREX LINGO QEPs, ECPs. Leverage
still applies, but ECPs can easily open accounts in London, Singapore, and
Sydney legally and circumvent all these rules which are guaranteed to choke any
strategy.
Why did Dodd-Frank
make all these silly rules?
The reasoning was, that because FX frauds used these tools,
they should be eliminated. But this is
severely flawed logic that would never work in the real world – that would be
like saying, let’s bomb a village because one or two criminals live there. Dodd-Frank and the climate in general cleaned
up a lot of the fraud – thank you. Now
the fraud is gone. But instead of
harassing legitimate traders and investors, regulators should invest in fraud
prevention tools. The list here can be
very long. Some suggestions:
A managed reporting system such as the NFA uses for RFEDs
like FORTRESS but for CTAs, Hedge Funds, and other CPOs who choose to
participate in the verified reporting system.
Sites such as myfxbook.com and fxblue.com provide this service
technically to traders – but there is no auditing function. One of the largest frauds has to do with
financial reporting, more specifically, the misreporting of performance
numbers. The solution is very simple – a
centralized reporting system that automatically captures performance data
(there are only so many trading venues) and ‘verifies’ these numbers are true
and accurate, and also can return statistics such as peak to valley draw downs,
etc. Each product can have an ID,
similar to an NFA ID, where investors can check in an official database, which
is secured and encrypted, all the numbers.
Building such a system is extremely cost effective, it would reduce
regulatory costs as well, reduce fraud, and boost investor confidence. In fact, it would cause foreigners to invest
in USA. Something like this doesn’t
exist in Europe. Let’s bring that money
into USA, support our markets, support the economy. Wall St. and Chicago should be the trading
centers of the world – not London. What
happened to the American Revolution, that 200 years later we’ll regulate and
tax our financial businesses out of America and back to the British whom the American Revolution freed us from? WTF
What would be the
effect on the markets if these suggested changes were implemented?
1)
There would be competition in retail FX – this would make
trading better, as competition in any market does. There was competition in the US before
Dodd-Frank and in the legitimate FX world (discounting the fraud) there were
many legitimate companies that had a good offering.
2)
Billions of dollars would flow back to USA to be held
by institutions in New York, Chicago, Charlotte, Los Angeles, and others.
3)
Instead of a new growth industry of algorithmic FX
taking off in foreign countries, it would happen right here at home in
Charlotte, Chicago, New York, San Francisco, Atlanta, and in other trading
centers.
4)
Stabilization
of FX markets in general; this will be nebulous to quantify, however it’s not
difficult to surmise, that if there is more competition, more volume, and less
fees – that the FX market will be more stable.
Because the US Dollar is the world’s reserve currency – that’s really
important! Also, it is critical that the United States take a global role in
administrating FX markets, because of the USD world reserve status.
Look at a quick practical example. Here’s a strategy that didn’t lose in 4 years
of real live trading www.magicfxstrategy.com
– but it won’t work with the ridiculous US rules. The stock market is going to tank, hedge
funds are flat on the year, 11 Trillion is in negative yielding assets. Investors will seek such strategies. But in this case, it will be market centers
like London, Singapore, Sydney, Auckland, Limassol, Moscow, and others – that will
receive the millions of dollars that will pour into such strategies. Why not, make Wall St. the FX capital of the
world? Isn’t that the idea of global
capitalism?
Or checkout some eye-opening classics: Wall Street and the Bolshevik Revolution. Armand Hammer: The Untold Story. Confessions of an Economic Hit Man. This is a MUST READ for any trader who claims to understand the markets.
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