Maximum leverage: what the advertised figure doesn’t tell you

The advertised figure is only a ceiling

The advertised leverage figure is a ceiling, the most a provider will ever give you. It applies only on the provider’s most liquid instrument, the one you can trade most easily without shifting the price, and only if you qualify. You get it only while your trade stays small enough to fall into the lowest band of the provider’s margin schedule. Each condition strips away part of that number. The advert mentions none of them.

For most people, the law settles the question and it’s the first condition. A retail client can get no more than 30:1 on major currency pairs if the company that opens your account is regulated in the United Kingdom or the European Union. From there the cap steps down through 20:1, 10:1 and 5:1 to 2:1 on cryptocurrency, where that’s allowed at all (ESMA Decision (EU) 2018/796, FCA PS19/18). Australia applies the same ladder to retail clients of locally licensed companies through a product intervention order, using a regulator’s power to limit or ban a product. The one difference is that its list of major currencies adds the Australian dollar, so a pair such as AUD/USD gets 30:1 there (ASIC order). Groups usually place someone living in one of those countries with their company there. Any provider advertising more is describing another company, another kind of client or another country (is trading safe).

Latin America and South-east Asia are different. In Argentina, Brazil, Chile, Colombia, Mexico and Peru, and Indonesia, Malaysia, the Philippines, Thailand and Vietnam, no broker from the broker comparison runs a local company for these products. If you live in one of those countries, you sign up with the group’s global company. No 30:1 cap binds that company. The comparison shows leverage of up to 500:1 there, and the conditions that decide whether you ever get it (why nothing here goes above 500:1).

How a tier table cuts leverage as your trade grows

Worked arithmetic: the numbers follow from the formula given in this section.

A tier table sets the margin rate in bands of trade size, so the rate on your first contract isn’t the rate on your last. Take a published schedule that charges 20 % margin on the first band of a share and 75 % on the largest band. Leverage on that share falls from 5:1 to about 1.33:1 as your trade crosses the bands. No price has moved and the provider hasn’t announced anything.

Providers measure the bands in different ways, and that matters more than the rates themselves. Some providers apply the bands to each trade on its own. Others apply them to your whole exposure in one instrument, no matter how many separate orders you split it into. Still others apply them to the account as a whole. Splitting an order into smaller pieces gets you round the first method but not the other two, and that’s why the provider comparison has a column for it.

Working out the effect on one trade takes plain arithmetic. When a schedule steps from 10 % to 50 % across five bands, a trade that covers four of them has a blended rate well above the first band’s rate. The deposit you need is that blended figure, whatever the advert says. Take a made-up schedule where the first $50,000 of a trade needs 10 % and the next $50,000 needs 20 %. A $100,000 trade then needs $5,000 plus $10,000, or $15,000 in all. That gives a blended rate of 15 % and leverage of about 6.7:1, even though the headline promised 10:1.

If you size a trade using the headline rate, a margin call will arrive sooner than you planned (leverage and margin). A margin call is your provider’s warning that your account is running short of the margin it needs.

The clause that outranks every published table

Almost every broker in the provider comparison includes a discretionary margin clause in its client agreement. This clause allows the provider to change margin as it sees fit. The wording of these clauses is strikingly similar, even among competing firms. Providers keep the right to change margin requirements at any time and at their sole discretion, and they keep the right to apply those changes to trades already open. Several providers state clearly that they may give no notice. One of the largest providers says it will generally not issue a margin call before closing out your trades.

A published tier table sets out normal conditions but offers no guarantees. If a provider promises notice at all, it’s usually a few business days. The provider still keeps the right to act on shorter notice, or with none, if it believes it has cause. One provider’s client agreement promises a week’s notice. Its own disclosure statement says leverage changes take effect immediately and apply retrospectively, so you can’t rely on either document (costs and fees).

What the evidence says about leverage and outcomes

Regulators that set leverage caps haven’t published evidence on whether a cap changes what happens to clients. The question of whether the cap works is still open, and any confident answer to it deserves suspicion.

What has been measured covers less ground, and it’s worth stating exactly. National regulators found that between 74 % and 89 % of retail accounts lost money across authorised firms as a whole, with ESMA publishing those results (ESMA, press release, 27 March 2018). That figure describes the product, not any cap that applies to it. It says nothing about whether higher leverage would make things worse, and that’s the one thing nobody has published on (risk management).