By ANNA PRIOR
With headlines blaring> about the dollar's decline, a yuan revaluation, a euro crisis and other currency-related news, it's probably not surprising that more individual investors are calling up brokers to trade currencies. But how much they are trading is a shock. Though it's still a small part of the more than $3 trillion in currencies traded daily, the amount of money that these aspiring currency kings trade is growing at a nearly 40 percent clip each year, to an estimated $125 billion a day. The catch? Trading money can cost, well, a lot of money.
Indeed, critics say the financial industry is making a small fortune off retail foreign-exchange traders. One broker says it's bringing in, on average, $2,300 in fees on each foreign-exchange account; that compares with less than $215 for stock accounts at discount brokers. It's one of the reasons some brokers are adding or expanding foreign-currency trading services, although they aren't particularly willing to talk about the costs. FXCM, a brokerage specializing in currency trading for individual investors, published the $2,300 figure in a document filed with the Securities and Exchange Commission in the fall but wouldn't comment further because the firm is in a quiet period before an initial public stock offering. TD Ameritrade also makes more from its foreign-currency customers than it does from its stock accounts, says Steve Quirk, senior vice president of trading.
The typical retail foreign-exchange trader is a man in his early 40s who trades usually between 6 and 10 a.m. Eastern time, says Derek Sammann, head of foreign-exchange and interest-rate products at exchange CME Group. This growing group likes the fact that "forex trading" (what the industry calls betting on currencies) has lots of ups and downs and doesn't move in tandem with stock or bond markets. A big reason forex traders can mean big bucks for brokers is that currency traders are a pretty active bunch; an average trader makes a move one to three times a month, Sammann says. Forex traders can also pay more for most trades than for a stock. In the most typical trade, one involving the euro and the U.S. dollar, fees can add up to about $21 for every $100,000 worth of currency bought and sold (most currency trades are done in units of $100,000), according to brokerages specializing in currency trading. Trades involving less popular currencies can cost close to $100 per $100,000 traded.
Another expense: Unlike stock traders, currency investors often borrow most of the money they ultimately use to trade. Brokers provide the money for a price, charging as much as $5 a night for every $50,000 an investor borrows. "It seems inconsequential, but it could ultimately double one's de facto commission," says Adam Kritzer, editor of ForexBlog.org, which tracks the industry.
Analysts say the costs, along with the complexity of the currency markets, make this an area where investors should tread lightly. As more retail brokers jump into the forex business, costs could fall, says Sang Lee, managing partner of Aite Group, a financial-industry research group. In the meantime, investors looking for ways to make longer-term bets on the rise and decline of certain currencies can turn to exchange-traded funds or a mutual fund that specializes in currencies.