Connect with us


Absence of Retail Forex Trading Regulation in Africa and its Impact on Traders

Regulations exist everywhere and they help to prevent process abuse. It is hard to imagine why a billion dollar industry like retail forex trading is unregulated in Africa. Many forex traders in Africa abide by the laws established and intended for overseas jurisdictions.

First of all, what does retail forex trading mean? It refers to a small segment of the forex market popularized by individuals. You make a profit/loss by buying and selling currencies.

For you to trade forex as a retail trader, you must have a forex broker that you would use to place trades in the market. There are a growing number of forex brokers on the continent, but most African countries do not regulate them.

Currently, of all the major countries, only South Africa and Kenya have regulations in place to oversee online retail forex trading in their jurisdictions. There are about 30+ South African brokers that are licensed by the FSCA, and there are about 7 CMA regulated forex brokers in Kenya.

South Africa tops the charts as the largest forex market in Africa and according to the 2019 BRI report, South Africa averages $20 billion daily in foreign exchange instruments. change. Although it does not indicate the retail turnover, but according to fair estimates, the volume of retail trading in the foreign exchange market is the highest in South Africa compared to other African countries.

Many Africans are starting to embrace retail forex trading, but that doesn’t mean the business is profitable for everyone. Statistics show that up to 90% of retail forex traders lose money due to several reasons including lack of regulation in the majority of African countries. Let’s examine the effects of non-regulation of the retail forex market on retail traders.

Avoidable loss of funds

There are many scam brokers out there to scam retail traders. Since there are no regulations in most of Africa, it is difficult to determine whether a broker can be trusted or not. Traders may think that because a broker is licensed, it is safe to deal with them.

However, foreign brokers, especially those licensed by island countries such as the Bahamas, Panama, etc., target African jurisdictions, but they are poorly regulated, leaving retail traders at their mercy.

There is a widespread increase in clone brokers, they disguise themselves as regulated brokers with a good reputation; rob innocent Africans of their money.

Unregulated and poorly regulated brokers lure retail traders by offering excessive leverage ratios. Leverage allows a trader to open a large trade position with little funds. This means that the broker borrows the trader’s funds to trade and gets a refund after the position is closed.

In Australia and Europe, leverage ratios are limited by the government between 30:1 and 2:1. However, in Africa, these same brokers can offer clients leverage as high as 1000:1.

For example, you want to trade EUR/USD. With a deposit of $100 and leverage of 1:1,000, you can open a trade 1,000 times larger, or $100,000. However, you can also register losses 1,000 times your initial deposit.

High leverage can lead to increased profits. However, if a loss is incurred, it can be disastrous as you could end up owing your broker. The higher the leverage ratio, the riskier the trade.

Besides an excessive leverage ratio, forex brokers operating in Africa engage in rigorous advertising, encouraging people to trade without informing them of the associated risks.

They offer bonuses on any amount you deposit, which entices the public to invest with them. While regulated brokers in developed countries are obliged to display loss statistics on their websites, this does not apply to them when operating in Africa.

Investor compensation funds usually pay some form of compensation to a trader when they lose money, but that’s when you’re trading with a broker regulated by your home country. Since most African countries do not support retail forex trading, their citizens are not compensated when they are defrauded or when their online forex brokers become insolvent.

The Securities and Exchange Commission (SEC) of Nigeria has advised the public to refrain from retail Forex trading as it is not regulated by them and may be subject to abuse in the country. Retail traders using foreign forex brokers have a lot to lose when trading.

Limited trading instruments

Another way to trade forex is to use currency derivatives. Futures and options are popular derivative products.

First of all a currency futures contract gives you the right to buy or sell a fixed amount of currency, at a fixed price on a specified future date.

Secondlya currency option gives you the right, but not the obligation, to buy or sell a currency futures contract at a fixed strike price on a fixed future date.

If you are worried that the exchange rate of a currency will drop in the future, you can buy a put option that gives you the right to sale. However, if you are concerned that he ascend you can purchase a call option which gives you the right to to buy without any obligation.

To buy a “call” or “put” currency option contract, you pay a premium. If your fears do not materialize, you forfeit the premium paid.

Options are derivative contracts and can be used for hedging risk and for speculation. Unfortunately, most African exchanges do not deal in derivatives, so many African traders miss this opportunity.

If retail forex trading were regulated across Africa, exchanges in Africa would have to start offering currency derivatives. For example, the JSE allows the trading of currency derivatives, and it is no coincidence that it has a retail forex market properly regulated by the FSCA.

Traders can lose more than their capital

Negative balance protection means you can’t lose the money your broker has lent you. You can only lose your initial margin contribution if a trade goes against your favor.

When your margin falls below the maintenance margin level, a margin call is triggered by the broker. Your position would be closed if you did not invest additional funds to keep your trade afloat.

For example, you open a EUR/USD position of $10,000 with a deposit of $1,000. This means you have 10:1 leverage. Due to market volatility, your losses amount to $1,700. The loss is greater than your initial deposit.

If you are covered by Negative Balance Protection, your loss is limited to the amount invested, which is $1,000. Otherwise, you must reimburse your broker $700.

It should be noted that some forex brokers in Africa might offer NBP initially as a means of attracting clients and then stop offering it halfway through once you are on their books.

Tier 1 regulators in developed countries such as ASIC and FCA require forex brokers under their regulations to provide NBP to their retail clients but not professional clients.

It is the duty of African market regulators to enforce the NBP, but this is not the case since retail forex trading is not even regulated in most African countries.

Slower execution of commands due to latency issues

Latency refers to any delay between the time you place an order and its execution time. Brokers use computer networks such as Electronic Communication Network (ECN) and Straight Through Processing (STP) to execute orders on behalf of their clients.

There is an inverse relationship between latency and execution time. When latency is low, orders are executed quickly and vice versa. Latency is determined by the distance the signal has to travel to execute orders.

Light travels in a vacuum at approximately 186,000 miles per second. Thus, those whose servers are located close to liquidity providers execute orders faster than those that are far away.

Most forex brokers do not have their servers located in African countries. This means that signals have to travel a long distance, which slows down order execution.

The latency causes the order and the execution price to be different. You can often see lots of new quotes when trying to place an order.

If these brokers were regulated, they would open offices in Africa and bring their large computer servers, reducing latency issues.

Inadequate customer service and complaint resolution

Since most brokers do not have physical offices in Africa, customers are forced to file their complaints online.

You need to reach their foreign numbers which can be difficult to connect to. The difference in time zones limits how often you can contact your broker since their lines are only open during working hours.

Online brokers use bots to respond to your inquiries and complaints. These answers may not be relevant to your questions; cause you to lose funds while waiting for an appropriate response.

Emails are not answered in time. It’s hard for you to get a quick response when you’re faced with business challenges that need immediate attention.

Poor customer service and complaint handling has led most African retailers to waste their funds unnecessarily.

The essential

African retailers need to self-regulate. You need to do adequate research to determine whether a broker is trustworthy or not. Brokers regulated by Tier 1 regulators like the UK’s FCA and Australia’s ASIC are considered less risky than offshore brokers. Use stop loss orders and engage cautiously with leverage to minimize your risk.

#Absence #Retail #Forex #Trading #Regulation #Africa #Impact #Traders

Click to comment

Leave a Reply

Your email address will not be published.