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Meet an Excellent Forex Opportunity: PAMM Accounts

PAMM (Percentage Allocation Management Module) accounts have been around for quite some time, but lately brokers have been exceedingly launching campaigns to boost participation into this management system.  Just a couple of weeks ago, FXOpen kicked off a referral partnership program, offering extra commissions to those who refer a client (or a friend) to PAMM accounts. Gradually, the reasons have been piling up to explore in detail the PAMM phenomenon.

 

What are PAMM Accounts?

 
Putting it simply, PAMM accounts allow forex firms to manage several individual customer trading accounts via bunched orders. 
 
First there are the investors, who put their money in the PAMM account. Then there is a manager (or master) of the PAMM account, who is responsible for the trading decisions and, henceforth, for the management of the capital. The manager is also an investor and risks own funds if something goes wrong. Last, but not least, there is the FX broker with which the account is registered – it is responsible for all money processing procedures.
 
 

PAMM Models

 
I'm going to surprise you by telling you that there are different models of PAMM accounts: the aggregator, the FIFO and the LIFO. Lost already?
 
The aggregator model is the most popular one and you must have at least heard of it – a bunched order of trades is placed by a PAMM manager on behalf of several individual forex accounts. By contrast, the FIFO (first-in-first-out) model envisages entering trades from individual accounts, with the first account to enter the trade being the first to exit the trade. In the LIFO (last-in-first-out) model, the last account to receive the trade will be the first to exit it.
 
While the FIFO and LIFO imply reduced slippage (because it is easier to fill smaller orders than the heavy bunched orders), they also lead to complicated trade reporting – imagine various trades being conducted at various accounts at various times. 
 
 

Why U.S. regulators dislike PAMM accounts?

 
Although PAMM accounts have become a customary offer by brokers in Europe and Russia, in other countries like the U.S., regulators are sensitive to the matter. The U.S. National Futures Association (NFA) has a grave problem with the PAMM aggregator model as it may be smudging the difference between individually managed forex accounts and pooled forex funds. NFA insists that managers of pooled forex funds should register as such instead of avoiding the necessary regulation.
In addition, PAMM accounts face extra restrictions in the form of the Blue Sky Laws in some American states, such as Pennsylvania.
 
 

How are investors' profits calculated?

 
Say you decide to pump $100 in a PAMM account whose manager charges a 20% commission fee. The manager is the first investor and also provides his own funds into the PAMM account, say $1,000. As a result, the total investment amounts to $1,100. In percentage terms, the first investor (the manager) controls 91% and you – 9%. 
 
Suppose that after a month, the manager succeeds in generating a 50% rise in the original deposit, that is, for the month the profit is $550. Now, we have to calculate your share: 9% out of $550 is $50. From this result we subtract the commission fee which is 20%, or $10.  Hence, you are left with a net monthly profit of $40. 
 
 

PAMM Benefits for Investors

 
1. The investor can reduce risk and boost profit chances by investing in a number of PAMM accounts.
2. The investor can be active in the forex market with minimal knowledge of financial trading, meanwhile experienced traders will take care of business.
3. Some small investment - as small as $1 as is the case with Russia's InstaForex, for example - is sufficient for an investor to participate in a PAMM account.
4. Managers participate with their own funds in the account, so the odds of fraud and sabotaging an account are null. 
5. The investor keeps control over his/her own account – deposits and withdrawals are up to him/her.
 
 

PAMM Benefits for Managers

 
A manager (or master) benefits mainly from the management commission fees – they vary widely – usually from 10% to 70% of monthly profits. 
 
By the way, some PAMM accounts apply the high-watermark rule which ensures that it is not possible to extract the same commission from the same height for the second time: weak performance is not rewarded! This may remind you of the restriction that social trading network ZuluTrade imposes on rewards for signal providers – the SPs usually receive 0.5 pip per standard traded lot (that's about $5) but if the SP's monthly loss exceeds 700 pips, the SP gets nothing.
 
Pay attention to the fact that under the reward scheme of eToro's OpenBook, SPs get a fixed sum based on the number of their eligible copiers, regardless of the success of performance. For example, $100 for 10 to 24 eligible copiers, the amount grows to $1,000 from 101 to 150 copiers, and so on. The PAMM reward scheme for managers is simply fairer, as it is based on the success of performance and envisages that when the manager gets paid, the investors get paid too.
 
In a further difference with reward schemes of social trading networks like ZuluTrade and eToro's OpenBook, PAMM accounts allow managers to set their own commission rates and to include unlimited number of investors' accounts into the PAMM, thus opening the way for vast, unlimited gains. 
 
 

How to Choose a PAMM Account Broker?

 
There are currently around 85 forex brokers offering PAMM accounts, among which are brokers with which we are well familiar – XEMarkets, RoboForex, ThinkForex, Mayzus, FXDD, LiteForex, Dukascopy, InstaForex, Alpari. The conditions vary widely not only among the brokers but also among different PAMM accounts. For example, the minimum investment requirement ranges from a single US dollar to several thousand dollars. 
 
To help you out pick the most suitable broker, non-official ratings are there on the Internet – I find the one on Myfxbook.com particularly useful.  
 
 

How to Choose a PAMM Account Manager?

 
Brokers that offer PAMM accounts have lists of various PAMM accounts that you can choose from. For example, Alpari's list of managers allows you to pick a PAMM Account based on the time of the account's activity, the amount of equity, the return (for a day, 3- and 6 months), as well as user rating. If you're having a deja vu, this is because the rating resembles that of SPs on Zulutrade.
 
And now – attention, please! When you decide to invest your money in a PAMM account, you should scrutinize the manager's offer, which must include: the size of the performance fee, the minimum amount of investment, as well as the trading interval.
 
Be bold, be smart and choose carefully – now you have all of the information necessary to make up your mind about PAMM accounts!

 

TAGS: percentage allocation management module  pamm account  brokers  forex trading  manager  investor  nfa 
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