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NFA case against Forex.com/Gain Capital 6 replies

NFA Takes Action Against Gain Capital 27 replies

What happens to brokers not meeting the NFA capital requirement? 4 replies

Is losing a requirement to be successful? 72 replies

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Attachments: Proposed NFA Capital Requirement
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Proposed NFA Capital Requirement

Quoting fxchant
I'm always amazed that the public is crazy enough to take on 400:1.
What is scarier are the brokers willing on take on the risk.
You, FS, and EFX-guy (particularly as he is involved in a brokerage) and anyone else feel free to correct me if I'm wrong, I haven't spent enough time looking at the actual background of how brokers work.

But in general, I look at this as a broker will close all trades on a client if they cross their leverage limits, and as long as there is money in the account when the trades are closed, it's the client that loses, not the broker (which is as it should be). But in a really fast moving market, it's possible that the broker winds up on-the-hook once a trade goes so sour that that the clients funds hit 0; in markets similar to the Dow in 87 (where no one will take on the contrary side) it seems fully possible that brokers may have to accept significant losses.

That's where the capitalization is important - it gives the broker time to clear bad trades. But without this, if enough trades go south the broker collapses, in which case while segregated client funds are ok, pooled funds are not.

Of course, from the broker's POV, it doesn't really matter, if they have set up their company correctly. If so the pricipals can extract hefty paychecks while things are safe & running smoothly, and walk away if/when things collapse, with little liability. One of those moral hazard things...Perhaps if the appropriate authorites set in a rule where personal liability on the part of the principals scaled directly with the leverage (say the maximum allowed leverage divided by 50 to get the number of years gain regulators could claw back in the case of a collapse) it might be a little safer
Quoting HalifaxCB
What is scarier are the brokers willing on take on the risk.
You, FS, and EFX-guy (particularly as he is involved in a brokerage) and anyone else feel free to correct me if I'm wrong, I haven't spent enough time looking at the actual background of how brokers work.

But in general, I look at this as a broker will close all trades on a client if they cross their leverage limits, and as long as there is money in the account when the trades are closed, it's the client that loses, not the broker (which is as it should be). But in a really fast moving market, it's possible that the broker winds up on-the-hook once a trade goes so sour that that the clients funds hit 0; in markets similar to the Dow in 87 (where no one will take on the contrary side) it seems fully possible that brokers may have to accept significant losses.

That's where the capitalization is important - it gives the broker time to clear bad trades. But without this, if enough trades go south the broker collapses, in which case while segregated client funds are ok, pooled funds are not.

Of course, from the broker's POV, it doesn't really matter, if they have set up their company correctly. If so the pricipals can extract hefty paychecks while things are safe & running smoothly, and walk away if/when things collapse, with little liability. One of those moral hazard things...Perhaps if the appropriate authorites set in a rule where personal liability on the part of the principals scaled directly with the leverage (say the maximum allowed leverage divided by 50 to get the number of years gain regulators could claw back in the case of a collapse) it might be a little safer
Nice post. Believe it or not, I don't view the 400 to 1 leverage thing as nearly as much of an issue to the platforms as some might. Most platforms have incredibly good electronic systems that close out customer positions before the accounts go under zero. Now, of course, in a massive news spike, all bets are off, and THAT is the real issue with most of these firms that could take ANY of them (big or small, whatever leverage they allow) under in a heartbeat. However, there are enough spikes in the market that if this were going to occur, it would happen more often.

I do know this for a FACT. The larger firms, meaning the ones that hold a larger capitalization, most of which they "earned" against their clients over the last several years, have a higher level of risk if they do have more customers trading. You can't get around the point that more customers and more trading = more that can go wrong, and when you realize that all of these non-ECN firms HAVE TO, BY DEFINITION, make their money against the trading of at least some of their customers (after all, they don't charge a fee like an ECN does), then they are at risk, and probably proportionate for the most part to the net capital. So I 100% do not agree with the idea that a higher net capital requirement solves really much of the issue. It might knock out some little guys that didn't belong, but as the MG interview went, it really just raises the bar for what someone needs to get into the market, whether they want to do good or do bad.

Instead, I view the 400 to 1 leverage issue as a MAJOR one to the retail customer. Almost none of them have the trading knowledge, beyond basic luck, to NOT wipe themselves out if they apply that leverage to their whole account value. I have heard stats that say that over 95% of 400 to 1 accounts go to zero inside of a month. It's the people that think they can turn $300 into a million, and most of them have no clue. It's a lure for those people, and I've basically had the President of a platform state that to me. Just like "$500 free when you open an account." There are people that actually fall for that. So I view 400 to 1 as a major negative for the retail trader, moreso than the firms.

What I view as a problem for the firms varies depending on the type of firm. As I have stated many times in the past, I have accounts with Oanda and EFX. I'm not particularly concerned about either company going under, anymore than you would be about any major financial institution. However, if you asked me which was "more likely" to have an issue, I would say Oanda. I doubt they will ever have a problem, but I know that they take on more risk. We don't know exactly what MBT/EFX is really worth if you account for all of their divisions, but even if you assume the Oanda is still worth more (since their net cap WOULD show their total value), it still could disappear very quickly if their traders made a mistake in judgement and got upside down. That wouldn't happen at EFX, since they don't have traders.

So, in my opinion, and I'm sure Savior will disagree with 80% of this when he posts, correcting this industry in the long run so that consumers are not hit with scam operations and can open an account without fear of a "bucket shop" that disappears overnight is going to come down to a variety of regulation, centralization, and policing. It might help if the NFA had a clue, which I'm not always sure if they do.
FXChant Singing the World of Forex
Anyone following the Sentinel case? Its a moneymarket fund where many FCMs sweep their free clientfunds into, to get a bit more return. They filed for chapter 11 on friday. Anyways, today there was a court ruling about the issue, and thats what judge Trizna had to say about it afterwards (Source: Bloomberg):

----
Trizna claimed that a lawyer for the Commodities Futures Trading Commission told him that, without the disbursements, some futures commission merchants -- businesses that handle buy and sell orders for commodities future contracts -- could fail.

The judge was faced with the CFTC telling him that it was their understanding that if these distributions weren't made, that as many as 11 futures commissions merchants, which clear trades for their customers, would fail imminently, Trizna claimed.
----

So much for brokers, that only live on commissions and interest, have little risk. 11 FCMs at the mercy of a single judge (according to CFTC), i find that pretty astonishing. You see, FXsaviour, Net cap requirements had nada to do with all of this, maybe you should look for another method to judge brokers?

P.S.: EFX was indirectly affected, because MBT/MBTF clears through Pension GHCO, who are down a few millions because of this. Apparently Pension is too big to be in serious danger tho. A few futures traders i know, who have accounts at MB, were in quite a panic, when on FR the Pension reporting pages went down. But it looks like all is good now.
Quoting shrike

P.S.: EFX was indirectly affected, because MBT/MBTF clears through Pension GHCO, who are down a few millions because of this. Apparently Pension is too big to be in serious danger tho. A few futures traders i know, who have accounts at MB, were in quite a panic, when on FR the Pension reporting pages went down. But it looks like all is good now.
Actually, just to be clear, we were never effected at all. Certain aspects of MB's business are cleared through Penson, which is obviously a huge name in the business and well-funded. Any issue might have potentially affected futures clients. However, Penson has zero to do with clearing our forex trades or holding our forex customer funds, so we were never worried or concerned.
Well, i signed my account application with MBTF and not efx. So if MBTF would be theoretically unable to return futures client funds, that would leave other customers completly unaffected?
Quoting shrike
Well, i signed my account application with MBTF and not efx. So if MBTF would be theoretically unable to return futures client funds, that would leave other customers completly unaffected?
Not sure if this was directed at me, but EFX and MBTF clients are all treated equal from a cash perspective.
Quoting shrike
Anyone following the Sentinel case? Its a moneymarket fund where many FCMs sweep their free clientfunds into, to get a bit more return. They filed for chapter 11 on friday
The Sentinel Case is in a word: Outrageous. I have been sorting through the Sentinel swamp the last few days and will be commenting on it shortly since there are so many ironies involving the case. Perhaps the most delicious being that futures commission merchants are required to segregate customer funds by regulators only to find out that Sentinel had been co-mingling customer funds with company funds for a long time. Meanwhile, Forex Broker Dealers who have been asking for help from regulators to mandate segregation of customer funds in the FX industry have been getting the cold shoulder and instead are required to disclose up front to customers their funds are not safe. Such is the wacky world of Forex regulation.

If anything I think what this case is showing is that the NFA is right now becoming so distracted dealing with Forex Broker Dealers like CFG that they are not paying as much attention to some of the big futures firms they have traditionally focused their time and energy on. The bottom line is the NFA's resources are stretched too thin. Already the press is hammering the NFA for not nipping this in the bud:
http://financial.seekingalpha.com/article/45105

Hopefully the NFA/CFTC will be able to sort through the wreckage and keep customer losses to a minimum. You can be sure this case now has their full attention judging by the fact there have been no press releases at all on their website since the Sentinel story broke. In any case this meltdown will be with us for a while so I suspect there will be many other lessons to be learned from it. But while the Sentinel meltdown raises disturbing new questions about how business is conducted in the futures industry it in no way should distract the forex industry away from the main problem it is confronted with today. And that problem remains in my opinion (and judging from the historical record), the problem of low capitalization.
Quoting forexsavior
The Sentinel Case is in a word: Outrageous. I have been sorting through the Sentinel swamp the last few days and will be commenting on it shortly since there are so many ironies involving the case. Perhaps the most delicious being that futures commission merchants are required to segregate customer funds by regulators only to find out that Sentinel had been co-mingling customer funds with company funds for a long time. Meanwhile, Forex Broker Dealers who have been asking for help from regulators to mandate segregation of customer funds in the FX industry have been getting the cold shoulder and instead are required to disclose up front to customers their funds are not safe. Such is the wacky world of Forex regulation.

If anything I think what this case is showing is that the NFA is right now becoming so distracted dealing with Forex Broker Dealers like CFG that they are not paying as much attention to some of the big futures firms they have traditionally focused their time and energy on. The bottom line is the NFA's resources are stretched too thin. Already the press is hammering the NFA for not nipping this in the bud:
http://financial.seekingalpha.com/article/45105

Hopefully the NFA/CFTC will be able to sort through the wreckage and keep customer losses to a minimum. You can be sure this case now has their full attention judging by the fact there have been no press releases at all on their website since the Sentinel story broke. In any case this meltdown will be with us for a while so I suspect there will be many other lessons to be learned from it. But while the Sentinel meltdown raises disturbing new questions about how business is conducted in the futures industry it in no way should distract the forex industry away from the main problem it is confronted with today. And that problem remains in my opinion (and judging from the historical record), the problem of low capitalization.
Amazing. Even in the face of a case that proves EXACTLY what we've been saying, that capitalization is only a small piece of the equation, you go right back to it. Come on, Man (or Woman...don't want to be sexist). What are you going to say if this Sentinel situation takes down one of the top five capitalized forex brokers? Don't you get that ANY of them could fall at ANY time if they manage their funds and risk in a poor manner? IT ISN'T JUST ABOUT NET CAPITAL. Many of these firms have operated just fine for the last several years with $1 million or less showing. Why does that change everything? The answer lies in regulating out the bucket shops and the high-risk factors and the higher margin.

I'll say it once again. Raising the net capital might wash out a couple of sketchy brokers. Was that the only way to do it? No. As the MG interview said, it raises the bar to get into the industry. That doesn't keep the problems out.
FXChant Singing the World of Forex
Quoting shrike
Well, i signed my account application with MBTF and not efx. So if MBTF would be theoretically unable to return futures client funds, that would leave other customers completly unaffected?
Sorry, I just re-read your question. I don’t think I read it right the first time. EFX was never under any concern from this matter because none of the funds clear through Penson. The stock side of MB and the futures side of MBTF clears through Penson. However, forex customer funds are held and cleared elsewhere. It was never a concern for a forex customer, in this particular case, in any manner. Penson could go under by millions and millions of dollars, but EFX forex customers, in this case, the way that this played out, would never have been at risk at all.
Quoting fxchant
I'll say it once again. Raising the net capital might wash out a couple of sketchy brokers. Was that the only way to do it? No. .
Sentinel is not a Forex Broker Dealer. They are a Futures Commission Merchant. If you could point to a rash of Sentinel like implosions among the big registered Forex Broker Dealers than I would certainly agree with you. But the historic record in the Forex Industry has been that these implosions have plagued brokers below $5 million. That is why the NFA is moving to raise cap requirements strictly for FDM's which are given a wholly different classification than Futures Commission Merchants.

Of course a large forex broker dealer could implode. Any company can implode. But the NFA has stated that in the forex industry it is the smaller firms that are at greater risk to implode, which is why they are seeking to raise the requirement.
Quoting forexsavior
If you could point to a rash of Sentinel like implosions among the big registered Forex Broker Dealers than I would certainly agree with you.
In this particular banking environment, I almost think the answer to that might be "Wait a month..."
FXChant Singing the World of Forex
Quoting fxchant
In this particular banking environment, I almost think the answer to that might be "Wait a month..."
If Bernanke keeps fiddling while Rome burns I'll be more worried about Citigroup than some Forex Dealer...
  • Post #313
  • Quote
  • Edited Aug 23, 2007 1:41am Aug 22, 2007 6:50pm | Edited Aug 23, 2007 1:41am
Quoting forexsavior
If Bernanke keeps fiddling while Rome burns I'll be more worried about Citigroup than some Forex Dealer...
This scares me a little bit to admit that we thought the same...but I basically said the exact same thing today about Citigroup.
FXChant Singing the World of Forex
For all the problems that exist in the U.S. domestic retail forex market they still pale in comparison to the problems that exist in the unregulated retail forex market. And it is here on the periphery of the respectable forex world that a whole host of firms operate outside any kind of regulatory scrutiny providing their customers with scant funds protection or any means to conduct any form of due diligence. In short, these firms are the damned of retail fx and woe be to the trader who opens an account with one of them since they are merely playing a game of Russian Roulette.

In the last few years firms have set up shop in unregulated locales all over the world from the Cayman Islands to Cyprus. From the British Virgin Islands to the Philippines to Belize. Yet no part of the world has attracted more unregulated forex broker dealers than has Switzerland.

Ah, Switzerland. Land of fine watches, exhilarating ski slopes and tasty chocolate. Renowned for its banking prowess and for being a pillar of international finance. On the face of it seems like Switzerland would be an ideal place to open a forex business since the Swiss of all people should be very knowledgeable about this most complicated of financial instruments. But that facade is easily torn away once you do some further digging and discover that the vast majority of Swiss forex broker dealers are not in the least bit regulated and for the most part are completely ignored by the Swiss Regulatory Establishment.

"But I go to the websites of these Swiss brokers and see all sorts of regulatory Acronyms referenced. What is that all about?"

Good question Smithers. You see, while Switzerland is well known for being a haven for high finance they are also well known for being a haven for drug kingpins, terrorists, Ex-Nazis on the run, deposed third world dictators, former Refco/Enron Executives and other money launderers and money swindlers as well. So to counter the problem the Swiss government requires any firm that holds customer assets belong to a self-regulatory body which requires member firms to obey certain anti-money laundering guidelines. There are a whole host of these organizations from OAR-G to Polyreg and ARIF. Membership in these associations does not mean the association is checking in on how the firm runs it forex business. Nor can one go to any of these organizations to ask for background information on their member firm. And if the firm goes bankrupt these associations could care less about helping you get your money back. In short, these anti-money laundering organizations are useless to the average forex trader. Listing membership in such an organization is in my opinion patently offensive since membership in that organization is of no benefit to traders.

There is one government body however that does regulate forex trading in Switzerland: The Swiss Federal Banking Commission. True, they regulate banks but they also offer licenses to Securities Dealers as well. Synthesis Bank has just such a license. You can also verify that license by going to the SFBC's website directly: http://www.ebk.ch/e/index.html
Yet the majority of Swiss forex brokers are not licensed by the SFBC because as the SFBC states on its own website (http://www.ebk.ch/e/faq/faq1.html) "Foreign Exchange dealers, provided that they exclusively deal in foreign exchange, are not subject to supervision by the SFBC." That lack of "supervision" is on full display right now in the case of Tradex Swiss AG (http://www.tradexfx.com/).

Tradex Swiss AG
Earlier this year the NFA barred Tradex from soliciting clients in the United States due to the fact they were not properly registered (http://www.nfa.futures.org/BasicNet/...d=0350721&rn=Y). As a side note the head of the Boston office of Tradex, Craig Karlis, is apparently trying to move on to bigger and better things. Several times this year Karlis tried to register a new firm by the name FX Nation Inc only to withdraw the FCM application with the NFA (http://www.nfa.futures.org/BasicNet/...tityid=0375959.) The latest withdrawal being as recently as July 30, 2007. Considering people can't even get money out of the last firm he was involved with you would think Karlis would know when to call it quits. Talk about churn em and burn em.

Anyway getting back to the main actor, Tradex Swiss AG. It appears that Swiss authorities shut them down. Although since Tradex has been very tight lipped it is hard to tell what is going on: http://www.hra.sz.ch/cgi-bin/fnrGet....0&shab=0000000
But the bulletin boards have been flooded with angry customers (http://www.forexfactory.com/showthread.php?t=10894) who can't get their money out. And Tradex is not exactly going out of their way to provide their own traders with any information. One click on their website and all you get is this very disturbing message:

Dear Tradex Swiss AG Clients
Due to technical reasons, we wish to inform you that for the time being, we cannot accept any new account opening requests, or receive payments on existing accounts. For the same reason we also request all clients to close any open positions on their accounts, and to refrain from trading until further notice. We apologise for any inconvenience caused, and we expect to restore all operations in the near future.

Some inconvenience! Such is the peril of investing with an unregulated Swiss Broker. When things go wrong you are completely in the dark with no one to turn to. One day you are trading with such a firm, the next you go to the website and it is kaput while your funds are lost in purgatory.

The lesson? Avoid unregulated Swiss Brokers. The following Swiss brokers, like Tradex Swiss Ag, are not regulated:

WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk.
Mr. Nettles and Mr. Karlis, those crooks run one FX scam after another. Mr. Nettles appears to run Finex now (their next swiss "regulated" MT4 fx-scheme, apparently).
Quoting forexsavior
The lesson? Avoid unregulated Swiss Brokers. The following Swiss brokers, like Tradex Swiss Ag, are not regulated:

WestCapFX
ACM
MIG
DukasCopy
GFX Group (Forex.CH)
Crown Forex

Forget the fancy sales pitches. Forget the Acronyms of the anti-money laundering organizations they belong to. Forget the spreads or the rolls or the foreign currency bank accounts they have. Ask them a simple question: Are you regulated and if you are please provide me with your registration number and a link where I can go and independently verify that you are indeed regulated. Absent that stay far, far away from Swiss Forex Broker Dealers. It just isn't worth the risk.
Interesting, that you would recommend not to trade at these firms and highlite the fact that they are not regulated, since half of them currently advertise here http://www.forexfactory.com/brokers.php, actually they account for a quarter of the brokerage firms that currently advertise as brokerages here at forexfactory !

Would be interested to see whether you could start and maintain a thread over here, clearly saying to stay away from these companies, and trade with regulated companies instead.
Not that I'm saying that these companies should be avoided. Just because a company is regulated doesnt make it safe, Refco being a particular case in point. In anycase, I think its important to recognise that the forex market is only more recently recieving more regulatory intervention.

This article by Richard Olsen and Michael Stumm of Oanda, makes an interesting read :

Retail FX: the triumph of hope over experience

http://www.euromoneyfix.com/Article....icleID=1399582

I particularly like this quote on the result of the regulatory environment.


quote: If anything, regulatory action is working to limit inflows of new ideas and processes and the always necessary increased efficiencies.

"(Banks sometimes give incorrect prices or “spikes”; at (xyz) we filter close to a hundred spikes a week, and while we don’t claim to be perfect, we’ll pit our information against anybody’s.)"

Riiiight. It's the banks running everyone's stops.

"The good news, and the bad news, is that individual currency traders are a demanding lot. This diverse clientele has irrationally high expectations of technology;"

Riiiiight. I used to work in tech at a very large U.S. trading firm (stocks) and a single trade error on a sinlge stock could (and did) cost them millions. It was a very rare circumstance. Those millions were never passed along to the customer since it would be illegal to do so. Customer order were always honored, even if the company had tech issues. That's very irrational of us all to want such treatment that already exists for traders in other markets.

"Equally good and bad is the fact that the global community of retail FX customers is wired in a tight and communicative group: they talk to each other – obsessively..."

Stupid customers are the best ones! (???) Obsessively they say, in the hopes we'll stop talking lol.

"...it’s frustrating to be praised one minute for your “transparency” and user-friendliness and then damned because your platform hiccupped just as a hundred customers wanted to sell."

Funny how it happens when 100 customers want to sell, and not when 0 customers are doing nothing. How about regulatory requirements to force record keeping for all incoming customer trades, and for all trades routed to banks? I'd like to see that from any broker, regardless of their "business model". Alright, one more request... how about in addition to being able to produce all trades records, how about a record of the broker-side bank quotes along with the broker-adjusted spread values, all notated with time of day? I bet with those three pieces of data we could find out if it is indeed the banks who are running stops as the artice suggested, or not.

More regulation please!!
How about you dont trade an OTC market if you arent comftable with it?

This isnt about stop-running, its about erroneous pricing. Just as multibank-platforms bust trades on such prices, Oanda undoes those too (the profitable ones AND the loosers). Even CME's FX Marketplace has a trade-busting policy. Its just common practice in FX. The question is just how a broker deals with this. In Oandas case, i had in total 4 trades (1 stop, 1 target and 2 limits, in 3.5 years) executed on an obvious spike, and each of them has been resolved to my satisfaction.

Even in exchange-traded markets like futures bad ticks are a problem, but its more a data-integrity issue there than an execution problem.
I'm doing fine trading, so you don't have to worry about my comfort. ;-)

As for the market being OTC, that doesn't have to change at all if recordkeeping requirements are kicked up a notch. I don't think of myself as an expert in all the interworkings of a brokerage of any type, but don't you think that if records were kept like what I was saying, that would in itself shake out *some* of the bad apples? If those kinds of records were kept (accurately, and subject to audit as other areas of finance / banking are), if customers were cheated, there's be a record to show it and the regulatory bodies could issue fines... just like in other types of finance / banking. Don't you think that would be good? What's recordkeeping cost these days with current tech, near to nothing? I think it would be really good. Every bit as good (if not better) as raising the net cap requirement, which I also think is good. At least it's something.
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