Hi Guys - I'm posting this long, but informative message from Jon Floyd, President of EFX Group.
Hi everyone-
I realize that Justin LeBlang keeps everyone up to speed and answers a lot of questions on many of these boards, but I really wanted to comment personally on certain things based on recent events.
If you have been watching and reading the forums lately, obviously there have been some interesting things that have come out from the NFA relating to this industry. Some of it has been very public and you can follow the filings themselves. Other bits have been more “behind-the-scenes.” I’m not here to mention other platforms in particular. What I wanted to address today was how this impacts EFX and how it relates to how we already conduct ourselves on a daily basis.
About two years ago, we sat down and mapped out the role that we wanted to play in this industry. This included a discussion about our technology, our marketing, and our customer service and regulatory matters.
On the technology side, I don’t think many people can question what we’ve done. I think it’s fairly accepted that our platform is a much desired platform for traders in this industry, and we have a lot of upgrades to come in the next weeks and months, including charting, management tools, and more order types. I do patrol the boards from time to time, and I’m happy to see that some of our biggest projects aren’t even “rumors” out there, meaning that they are being kept in-house and will be nice surprises when released. As with anything software-related, especially with the scope of some of our projects, there are no release dates. The release date is “when it’s done and meets our standards.”
What I really wanted to focus on today, though, was the regulatory side of this business. We decided long ago that the industry was going to be forced to move away from the “deal desk” approach where platforms offered themselves as “commission-free” while making gobs of money controlling their prices, their customer executions, and their spreads. Too many people measure the “cost of trading” in this business as the spread. That simply isn’t the case. Any financial vehicle that is traded has a bid and ask, which represents the best buyer and best seller in the market. If they were at the same price, it would be a trade, and they would execute against each other. Therefore, there is always going to be a “spread” between those prices. That by itself is not necessarily a cost, and I think this is where the confusion comes in.
If the quotes are true based on the number of participants, if your orders are accurately reflected in the market, if no one is allowed to manipulate their prices around their customers exclusively, and if you are given the tools to show your orders to the market properly, then you have a true market. If not, you have a controlled market. When one platform has control over all of these aspects of the market, trading is actually very costly, and it isn’t just measured in the spread. It’s measured in how good your fills are compared to wherever the real market is and whether the platform wants to fill you at all.
Our feeling is that this industry is going to self-regulate and move away from the model of deal desks completely. We took that approach when developing our model. We direct your orders instantly and immediately into the pools of liquidity that are offered in the TDFX ECN. That includes banks, institutions, and other customers that you can buy and sell against, show your orders to, and compete with. For that, we charge a fee, and that fee is disclosed. It makes a lot more sense than using the words “commission-free” to get your account and then manipulating you out of your money. It should also be noted that any platform that calls itself “commission-free,” no matter what their spreads, is trading against your orders, which means that you are not interacting with the true market.
One thing that we hear from people about working with us is that our process of opening an account, starting an IB, or becoming a money manager with us is tougher than with other platforms. There is a reason for this. We do full background checks on our money managers that includes an FBI profile. We actually turn down business that other platforms would take without hesitation. There are issues in this industry that relate to money managers who open up accounts with deal desks, churn the accounts, and get paid hidden kickbacks in commissions from the platforms, with no intent of making money for the client unless it is by accident. It is our opinion that this sort of relationship will ultimately be “regulated-away,” and there were some signs of that in the last few weeks, something that has not been mentioned much on these boards. The NFA is starting to require that firms “supervise responsibly” their money managers and their relationships with those money managers.
Another request we have from people is that we should take Paypal as a form of payment for our accounts like some other platforms do. Here is the situation. We feel that regulation is getting stronger and stronger about what we call a “know your client” policy. This incorporates a lot about our supervisory responsibilities, including something as seemingly unrelated as the Patriot Act. It is our obligation under law to know that funds being deposited into a client account are indeed those client’s funds as much as we can. The issue with Paypal is that someone could open an account here and then use Paypal to send in funds from any source, inside or outside the country, clean funds or not. When funds come in from Paypal, there is nothing that says that those funds belong to the person whose name is on the account at our end. We feel that this violates the intent of the law and that coming regulation will toughen up on this. We have chosen to be ahead of the regulation here as well.
We also think that there will be regulatory steps that lower the max leverage that platforms can allow customers to trade at. Statistically, accounts at 400:1 leverage have virtually no chance of being successful.
Our goal at EFX is to provide the best technology available while making clear what the customer costs of using the software are. We also want to deal with people who are acting appropriately in the business, and at the level of managed funds and “introducing brokers,” we want to work with people that do not have criminal backgrounds. Therefore, some of the process of opening certain types of accounts with us and becoming a partner with us are supervised at a higher level of Compliance than most firms have operated at to date.
One final thought is on the handling of customer funds and net capital issues. I see many people discuss on boards the net capital of firms, and I think that it is a legitimate issue to a point. However, keep in mind that deal desks, by definition, are maintaining a high level of risk by taking the opposite side of customer orders. Since we don’t do that, our primary risk on a day-to-day basis is monitoring our customer accounts to make sure that they don’t get in a position where the accounts could be “underwater” on a spike in the market. We do this with a combination of software and human intervention.
People seem to want some guarantee that nothing in the world could happen that would jeopardize their account outside of their own trading activity. There is no such possible guarantee at any financial institution. Different types of accounts at various banks and brokerage may offer a certain amount of insurance, but if you have more than the covered amount in your account, there is always something “in theory” that could bring down the institution and wipe you out beyond that level. What we can tell you is that we handle things with the following safeguards:
1) Clients funds are segregated from our operating funds.
2) Funds are held here in the US with Wells Fargo Bank.
3) MBTF has a Fraud Bond to protect against action by an employee to act in a fraudulent manner.
4) We have software and dedicated personnel who monitor large positions in customer accounts to control potential problem trades.
Is there a potential world event that could so dramatically impact us that customer positions would place the firm under beyond our net capital and the value of the customer accounts in question? Again, “in theory,” there always is. We feel very strongly that we have protected ourselves and our clients as much as possible against such an event.
Sincerely,
Jon Floyd
President
EFX Group
Hi everyone-
I realize that Justin LeBlang keeps everyone up to speed and answers a lot of questions on many of these boards, but I really wanted to comment personally on certain things based on recent events.
If you have been watching and reading the forums lately, obviously there have been some interesting things that have come out from the NFA relating to this industry. Some of it has been very public and you can follow the filings themselves. Other bits have been more “behind-the-scenes.” I’m not here to mention other platforms in particular. What I wanted to address today was how this impacts EFX and how it relates to how we already conduct ourselves on a daily basis.
About two years ago, we sat down and mapped out the role that we wanted to play in this industry. This included a discussion about our technology, our marketing, and our customer service and regulatory matters.
On the technology side, I don’t think many people can question what we’ve done. I think it’s fairly accepted that our platform is a much desired platform for traders in this industry, and we have a lot of upgrades to come in the next weeks and months, including charting, management tools, and more order types. I do patrol the boards from time to time, and I’m happy to see that some of our biggest projects aren’t even “rumors” out there, meaning that they are being kept in-house and will be nice surprises when released. As with anything software-related, especially with the scope of some of our projects, there are no release dates. The release date is “when it’s done and meets our standards.”
What I really wanted to focus on today, though, was the regulatory side of this business. We decided long ago that the industry was going to be forced to move away from the “deal desk” approach where platforms offered themselves as “commission-free” while making gobs of money controlling their prices, their customer executions, and their spreads. Too many people measure the “cost of trading” in this business as the spread. That simply isn’t the case. Any financial vehicle that is traded has a bid and ask, which represents the best buyer and best seller in the market. If they were at the same price, it would be a trade, and they would execute against each other. Therefore, there is always going to be a “spread” between those prices. That by itself is not necessarily a cost, and I think this is where the confusion comes in.
If the quotes are true based on the number of participants, if your orders are accurately reflected in the market, if no one is allowed to manipulate their prices around their customers exclusively, and if you are given the tools to show your orders to the market properly, then you have a true market. If not, you have a controlled market. When one platform has control over all of these aspects of the market, trading is actually very costly, and it isn’t just measured in the spread. It’s measured in how good your fills are compared to wherever the real market is and whether the platform wants to fill you at all.
Our feeling is that this industry is going to self-regulate and move away from the model of deal desks completely. We took that approach when developing our model. We direct your orders instantly and immediately into the pools of liquidity that are offered in the TDFX ECN. That includes banks, institutions, and other customers that you can buy and sell against, show your orders to, and compete with. For that, we charge a fee, and that fee is disclosed. It makes a lot more sense than using the words “commission-free” to get your account and then manipulating you out of your money. It should also be noted that any platform that calls itself “commission-free,” no matter what their spreads, is trading against your orders, which means that you are not interacting with the true market.
One thing that we hear from people about working with us is that our process of opening an account, starting an IB, or becoming a money manager with us is tougher than with other platforms. There is a reason for this. We do full background checks on our money managers that includes an FBI profile. We actually turn down business that other platforms would take without hesitation. There are issues in this industry that relate to money managers who open up accounts with deal desks, churn the accounts, and get paid hidden kickbacks in commissions from the platforms, with no intent of making money for the client unless it is by accident. It is our opinion that this sort of relationship will ultimately be “regulated-away,” and there were some signs of that in the last few weeks, something that has not been mentioned much on these boards. The NFA is starting to require that firms “supervise responsibly” their money managers and their relationships with those money managers.
Another request we have from people is that we should take Paypal as a form of payment for our accounts like some other platforms do. Here is the situation. We feel that regulation is getting stronger and stronger about what we call a “know your client” policy. This incorporates a lot about our supervisory responsibilities, including something as seemingly unrelated as the Patriot Act. It is our obligation under law to know that funds being deposited into a client account are indeed those client’s funds as much as we can. The issue with Paypal is that someone could open an account here and then use Paypal to send in funds from any source, inside or outside the country, clean funds or not. When funds come in from Paypal, there is nothing that says that those funds belong to the person whose name is on the account at our end. We feel that this violates the intent of the law and that coming regulation will toughen up on this. We have chosen to be ahead of the regulation here as well.
We also think that there will be regulatory steps that lower the max leverage that platforms can allow customers to trade at. Statistically, accounts at 400:1 leverage have virtually no chance of being successful.
Our goal at EFX is to provide the best technology available while making clear what the customer costs of using the software are. We also want to deal with people who are acting appropriately in the business, and at the level of managed funds and “introducing brokers,” we want to work with people that do not have criminal backgrounds. Therefore, some of the process of opening certain types of accounts with us and becoming a partner with us are supervised at a higher level of Compliance than most firms have operated at to date.
One final thought is on the handling of customer funds and net capital issues. I see many people discuss on boards the net capital of firms, and I think that it is a legitimate issue to a point. However, keep in mind that deal desks, by definition, are maintaining a high level of risk by taking the opposite side of customer orders. Since we don’t do that, our primary risk on a day-to-day basis is monitoring our customer accounts to make sure that they don’t get in a position where the accounts could be “underwater” on a spike in the market. We do this with a combination of software and human intervention.
People seem to want some guarantee that nothing in the world could happen that would jeopardize their account outside of their own trading activity. There is no such possible guarantee at any financial institution. Different types of accounts at various banks and brokerage may offer a certain amount of insurance, but if you have more than the covered amount in your account, there is always something “in theory” that could bring down the institution and wipe you out beyond that level. What we can tell you is that we handle things with the following safeguards:
1) Clients funds are segregated from our operating funds.
2) Funds are held here in the US with Wells Fargo Bank.
3) MBTF has a Fraud Bond to protect against action by an employee to act in a fraudulent manner.
4) We have software and dedicated personnel who monitor large positions in customer accounts to control potential problem trades.
Is there a potential world event that could so dramatically impact us that customer positions would place the firm under beyond our net capital and the value of the customer accounts in question? Again, “in theory,” there always is. We feel very strongly that we have protected ourselves and our clients as much as possible against such an event.
Sincerely,
Jon Floyd
President
EFX Group
Makes me glad I'm a live customer with EFX!!
