Another one bites the dust. Learn from it!
Posted by John Forman in Forex, Market Commentary, tags: alternative investment, Currency, diversification, Forex, futures, LIBOR, MF Global, PFG Best, transparency
For a long time there’s been an argument in the retail foreign exchange trading community about whether it is better to trade futures or spot. It’s something which comes up so often that I included “Is it better to trade spot forex or currency futures?” as one of the questions addressed by contributors to my Trading FAQs book. One of the key elements long seen as being in favor of futures is the regulation, transparency, and security of the futures market.
Then we had MF Global go under.
In one shocking moment the accounts of thousands of futures traders were at best frozen and at worst completely gone. This was a stunning development. After all, customer funds with brokers are supposed to be sacrosanct. Even if a broker goes belly-up it’s not supposed to impact customer accounts. The MF Global fiasco shook that confidence in the system very hard.
Now we get PFG Best.
No doubt it will take a while to get things all cleared up, but early indications are that a lot of customer money has vanished. This is another blow to the previously nearly unassailable integrity and stability of the futures markets and brokerage industry.
I am personally on record as having favored spot trading over futures for some time now, primarily on the basis of flexibility and lower capital requirements. Those on my side of the debate may very well use the MF Global and PFG collapses as arguments in favor of the spot market, especially since none of the big brokers in the retail forex space have suffered anything like this kind of failure (though they have had issues of their own). This, to my mind, is a dangerous case to make.
What the implosion of these two futures brokers does is highlight the need to manage risk not just on the level of your trades and/or portfolio, but also in the security of your accounts. We may feel comfortable working with highly capitalized firms, but as MF and PFG have shown, there are flaws in the regulatory and oversight structure.
And on top of all that, whenever things aren’t going well in society there is an increased effort to find someone to blame (notice how few market scandals there are during bull markets?) and to look for lawbreaking behavior. The banks and other financial institutions are facing that now from many different angles, as the current LIBOR scandal demonstrates. What impact would there be on your broker or bank if a regulator or court slapped it with a huge fine or judgement?
The point is that diversification of assets isn’t the only thing you want to be doing. You should be diversifying your exposure to financial institutions as well.
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