There is a rumour doing the rounds that there may be a little more than meets the eye to the new CFTC proposals to reduce leverage for retail forex traders from 100:1 to 10:1.

The rumour involves a turf war. The two rival gangs are futures brokers and forex brokers. The futures brokers are the Old Boys Club, the forex brokers are the cocky new kids on the block. Both are registered at the NFA, both are regulated by the CFTC, but at the moment there is only one winner – the forex brokers.

Forex brokers’ growth skyrocketed while futures commission merchants at best stagnated. It is estimated that 20% of forex trading in Japan is now done by people like you and me, little people, who were previously excluded from this game. A major New York based forex broker claims 150,000 live trading accounts and $600 million in client funds.

So the Old Boys Club, the futures brokers in Chicago, watched as new forex start-ups grabbed more and more of their market share every day. The forex guys so effectively combined new technology (the internet) with aggressive marketing that they leapfrogged the competition puffing on their cigars in dark wood-panelled rooms.

Some Futures brokers incorporated forex brokers and added forex to the mix of their offer to the public. But it wasn’t enough. While some of these measures helped to stop the drain of their existing client base they were stagnating in terms of growth while forex brokers were booming.

So what did they do? Here’s my educated guess. Let’s look at the history.

Initially the Futures Modernization Act (that regulated both futures and forex traders) had the best interest of the forex trader and investor at heart because it brought some much needed regulation into a gangster paradise. Except it didn’t stop there.

In fact they went on regulating and regulating and regulating. In fact, the CFTC took more regulatory actions against a handful of forex brokers in a few years than they took against all the rogue old boys in their many years of not always proud and ethical existence! And still the regulatory screws tightened.

All these regulations about global spot forex trading were legislated in the US Farm Bill of 2008 and the powers so vested in the CFTC. Farm Bill? That’s right, pork bellies, bushels of corn, and forex – to the regulator it was one and the same. Find that a bit strange? I do.

Take a quick look at this:

• The 2002 Act asked for measly capital requirements of $250,000 for forex brokers.
• Soon this was increased to $1,000,000, then $5,000,000. Swimming in cash most of the forex brokers posted this collateral out of their back pockets and more were registering every month.
• Regulations soon set the minimum at $20,000,000.