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
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 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. Why should any trader have to exit positions in the same order as they were entered? (Use the Hotel analogy, Trump owns 12 hotels, some are profitable some not – why should Trump sell the 1st hotel built – and not just the 3 losers?)
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?
7) 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? 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. Because there are so few strategies that work consistently over a long time frame, we’re raising capital for this strategy (seeking investors). Contacting some Pension Funds, and other Hedge Funds that have shown interest in the tens of millions potentially $100 or $200 Million allocation which will at some point, be wired to London, Singapore, Sydney, Malta, or Cyprus. Why? The foreign brokers will enjoy large customer deposits, good strategies, and huge commissions. They will hire more workers – in their country. The most we can hope for, they will take their bonus checks and vacation in USA
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.
[pictured above, this mountain is in North Carolina (Not Switzerland)]
UPDATED: 11/25/2016 SIGN THE PETITION TO REPEAL DODD-FRANK
