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FXCM fined for for failing to treat its customers fairly
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
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NYTimes/Dealbook: Foreign Exchange Firm Fined in Britain
By JENNY ANDERSON
Britain’s Financial Conduct Authority on Wednesday fined the British units of FXCM, a retail foreign exchange trading firm, 4 million pounds for withholding profits from its clients.
In what appears to be a classic “heads we win, tails you lose” case, FXCM, whose United States parent is listed on the New York Stock Exchange, allowed its British units to execute trades in another part of the firm and profit from them if the market moved their way but passed on losses to the clients if the market moved against them.
The regulator said nearly Ł6 million, or about $10 million, which should have gone to its customers went into its own coffers instead. The firm will pay that amount to clients in restitution.
Most of the fine that FXCM will pay is for failing to treat its customers fairly. But the authority also fined the firm for not disclosing that the United States authorities were investigating another part of FXCM for the same misconduct. In 2011, the Commodity Futures Trading Commission ordered the company to pay $14.2 million to settle similar accusations.
FXCM violated an F.C.A. principle that says firms must have an open relationship with its regulators.
“Not only did FXCM UK fail to treat its customers fairly or correctly apply our rules, I am particularly disappointed that it was not transparent in its dealings with the F.C.A.,” said Tracey McDermott, the authority’s director of enforcement and financial crime.
FXCM said in a statement that it had put in place changes to make sure it does not profit from trades at its clients’ expense. “This settlement is a significant step in our efforts to put this legacy trade execution issue behind us,” said Brendan Callan, the chief executive of FXCM’s British operations.
The investigation and settlement are unrelated to the broader foreign exchange investigation being led by the United States Justice Department, the Financial Conduct Authority, the Serious Fraud Office and other regulators spanning the globe.
But it does highlight the opaque nature of the huge foreign exchange market, which is bigger than both the stock and bond markets.
According to the authority, FXCM’s British division placed “over the counter” foreign exchange transactions known as rolling spot forex contracts on behalf of retail clients, which were then executed by another part of FXCM in the United States. Between August 2006 and December 2010, FXCM kept trading profits but passed on any losses to clients — a practice known as “asymmetric price slippage.”
The authority is conducting a so-called thematic review of firms’ execution practices, including the way services are described to clients and arrangements for order execution and review. It plans to publish its findings by summer.
First, I want to thank you for sharing this article. No doubt there are others on this forum who share the sentiments of the author. I want to take this opportunity to say that you're right to be upset with us. FXCM should have passed on positive slippage to our clients from the beginning.
While the FCA settlement was announced just this Wednesday, the time period this relates to actually occurred from 2006 to 2010. Our system was updated in 2010 to pass all potential price improvements to clients, and our clients have received the benefit of price improvements since that time. Like the NFA action discussed in 2011, this FCA settlement has to do with positive slippage not being passed on in full when transactions were offset with liquidity providers prior to the 2010 update.
It's important to note that FXCM is currently one of the only firms in the industry to give price improvements on market and limit orders. I have mentioned over the past couple of years how many traders with other brokers currently experience re-quotes if the market moves in their favor, but often don't receive re-quotes for the better price when the market moves against them. Earlier this month in their newsletter, the FCA announced a thematic review of best execution, which we welcome to introduce best execution standards across the industry that benefit traders in the same way our traders have benefited for years.
Taking a look at FXCM price improvements today…
Analyzing a total of 43,128,901 forex and metal trades executed by FXCM during the six month period of August 2013 -January 2014, 6,391,641 or 15% of the trades benefitted from price improvements totaling $15,726,247. Of the total number of trades executed, 4,648,672 trades were limit and limit entry orders. Sixty percent of those limit and limit entry orders were positively slipped providing clients $7,296,520 in price improvements. Of the total trades executed in the six month period of August 2013 - January 2014 clients were executed at their requested price 73% of the time with no slippage. Only 12% of orders were slipped negatively. As mentioned before, FXCM is currently one of the only firms in the industry to give price improvements on market and limit orders.
At FXCM, there are no re-quotes and traders benefit from the positive slippage in full whenever it's available.
If you have questions about our services at FXCM please send me a Private Message.
The settlement, is certainly a step towards addressing the problems here. In my opinion however is not a 'significant step' as Brian Callan (FXCM UK CE) is quoted as saying. The significant step in my view is providing restitution to your clients (which is a step you are noted as having started) and secondly to ensure practical internal steps to ensure higher standards are maintained in future for your clients.
As a potential customer I'm quite alarmed at reading this FCA statement, and it has damaged FXCM's reputation in my view. In my position as a commentator, potential client and as an investor, I would like to pose the following questions that I hope you can answer for me:
How have FXCM addressed the issue of transparency to the regulators since these issues were raised?
What steps have FXCM taken to improve handling of future conflicts of interest in line with their policy to treating customers fairly?
And finally, this issue has been quoted as occurring between 2006 and 2010 and normal conduct has been presented by your statement as occurring in 2013. In my opinion that shows signs of improvement without necessarily defining what has been changed/improved internally. I'm sure your clients would appreciate a statement of plain and simple apology given the moral failing to your customers during the 2006-2010 period (as has been quoted in this thread). Is that something that FXCM will extend?
Thank you for your questions. As you mentioned, under the terms of our settlement with the FCA, FXCM has agreed to pay fines totaling Ł4 million to the FCA and to provide approximately $10 million in restitution to the affected clients. All clients receiving restitution will be notified within 60 days.
In compliance with NFA rules regarding Price [AUTOLINK]Slippage[/AUTOLINK] and Price Re-quoting that were finalized in 2012, FXCM LLC provides daily trade reports to the NFA which monitors and supervises FXCM LLC's activity including information on the price where all client orders are filled and the corresponding price where those orders are offset with our liquidity providers. All of FXCM's global trading entities including FXCM UK execute client rolling spot forex transactions as a riskless principal with FXCM LLC, so the same execution standards are applied for all of our clients worldwide.
FXCM took major steps to address potential conflicts of when we first introduced the No Dealing Desk (NDD) forex execution model in 2006/7, back when the vast majority of brokers in the industry were still using a dealing desk model. We made this change because we believed then and we still believe now that the NDD model is more fair and transparent in that it offers competitive, market driven prices that are sourced from multiple liquidity providers.
In switching to the NDD model, we left behind the fixed-spread dealing desk model which was the norm at the time. This meant that our clients enjoyed benefits that weren't traditionally available to retail forex traders in the past such as the ability to set stops and limits as close as 1 pip from the market price, with no restrictions on setting orders during news events, and no re-quotes. This eliminated a lot of the conflicts of interest that are built into dealing desk model, and helped FXCM grow into an industry leader with over $1 billion in customer funds.
Our 2010 updates to pass on all positive slippage to our clients have served to enhance our trade execution model. As a result, FXCM is currently one of the only firms in the industry to give price improvements on both limit orders AND market orders. Often when a dealing desk broker re-quotes traders, they receive a re-quote when the market moves in their favor, but don't receive a re-quote when the market moves against them. It's possible that this asymmetrical application of re-quotes could cause traders to miss out on potential positive slippage.
At FXCM, there are no re-quotes and traders benefit from the positive slippage in full whenever it's available. In the last six months alone, FXCM clients have received price improvements totaling over $15 million. Last month, the FCA announced that they are conducting a thematic review of best execution, which we welcome to introduce best execution standards across the industry that benefit traders in the same way our traders have benefited for years.
On behalf of everyone at FXCM, I would like to apologize for us not passing on positive slippage in full to our clients prior to 2010. I also echo the sentiments of our FXCM UK CEO Brendan Callan in saying that we hope this FCA settlement is a significant step in our efforts to put this legacy trade execution issue behind us. I appreciate your post and will also relay your feedback to our top management.
Jason Rogers
FXCM Ambassador to Online Communities
If you have questions about our services at FXCM please send me a Private Message.
It is good to see that after the NFA ruling, FXCM over the following years took actions to better its behavior.
However I still do find FXCM ....to say it politely..... ‘ethically challenged’.
After the NFA 2011 ruling FXCM only reimbursed their American clients. To the best of my knowledge FXCM did not refund their international customers with accounts in the US. Of course FXCM did not have to as per strict interpretation that the NFA ruling only applied tot their American customers.
However clearly the international clients in the US would have been affected by earlier FXCM pratices exactly the same as their US clients.
Not extending the compensatory action to non US customers who were not protected by the NFA regulator is IMHO ‘ethically’ highly questionalble.
Furthermore it is quite obvious that the business practices for which FXCM was fined in the US in 2011, had also been practiced at other FXCM branches. FXCM apparently deemed it appropriate to wait 3 year for another ruling (now in the UK) to be ordered to compensate the UK clients. BTW...Is it all UK clients or only clients with a UK residency?
FXCM knew they were wrong and had been caught in 2011.
The ethical correct way would have been to apologize and take the pro-active steps in other geographies and compensate all customers. However FXCM apparently decided to wait until the next jurisdiction caught up and had to be forced to reimburse their clients covered by the next ruling.
I think that FXCM certainly has not taken the moral high ground over the last 4 years. One can only hope that this has changed over the past months.
So hereby a specific question to FXCM: Will now all of your clients be reimbursed for actions/issues related to the NFA and FSA ruling?
By ‘all’ I mean independent of where they live and independent at which FXCM branch they had their account?
BTW a disclaimer:
Even while I question their business ethics, for specific reasons I am looking at maybe using FXCM as broker.
Thanks for this post and drawing it to my attention Peter. I am also considering opening up an account with FXCM, so I'll be interested to see FXCM's response to your question.
I'm sorry but that article went to a lot of effort to demonstrate something that should be blindingly obvious when trading any market that isn't inherently directionally biased like forex.
It's true that there is no central exchange in forex, but not all brokers are out to cheat you. I've been trading forex on Interactive Brokers for some time, I record detailed statistics about slippage across all trades and I've not detected any suspicious activity. I don't use on-exchange stops or targets either, so they couldn't even stop hunt me if they wanted to.
I understand why forex has a bad reputation due to it being simple and easy to open an account with high margin. It's also true you need to conduct due diligence in terms of your broker. That's what I'm doing in this thread.
