Columnists

How local investors can grow retail foreign exchange deals

FOREX

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Summary

  • Foreign exchange trading has been one of the fastest-growing activities among retail investors in the country.
  • Possibly, Kenya’s geographical location is a huge factor explaining this huge interest.
  • Nairobi is only two hours behind the most active FX centre; London, which alone accounts for 43 per cent of global FX turnover.

Foreign exchange trading has been one of the fastest-growing activities among retail investors in the country. Possibly, Kenya’s geographical location is a huge factor explaining this huge interest.

Nairobi is only two hours behind the most active FX centre; London, which alone accounts for 43 per cent of global FX turnover.

According to the 2019 Triennial report, retail investors, who differ from institutional investors especially in their FX trading patterns, accounted for 3.0 per cent and 3.3 per cent of total and spot daily turnover, respectively or an equivalent of Sh20 trillion per day.

This group, which tends to use leverage that can go up to 400 times the amount of cash deposited known as the initial margin, is now fully part of this global electronic market.

Electronic execution, which allows for fast trading and, therefore, contributes to overall FX turnover growth, now accounts for over 50 per cent of the total FX trading channels.

Though more opaque than many other financial markets because it is organised as an over the counter (OTC) market, online FX trading has not stopped local retail traders from participating.

It is estimated that the number of tradable retail accounts locally stands at about 70,000. Looking at last year’s annual results of the only two brokers that had full year results, EGM and Scope Markets, working with a Sh75 revenues per Sh100 million traded, the Sh412 million total revenue shared by the two brokers assumes a gross turnover of Sh5.4 trillion in 2020. This is quite massive.

Of course, at some point as new brokers join in, some may adopt a lower pricing plan (lower than Sh75), a scenario that may lead to industry margin compression.

Nonetheless, a reduced pricing structure could spur more trading activity as reduced spreads have shown in other markets to directly correlate to higher customer activity.

Retail aggregators, who act as intermediaries, aggregating quotes from dealers and facilitating trades by retail investors by offering them trading through margin accounts, are the main players.

The Capital Markets Authority has so far licensed four non-dealing online foreign exchange brokers namely; EGM Securities Ltd (trading as FXPesa), SCFM Ltd (trading as Scope Markets), Pepperstone Markets Kenya Limited, and Exinity Capital East Africa Limited.

Obviously, the 2017 Online FX market regulations have been a big draw to foreign investors and traders alike as they are all looking for a more secure industry.

Consequently, I see a future being dimmer and dimmer over time for brokerage firms that are not regulated or regulated in offshore destinations but continue to solicit clients. In sum, the sky’s the limit. The local FX trading community will continue to grow and there’s no stopping for now.

Even so, there are perennial lessons that traders of any age must continue to know: discipline, patience, the value of money, treading carefully in a market that works 24/7 and is very efficient and not very merciful if one assumes too much. More importantly, before deciding to invest, check with the different offerings and compare their charges as well as their services.

Some brokers charge a per-trade commission, while others charge a mark-up by widening the spread between the bid and ask prices that they quote to investors

Mr Mwanyasi is managing director at Canaan Capital