Limits on Short-Term Currency Bets to Cut Japan Broker Profits

Broker profits from short-term bets on exchange rates may be reduced as Japan’s financial regulator considers limiting the trades, according to FX Prime Corp., a currency-margin brokerage in Tokyo.

The minimum expiration time on binary options, contracts that pay out when a rate moves in the chosen direction, will be extended to two hours, and controls on time lapses between orders and executions will be tightened this year, said Marito Ueda, senior managing director at FX Prime. Trades at some brokers now expire in five minutes.

“We’re reviewing our products,” Ueda said. “There will be some impact on our profits, but the proposals for the binary option rules have been talked about since last fall around September, so we have already taken that into consideration in our business plan.”

The Financial Services Agency hasn’t made a final decision on the limits, said Hiroshi Okada, a Tokyo-based spokesman at the regulator. “We are continuing to seek public opinions on the proposal,” he said. The Nikkei newspaper reported details of the rule changes earlier today, saying the agency may levy fines as large as 100 million yen ($990,000) for violations.

“Binary options trades have deep-rooted popularity among a small number of investors for their simplicity,” said Takuya Kanda, an analyst at Research Institute, a unit of the nation’s largest currency-margins trader. “Trading volumes of binary options will fall, at least temporarily,” he said.

Shares in Japanese companies that offer currency-trading services fell on the news of tighter regulations. GMO Internet Inc. dropped 4 percent to 979 yen today, while SBI Holdings Inc. declined 4.1 percent to 1,298 yen.

Trading Impact

The volume of currency trades plunged two years ago when regulations halved the amount of leverage, the use of debt to multiply trading bets investors could use in foreign currency trading, Kanda said. The impact on the currency market as a whole will be smaller this time, he said.

About 10 percent of more than 70 Japanese margin-trading firms offer the contracts, according to Kaz Shirakura, a senior researcher at Tokyo-based Yano Research Institute.

Binary options are among the most risky speculative trades, Javier Paz, a Boston-based senior analyst at research firm Aite Group, said in an interview in Tokyo on Feb. 12.

“They were created as an instrument that’s very simple, that anybody thinks that they can use,” Paz said. “In reality, you still have to contend with which direction? Do I buy or sell? When will the trade go in the right direction?”

One of the regulator’s concerns is slippage, the difference between the expected price of trade and the actual price, FX Prime’s Ueda said. The exchange rate can move before the transaction is complete.

“In theory, there should be a 50-50 chance the executing price will be favorable for the customer,” he said, “but there are some bad companies that approve transactions at rates that are favorable for them, or change rates deliberately.”

“Those fraudulent acts certainly need to be eliminated,” Ueda said. “The gist of the new rules isn’t to ban all slippage, but to pursue fairness for customers and brokers.”

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