what you mean with "bad fit"? I worked for many years at sell-side banks on the trading side and was aware that this practice exists on the equity execution floor. They look at all clients on a monthly basis and "speak" to those clients the bank loses money on. I have from the first time I heard of such behavior already raised my eyebrows (I worked most of the time on the rates side hence this behavior did not affect me). Closing client accounts or otherwise "discouraging" certain counterparties from trading with the bank is in my book irresponsible and should be banned by regulators. When I started out as market maker on the rates derivatives OTC side I knew there were more intelligent clients than others. But I always used that information to my advantage. Sure I would quote wider if a pricing request was in large size or when it did not "suit" my book. But I would never turn away a client because they make money vs the bank. I could simply not afford it. They would have made a call to upper management of the bank and certainly would have had their way. You could argue that they had negotiation power because they may have brought in business in other areas. But even if they did not I would have still quoted to them. But here is the problem: The above all pertains to OTC trading, meaning, I would be on the other side on each and every of their trades. However, an FCM is never on the other side of the trade. They simply provide market access to listed markets. Hence there should be no fear of onboarding smart and profitable clients. It is outright stupid to discourage those who make money from trading with the firm. Either an FCM has their risk procedures in place or not. This particular FCM seems to really have issues with their own internal system else they would not discourage others from trading through them. As long as exchange rules are adhered to there should be nothing an FCM has to fear. I strongly object to the notion that an FCM can close client accounts merely on the basis of not liking the "style" or "approach" of a client. It is like Microsoft or Sony asking all clients on which they lost money on the first batch of video game consoles to return their consoles and stop doing business with them. Either you are in the game and are open to business or not. But for a pure pass-through agent to close accounts because they don't like the style is a ridiculous behavior. An FCM can of course spell out in its contract that they are not in the business of penny stocks or certain other derivatives. Sure, but their internal risk checks should support that model and it should be clearly spelled out to the client. After that I see zero rational to kick clients off the platform who adhere to the rules and regulations. FCMs are anyway a dinosaur and leftover of antiquated American ways of trading listed derivatives. I have no idea why they still exist. Makes zero sense. They exist nowhere else in the world. A client signs up with a broker or prime broker and thats it. Each broker specifies in details which products they offer and which not. Simple as that. In that I would strongly discourage anyone from using an FCM that exhibits the behavior as described by the OP. Let them change their attitude or go out of business. Simple as that. Clients have leverage, too. It is only when gullible and stupid customers eat shit when black sheep can exist in this industry.
You can be a customer that costs the bank money if your customer service load is higher than the commissions you generate, i.e. the company had to spend 3 hours on the phone with you and have a programmer do 10 hours of work to get your trading software working this month, $2,500 in labor costs, but you only generated $200 in commissions. If they see that trend continuing there's no reason for them to keep you as a customer, nothing nefarious there. Giving the customer 48 hours to transfer is pretty crappy, for sure, but the concept of firing unprofitable customers is pretty commonplace and completely legit in any industry except regulated monopolies.
A reputable and good business never ever offloads customers without a decent discussion. I have often sat in meetings with customers where we had an open chat about not seeing enough in terms of trading volume but them being very demanding of IT resources and other value added services. Never ever would I let a customer go without such chat. It's very hard to win new relationships these days and before I let a customer go i want to be absolutely and positively sure that he won't bring future benefits to the table. Nothing this FCM has done makes much sense in my book.
Yea I agree 100% conduit, We really should have direct access to CME . No FCMs, brokers, routing and other nonsense. There is no excuse. As you said, there are other industries where people can just rock up and have direct access so we should have that for our trading. The thing is tho, the FCMs take the hit when there are serious market moves in which traders don't have enough in their accounts to cover the trade. In general tho. I would just like to place my trade out there on the market. Just me and the exchange. That is my dream!
even with direct market access the orders will still need to be risk-checked and they always are in every market globally. So, in essence you never have a pure direct market access. Its called pre-trade risk check and every broker and prime broker via their platform risk checks orders that are routed via the technology providers through them to the exchange. Brokers usually provide their own platform to the client (such as Interactive Brokers does). With a prime broker the client chooses the technology provider and platform that may not be the prime broker's but the PB must have a relationship with the platform provider in order to have the orders routed through their risk engine before they reach any matching engine. But those are details that are unrelated to this discussion. What does matter, however, is that people take a hard look at which broker/FCM they sign up with and Wedbush seems to be an issue and if they were honest they would be coming out and explain the situation and rectify it. At least I would never sign up with such FCM unless I fully understood under which conditions they want or don't want my business.
You really want one company that is your counter party risk ALSO being the entity that backs the customer accounts for losses? Look at how much capital is 1st loss before the CME gets hit. http://www.cftc.gov/marketreports/financialdataforfcms/index.htm What you are suggesting is very dangerous.
I don't think CME should take any hit. It should just be traders vs traders. If som1 doesn't have enough to cover a trade then to bad. Anyway, this has been a interesting thread. Wedbush went kinda crazy in this. Looks like the business world is no longer about money.
how would a liquid market work if every trade required due diligence to confirm the counterparty can afford the trade?
No question they did a horrible job of firing this customer. It's a difficult conversation, just like firing an employee is a difficult conversation. As a result it's often poorly done, as firing an employee is often poorly done. I was addressing the perception that it's impossible/crazy/unheard of to fire a customer, which it's not. Done properly, as you pointed out, it doesn't have to be a bad thing for either party.