It's official, brokers trade against you

If you have any doubts, this is the a section from the new Client Agreement at CMS called "NFA FOREX DEALER MEMBER DISCLOSURE":



THE FOREIGN CURRENCY TRADING YOU ARE ENTERING INTO IS NOT CONDUCTED ON AN EXCHANGE. CMS IS ACTING AS A COUNTERPARTY IN THESE TRANSACTIONS AND, THEREFORE, ACTS AS THE BUYER WHEN YOU SELL AND THE SELLER WHEN YOU BUY. AS A RESULT, CMS' INTERESTS MAY BE IN CONFLICT WITH YOURS. UNLESS OTHERWISE SPECIFIED IN YOUR WRITTEN AGREEMENT OR OTHER WRITTEN DOCUMENTS, CMS ESTABLISHES THE PRICES AT WHICH IT OFFERS TO TRADE WITH YOU. THE PRICES CMS OFFERS MIGHT NOT BE THE BEST PRICES AVAILABLE AND CMS MAY OFFER DIFFERENT PRICES TO DIFFERENT CUSTOMERS.
IF CMS ELECTS NOT TO COVER ITS OWN TRADING EXPOSURE, THEN YOU SHOULD BE AWARE THAT CMS MAY MAKE MORE MONEY IF THE MARKET GOES AGAINST YOU. ADDITIONALLY, SINCE CMS ACTS AS THE BUYER OR SELLER IN THE TRANSACTION, YOU SHOULD CAREFULLY EVALUATE ANY TRADE RECOMMENDATIONS YOU RECEIVE FROM CMS OR ANY OF ITS SOLICITORS.

At least they acknowledge it.

true

Changes made in an upcoming farm bill have a section on fraud that makes it illegal to claim that orders are "to be executed" when they are, in fact, not. Also makes it illegal to be a counterparty if you claim that orders are executed.

We will see more and more of these disclaimers on small forex brokers. For obvious reasons micro and mini lot brokers have to make a market locally before passing on the net (if they do) to the open market. This means, at some stage, they are a counterparty.

None of this is really news. Of course prices aren't always the best, spreads differ from broker to broker. If your broker is a counterparty you'd be smart to have more than one, so at the very least you can compare prices, spreads and executions.

hey rabid

i'm aware of the bill you speak of, but am not sure what the impact will be on forex brokers.

do you think we will see a lot of them close soon?

the "trade against clients" coupled with the NFA capital requirements have me wondering what the future of forex will be.

Well the language is still in committee, so we don't know how it'll end up. But the way it's specified now it's more concerned with transparency and accountability than blunt regulation. The fraud language seems aimed at a "you can't do X if you claim to do Y" interpretation at the moment. Obviously until it gets to court tho we can't cite precedent, things could end up very differently.

The capital requirements actually phase in over, I believe, 90 days. So it's not just "ok, if you don't have the money you're out of business." A lot of companies will be able to find the funds to continue going, I'd imagine. I'm mixed on the capital requirements, obviously a higher level of requirements doesn't mean that qualifying brokers are any more legitimate. But it does balance out trade risk, if a company is trading against it's clients it better have large cash reserves to cover your gains (it's losses).

Do I think we'll see some brokers go poof? Sure. Some won't be able to meet the fund requirements, some won't be able to qualify for NFA membership (which is also a new requirement), some won't feel like disclosing the conflicts of interest, some will probably die. But I'm sure some will continue too. It doesn't seem like they're trying to regulate forex to death or kill the industry, just that they want to add some accountability, transparency and of course... a revenue stream, to the mix. There will be fewer fly-by-night forex brokers.

The biggest impact, IMO, will be on small funds or individual advisors. Under the new rules it is illegal to accept funds or trade accounts on behalf of clients if you're not registered with the NFA (aka a "qualified futures association"). NFA registration for a CTA or a commodity pool operator is not that expensive, $900 per year (??) I think, but there are some other qualifying factors. Before this you could operate a fund, go bankrupt, do something illegal, and still go manage forex funds. Now you'll have to pass a background check and go thru an oversight process. Overall good, but there will be a rough patch during transition.

so what? even u trade at ecn, bank/lp is your counterparty and trade againts u.

of course bank is trading against you, like others traders. but in ecn model broker only link offers, isn't trading and this is a huge difference.

Saying a trader is trading against you is a misnomer. They are holding the other side of the trade. They are only trading against you only if they manipulate the trade. There is a big difference both in terms and results. As long as a company is following price action live they are only holding the other side of the trade. You can check your company out by subscribing to several companies and see if they manipulate the price action or not. I dropped one company because their spikes were always bigger than other companies. You will notice some companies price action moves quicker than others but I noticed most of them stay within a pip or two of each other. If you trade mini or micro lots, of course the trade stays in house, no bank is going to waste its time with trades like those. Even if you trade ECNs there is no guareentee the bank doesnt control price at times for its benefit. The only way I have seen around this problem is to trade long term whereby they cant over manipulate your trade , or not use stop losses and discipline yourself to exit bad trades.

I got Thre same disclosure statement from Gains Capital today as well

Nothing new but apparently there being forced to disclose the info

Yes, IBFX released theirs as well......word for word basically.

What is the difference between a broker and a dealer? Thanks, Ken

One just deals while the other makes you broker?

No update from InteractiveBrokers, HotSpot or MBT.

I did not get an email from FXSol, FXCM, or FXDD unless they sent it several weeks ago and I did not pay attention. Did anyone else get an email from one of these three companies?

i don't think it apply to ecn type brokers only broker's who can change the game on there client and who can hold trade's in house if they wanted to.

No email from FXSol either..... Does that mean they don't trade against you? I assume they do... anyone in their right might trading minis and micros would think they keep it inhouse, I guess they just haven't sent it out yet. Someone said they had to say it by June 1st?

It was sarcasm.

got you

Is it still possible to just hand over power of attorney to any other individual for an account, be it a normal bank account or a brokerage account, and have someone trade for you/have full access to an account /funds without any of this bigwig stuff?

I'm not sure how far all these regulations apply outside of the USA, either, anyone have any idea how this stuff works with mixed nationalities etc?

Gets off topic, doesn't it...but imho far more interesting than the same old "brokers trade against you" stuff..they can do what they want as long as their quote is close enough to the other 4 feeds I am watching..

Hi Sl, to answer your question, and this only applies to US regulations, yes with a power of attorney you can trade for a client(whoever that client may be) but, the client would have to pay you out according to the agreement you would have with the client. Also, the client would only be able to pay you if you had made profits or a small 1-2% management fee per month. In order to collect the rebate from the broker you would have to be registered(series3). It is common practice to collect anywhere between .2 to a full 2 pips on a round term transaction bases from the broker if you are registered and disclosed that fact to the client. Hope this answers the question.