FXCM Rips of Customer by

Discussion in 'Forex' started by gotta_trade, Sep 14, 2011.

  1. What do you all think of this?

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    The nation’s largest foreign currency broker was hit with a $2-million fine and accused by regulators of Currencies profiting at the expense of its customers.

    The fine levied against the broker, FXCM Inc., comes as foreign currency trading is growing in popularity among home investors but also coming under greater scrutiny for the large losses suffered by investors.

    The $2-million sanction from the National Futures Assn. is the largest single fine ever imposed against a currency broker in the U.S., according to the NFA. The complaint filed by NFA said the agency's investigation "revealed a number of deficiencies," including practices that were "unequal," "inequitable" and "arbitrary."

    FXCM has said it is also the subject of a separate investigation by the Commodity Futures Trading Commission looking at similar issues.

    In addition to the fine, FXCM has agreed to pay back customers for money they lost due to the practices. The company said it had put aside $8 million to do this.

    FXCM did not admit or deny the charges but said it took measures to address the problems when the NFA originally contacted it last August.

    "FXCM continues to strengthen its compliance program and internal supervisory procedures," the company’s CEO, Drew Niv, said in a statement.
    FXCM has been one of the leaders in the growth of the retail foreign currency industry, which has seen revenues explode 374% just since 2007, drawing in 615,000 American traders, according to the Aite Group consulting firm. FXCM said last week that it has 155,000 active accounts.

    Critics of the industry have said that it uses intensive marketing to lure naïve investors who rarely win. Roughly 75% of the customers of U.S. brokers lost money last year, The Times reported in a story earlier this year.

    Critics have also said the brokers can take advantage of unwitting customers because currencies are not traded on a public exchange like other assets traded by home investors. Instead, foreign currency brokers generally take the other side of their customers’ trades, winning when the customer loses and losing when a customer wins.

    Last fall the second largest foreign currency broker, Gain Capital Holdings Inc., was hit by the NFA with a $459,000 fine for practices "that benefited Gain to the detriment of its customers," the complaint said.

    The new complaint against FXCM discusses similar problems, though on wider scale. One unfair practice alleged by the NFA helped FXCM take in $650,000 from its customers during the first eight months of last year.

    Gain and FXCM have jointly sponsored a show about foreign currency trading on CNBC that began airing this spring.

    The Securities and Exchange Commission recently issued an investor alert warning home investors about the risks of foreign currency trading. It did so at the same time that it instituted new rules for the industry that will be in place while regulators consider how to deal with currency trading moving forward.

    A hedge fund investor who researches investment brokers wrote a letter to the SEC two weeks ago urging the agency to ban currency trading for unsophisticated investors. The investor, Justin Hughes of Philadelphia Financial, cheered the fines against FXCM.

    “This is a good first step,” said Hughes. “Hopefully the ongoing SEC review will make further improvements to the industry and highlight that this industry needs further regulation.”

    Last Wednesday FXCM wrote Hughes a cease and desist letter demanding that he stop disparaging the company publicly.
  2. Jason Rogers

    Jason Rogers ET Sponsor

    The action from the NFA that occurred August 12th primarily concerns positive slippage, and I would like to shed more light on how positive slippage with FXCM's NDD forex execution system used to work prior to August 2010 and how it has worked since then.

    FXCM’s platforms display the best bid/ask spread streamed from the firm’s liquidity providers plus FXCM’s mark-up. Every FXCM NDD forex trade is automatically offset in a two-step process, designed to ensure that FXCM does not profit from a trader’s losses. In the first step of the execution process, a trader clicks on the price and the order is sent to FXCM. In the second step, FXCM automatically sends the client’s order to one of its liquidity providers to offset the trade.

    FXCM’s execution system prior to August 2010 only offered price improvements to clients in the first step of the process. If a better price became available on FXCM’s platform in the fraction of a second after the client submitted the order but before the order was received by FXCM, the client would benefit from the price improvement. However, FXCM’s previous execution system did not provide clients with price improvements in the second step of the execution process, even if FXCM was able to offset the order at a better price, excluding FXCM’s markup. FXCM enhanced the execution system in 2010 so that clients now benefit from price improvements in both steps of a transaction for all order types.

    It is important to note: By the end of 2010 FXCM enhanced its execution system to offer price improvements on all trades. You may remember from my forum posts last August that I announced positive slippage for limit and limit entry orders on this thread. All orders now eligible to receive positive slippage, and all price improvements are subject to available liquidity.

    The settlement amount and the client price improvement credit will have no negative impact on FXCM's financial balance sheet because several founding partners of FXCM have reimbursed the company for the credit and the fines. As of June 30, 2011, FXCM Inc. had over $200 million in cash and no debt.

    FXCM's goal is to have a fair and transparent system, and we are proud to offer an execution system that passes on any price improvements. FXCM has compiled statistics from July 1, 2010 until now to display the percentage of orders positive slipped and negatively slipped, and which orders most frequently experience each. The percentage of orders between positive and negative slippage has been roughly equal.


    And we have broken this down even further to display the number of orders on a monthly basis positively and negatively slipped:

    Limit and limit entry orders are the most likely to experience positive slippage which is why we highlight using limit and limit entry orders in the execution center on our website. You can find even more data on slippage broken down per order type in the complete report here: Slippage Statistics

    Please let me know if you have any additional questions. I will do my best to answer them as thoroughly as possible.