Retail growth needs responsible attitude

The fact that aggregators now make up some 10% of the market highlights the fact that retail investors are becoming increasingly attracted to the benefits of foreign exchange. The establishment later this year of a currency futures exchange in Dubai proves that this trend is set to continue (see related article, this issue).

It is easy to see why. Foreign exchange offers investors a huge, fast-moving and highly liquid asset class that is becoming easier to access. However, while this increased activity is obviously an opportunity for the industry, it also represents a significant threat.

Financial institutions need to be careful about how they market FX to potential investors. It can offer another source of alpha and a further diversification tool to the sophisticated investor, but the fact that it is unregulated puts an additional onus on those selling the products to spell out its pitfalls.

If this does not happen, there is the potential for less experienced investors to suffer from losses that they may not realise they are liable for. If too many investors lose out in this way, there is a real danger that the reputation of FX as an asset class will suffer.

This means those marketing the products to potential investors need to highlight potential risks. If the burgeoning industry maintains a responsible attitude, there is no reason why retail investors will not continue to become an increasingly large part of the FX market. If it does not, large-scale losses suffered by investors saying they were unaware of the risks could lead to serious problems for those trying to offer foreign exchange products.