Dear reader, you are about to embark on a journey. It starts with the dark beginnings of the modern forex industry and leads you to a city of light: Stockholm. You will hear about the questionable practices of the dealing desk brokers. You’ll learn about the Nordic philosophy of fairness and balance. And you'll start to understand why Sweden represents a Valhalla for forex traders.
Introduction: A New World for Forex
The forex world is changing. New regulations are making it difficult — if not impossible — to operate in traditional locations like London and the EU. Meanwhile, the shady practices of places like Cyprus, Malta and offshore have led investors to seek out new opportunities overseas in countries like Australia and Singapore.
What if you could keep all the convenience of staying local while avoiding the more arduous aspects of EMSA, MiFID II, and BREXIT?
Consider Sweden. The best-kept secret in the forex industry is finally ready for prime time. But to truly understand why Sweden makes sense, you must first understand the past, present, and future of forex trading.
A Dark History
Can I make a living trading forex? Can forex trading make you rich? Who is the wealthiest forex trader in the world? These are just some of the questions that dominate any forum devoted to educating new traders in forex. While forex presents a lot of opportunities to make money and even become extremely wealthy, without proper guidance and trustworthy brokers, many newbies crash and burn — and, unfortunately, many unscrupulous industry participants profit from those traders' losses. As a result, forex is seen by many as a treacherous and risky endeavor, while others see the risk as a challenge, and end up paying dearly for their hubris.
Lawlessness and Losses
It’s been called the Wild West of trading: ridiculously high leverage, little enforcement, and even fewer requirements on who could call themselves a money manager. Obviously, forex trading is not new. In fact, the roots of today’s currency trading and exchange extend as far back as the ancient civilizations of Greece, Egypt, and Mesopotamia. The Medici’s ran trading during the 15th century, eventually giving way to England: in 1913, almost half of the foreign exchange occurring globally used the pound sterling.
Thanks to modern technology, today’s forex market can take place in many different channels all over the globe, wherever one currency is exchanged for another. The truth is, new electronic platforms combined with almost unfettered leverage has transformed forex into an alluring activity. With heavy marketing pushing the idea of easy money and a steady income, a cottage industry exists pushing new training courses, strategies, and tools, all guaranteeing success.
Unfortunately, those claims rely almost entirely on smoke and mirrors. Statistics paint a grim picture: 95% of all new Forex traders lose their entire invested capital within 3 to 4 months, and only around 1% of traders make any significant profit from their forex endeavors.
Shady Practices and Sacrificial Lambs
While technology lowered trading costs, it opened the door to unsavory practices and exploitation on a larger scale. Survivors of dealing desk brokers already know firsthand what it’s like to get lost in a maze of shady deals, including clients pitted against each other or brokers setting up the trade to benefit the house.
More akin to bookmakers, these dealing desk brokers bet against their own clients, knowing that because 95% of retail traders fail, their wager is a sure thing. Even worse, the house is often stacked against the trader, with brokers tilting the game in their favor by inserting “cost of carry” charges and momentarily widening their bid-to-offer spreads to hit stop losses and force a loss on the client.
Because of these and other similar tactics, the retail forex world became a bloodbath for new and inexperienced traders who - like innocent lambs led to the slaughter - sacrificed their livelihoods (and sometimes their lives) for the unattainable dream of becoming an overnight millionaire.
Setting the Stage for Huge Losses and Greater Regulation
In retrospect, the 2008 financial crisis appears almost preordained. So much speculation, so little regulation. It was only a matter of time before a confluence of events coalesced into a catastrophic series of events.
As black swan events go, 2008 sits alongside such other notable calamities as the 1997 Asian financial crises, the Dotcom crash, 9/11, BREXIT, and the SNB crisis of 2015. The SNB crisis - when the Swiss National Bank suddenly announced it was abandoning its currency’s peg to the Euro - could be flagged as the precipitating factor for the most recent slate of regulations imposed on the banking, finance and investment industries. The SNB event was also the driving factor of ASIC no longer allowing brokers to use client deposits for margin at their liquidity providers.
When combined with the 2008 financial crisis and continuing unrest and unpredictability in many foreign markets, the SNB crisis sent out a flare to the European Union, demanding attention and setting the stage for more robust and purposeful regulation of the forex industry.
Jumping Ship and the New Regulatory Reality
Changes are in the air. ESMA and MiFID II (along with BREXIT) are changing the forex landscape and making traditional locations, like London, inhospitable to forex trading. Additionally, traders are fleeing these traditional centers like London, Cyprus, and Malta and relocating to Australia and Singapore. After the passage of Dodd-Frank in the US, many forex firms relocated abroad in order to avoid stringent regulations, but now the EU is no longer a safe haven.
The tides shifted initially with the implementation of the “Markets in Financial Instruments Directive” (MiFID II) in the EU in January of 2018. MiFID II requires forex brokers to store all transactions for a minimum of five years, and traders using algorithmic trading must register as an asset management firm and submit their algorithms for review.
In March 2018, the European Securities and Markets Authority (ESMA) introduced another set of regulations that impose limits on leverage for various assets (30:1 is the top tier), banned binary options and bonuses, required transparency and negative balance protection measures from brokers, and much more. The result is that traders benefit from greater protection but lose agility and flexibility. For brokers and money managers, the new regulations make it difficult to operate within the EU without a professional status classification, which can be difficult to obtain.
The Offshore Option
For many brokerage firms and forex traders, these EU regulations signaled a sea change, and the addition of BREXIT only muddies the waters. Many began departing to Australia and New Zealand, where leverage ranges are wider, but the forex industry is still well-regulated. Others chose classic offshore havens.
Unfortunately, while these offshore locations provide a haven from EU regulations, they are not without their deficiencies. For example, some traders encounter difficulties transferring funds between EU banks and offshore companies. In addition, many offshore brokerages in places like Belize, the Cayman Island, Vanuatu and Seychelles are scam companies set up to bilk investors with little to no repercussions. After all, the same lax regulation that proved alluring will also apply when an offshore broker disappears with a trader’s funds.
The question is: Can forex emerge from the shadows into something brighter, more positive, and scaled to provide opportunities for every trader and money manager?
At Scandinavian Capital Markets (SCM), we think that forex can emerge from the darkness and we believe Sweden is the spot where this will take place.
According to Finnish journalist Anu Partanen, “When the World Bank ranks countries on ease of doing business, based on criteria such as starting a company, dealing with construction permits, getting credit, trading across borders, enforcing contracts, or paying taxes, the Nordic countries consistently rank among the most business-friendly nations in the world.”
Stability and Security
The Scandinavian reputation provides a framework for understanding why Sweden is the perfect environment for a new age of foreign currency exchange. Known for being bastions of honesty and reliability, the secure and stable banking infrastructure in Sweden provides a foundation of political and economic stability ideal for the modern forex trader. The banks are strong; with liquidity and solid investments backing up the banking industry. The core Tier 1 capital ratio of Swedish banks is currently 24 percent, almost double the EU average of 13 percent.
In addition, in Stockholm, the economy continues to grow at a rate faster than the rest of Europe. For example, investments in tech companies in Stockholm nearly tripled between 2015 and 2016 and continued at a feverish pace well into last year. In addition, revered, trusted, and well-liked companies like Volvo, Ikea, H&M and Ericsson also call Sweden home.
A Culture of Fairness
Dutch social psychologist Geert Hofstede describes Nordic society as horizontal, with a “low power distance” between the wealthiest and most humble Scandinavian citizens.
In Swedish culture, this horizontal mentality manifests itself in the country’s business culture, which is less hierarchical and more relaxed than many western countries. In addition, the Swedish people prefer making decisions through consensus and place a high value on egalitarianism and fairness in all aspects of their personal and professional lives. The Swedes also place a premium on balance rather than excess, as expressed in the old Swedish proverb, “Lagom är bäst,” which means, “The right amount is best.”
Location, Location, Location
There’s no reason for traders to move their actions offshore to far-off countries when they can operate out of a closer locale that also happens to be more reliable and honest. Located in the geographical center of Northern Europe, Sweden is not just the gateway to the Nordic nations, it’s a hub of operations from all parts of the EU and UK. Swedish companies export their goods and services across the globe, giving them an understanding of different cultures. In addition, the Stockholm business world is fluent in English – making it simple for companies from all over the world to thrive within its borders.
Conclusion: The Lagom Mentality
In Sweden, you don’t try to “have it all.” Instead, you focus on having enough. It’s the Lagom mentality, and it influences almost all aspects of Swedish life, including business. For Swedes, greed is nonsensical, and balance and fairness are valued more than money or material goods. At first glance, it may be difficult to reconcile the image of cutthroat forex dealing desks with an egalitarian and even-handed mindset, but not if you find truth in that old saying, “a rising tide lifts all boats.” For years, the forex industry was dominated by avarice and excess. It was a place where a few controlled - and deceived - the many. In places like Cyprus and Malta, local brokers conspired to steal billions from traders in the dealing room.
But there can be a better way. The Dealing Room in Limassol populated by self-serving dealers is a thing of the past in retail forex. It’s no longer du jour to be a clever dealer or a crafty brokerage owner in forex. Now the leading forex brokerages are solely focused on helping traders win.
The forex organizations of the future invest in excellent education, service, and technology. Gone are the days of knowingly stealing from clients. It’s over completely. Now retail forex participates in assisting traders to manage risk properly, learn when (and when not) to trade, and instantly enter/exit trades on next-generation platforms. At Scandinavian Capital Markets (SCM), our leadership has seen it all, and we know exactly how to help brokers, money managers, and traders feel comfortable and safe.
A new era is dawning, one that is brighter, fairer, and full of opportunity for all. At SCM, we believe the new age of forex is on the horizon, and it all begins in Stockholm. Think of Sweden as the Valhalla of forex, a transformation from the hell of the past to a heaven of prosperity and security. In Valhalla, those who were slain in battle found everlasting life and endless sustenance. Such is the legacy of Sweden for its own citizens and such will be the experience of SCM clientele.
At SCM, we are proud of our Swedish roots, and we adhere to the Lagom mentality and our nation’s historical emphasis on fair-dealing and stability to provide a revolutionary forex service that combines the benefits of innovative technology with superior customer service. The result: an honest brokerage well-positioned to use the latest technologies to help new traders, IBs and experienced money managers not just succeed, but thrive.