Hello,
I'd like to talk about a problem that many of us have experienced, and I'd like to propose some solutions to this problem and hear your ideas on this subject as well. Since this has happened to me more than once, I'd really like to see us pull together and form a solution to this problem as group to the benefit of all.

I'm talking about brokerages being closed down by regulatory agencies, and it taking a minimum of months and in most cases years or simply unknown before any of the money is returned at all. Even then, when it finally does happen it is in pennies on the dollar. This can be and is devastating to traders, particularly those who are using trading to support their families or to supply a necessary supplement to their incomes. Even if trading is a hobby, it is still a loss. Most of us leave the majority of the money that we make from trading in our accounts so we can have the benefit of compounding our money.

As I said, I have experienced this more than once. Before the last time it happened at FXLQ, we (a friend and I) had gone to the effort to join a group of traders who had pooled their money so as to be able to take advantage of being able to use Goldman-Sachs to keep their money in a separate account from the brokerage as the brokerage we were with before had been shut down by a Swiss government agency.

In my understanding the horrifying thing was that in spite of our vehement protests when the NFA shut down FXLQ they FROZE the Goldman-Sachs account, and WORSE than all that, it has been declared an ASSET of FXLQ, and subject to CREDITORS which at least DOES include us, but does NOT exclude others who are not traders. In other words the electric company has the same rights on our money that we do because they are creditors as well.

Those of you who have experienced this sort of thing well know how outraged and angry this can make you feel, and it sure doesn't put toast on the table either. Nor does it pay the mortgage, hospital bill or anything else. Regulatory agencies simply do not care what happens to you. They think that you are rich because you invest in forex. They have no conception that to most of those involved it is like being fired suddenly with no warning and no unemployment. It is interesting to note that at the time FXLQ was closed down they had more than enough money to return all client funds and had volunteered to do so. The NFA would NOT allow them to do so. Not only that, but you were not allowed to make ANY adjustments to open trades. They gave you no time, no warning to make these adjustments to these trades or even to close them gracefully. Our group was in a carry trade- the stop could not be moved nor funds from one part of the trade to the other. Right there we lost about 50% of our in trade money, with no way to prevent it.

In summary having your brokerage shut down by a regulatory agency is the pits.

I've been doing a lot of thinking and talking with friends and have come up with some solutions. Here they are. I'm saving what I consider the best for the last and excluding obvious personal options like savings accounts.

1. Using money management in a different way. I will be using a 2% rule and small figures to explain this. That way I have to keep track of far fewer zeros!
Let's say you have $1000.00 to trade. You decide to use sound money management and you risk only 2% of your trading money on a single trade. That gives you $20 to risk on your trade which on a mini would give you an 18 pip SL on the EURUSD @ a 2 pip spread. Now using this same setup, let's say that you still have $1000.00 to trade, but you only put 25% of your total trading money at the brokerage. You stuff the rest either into your sock, or put it in the bank, but you don't spend it. You now have $250 in your trading account, but the rest is out of the hand of the broker. You continue to trade as though the $1000 were there risking your $20. You have to watch your margin more closely, but the majority of your money is safe. You also remove money regularly to keep from having too much build up at the brokerage. The major disadvantage of this is the lack of compounding.

2. We could form a group or could individually find an insurance company to underwrite an insurance policy for the event of a regulatory agency intervention in our trading lives. This could be really expensive initially, plus it would cost each person a monthly premium probably based on the size of their trading account. The disadvantages of this are probably cost, and the fact that insurance companies in spite of their advertising are not cheerful about paying out, and again they too are subject to regulatory agencies. Plus they can mismanage funds and not have them available.

3. We could form our own protective group to replace monies shut down, and do this in a way that could conceivably be mostly FREE to members. It would, however, make some people unhappy as we would be competing with their business. What I suggest we do is form an introducing brokerage and do this for an extensive list of brokers so that all our members have their choice of brokers and we get a commission on each trade. Most traders never see money that goes into spread. That money would then put into a bank in a country with a solid reputation for money management and that would not let a US or European regulatory agency claim that the money actually belonged to some broker they were shutting down! Furthermore as our funds grew, I suggest that part of it be put into trade among several of the best traders in the group with established records that were comfortable trading money for others. That way we could hopefully reach a point where if a brokerage shut down that had our members involved, that we could replace their entire trading account within a short period of time at the new broker of their choice. However, it would also be important in my opinion to hold in reserve at least 50% of the funds in case another brokerage was shut down.

To do this effectively not only is good input needed, but we would need to elect a committee to work on the particulars which are NUMEROUS- everything from finding a bank, to establishing broker relations, to how many signatures are required on a check, to membership requirements including establishing how much was actually in a members account, and, of course the original incorporation which would require some contributions from members.

If you are interested in this, and have positive ideas, please come forward and say what you have to say.

It is possible we could make the trading world a lot safer.