Retail forex traders will bounce back

Retail foreign exchange traders were among the hardest hit in the August turmoil, where risk aversion led to a sharp reversal in carry trades. But it looks like many market participants haven't been deterred from pursuing the potentially lucrative investor base.

According to the FXCM Speculative Sentiment Index on August 16, open positions in the yen were down 15% overnight. Meanwhile, banks had been reporting that Japanese retail FX traders had reduced their positions by more than 80%. This, according to Kathy Lien, chief strategist at the online trading company in New York, suggested that "Mrs Watanabe" was getting "shaken out" by the recent moves as well. With these moves including GBP/JPY falling 700 points from its high that day and 1,200 points since the beginning of the week, it is hardly surprising that these investors got spooked.

Certainly, many companies with high retail activity put the breaks on during the tough period. The Chicago Mercantile Exchange and the Chicago Board of Trade increased their margin requirements on some currency, interest rate and stock-index futures at the close of play on August 16, upping the stakes for those still wanting to trade, and deterring those that couldn't afford to.

Similarly, Saxo Bank doubled FX margins for partners and clients on August 16, claiming extreme FX volatility. The bank even "strongly" recommended positions be reduced. This indicates prudence not only on the part of the bank but also on the part of its liquidity providers.

Despite the fears of retail FX risks, it seems online trading companies are still viewed as hot investment property. The fact that Oanda can close a deal that sees it receive $100 million in investment during such turbulent market conditions is a pretty strong indication.

Meanwhile, the Royal Bank of Scotland has said that it has had no issues with the service received from its two-month-old deal with CMC Markets through its joint venture with TD Securities, NatWest Stockbrokers. NatWest Stockbrokers entered into an introductory broker agreement with CMC Markets, UK to provide spread betting, contracts for difference and FX trading from June 28.

And in Tokyo, EBank, the county's most profitable online bank is only now entering the retail FX market by enabling FX margin trading at the Tokyo Financial Exchange in coming months.

With the projected growth in retail volumes, things should get even more exciting when dealers re-focus on strategies targeting retail FX traders, which were shelved to trade the volatile markets.