Finally Casino Brokers are going to be Out!!!

Take a look at this article: http://financefeeds.com/no-trading-c...-investigates/

Europe is FINALLY going to crack down on market-making brokers with no hedging AND B-booking brokers that actively advertises STP, DMA order execution when in fact still make market on those trades.

Hopefully, under ESMA, brokers like Gain Capital are going to be GONE!!! And retail forex is getting closer to operate like central market place, still controlled by the ultimate market makers, the liquidity providers but with more peer-to-peer trading.

That is good news, I guess Fxcm UK have to close down shop then

That is definitely good news - hands down!

This is indeed very positive news! It would be good to know which brokers have been shortlisted for this investigation so one can either avoid them, or move if you are already with one.

No doubt there will be away around this ie operate a subsidiary company that take the other side of your trades; which some do now if I am not mistaken.Edit: I see that they already mention that's what some brokers do now. Don't see how it will change.Also what about all the spread betting firms in the uk would they have to comply.

Yes it is true. Some brokers already do it. They channel the trades to be cleared by the subsidiaries many times located in countries that has more lax regulations. Right now this is just a proposal. There is going to be a LOT of wrinkles to be ironed out when it's time to actually implement it, that's for sure.

It won't impact anything.

When the US introduced their FIFO and leverage restrictions all we saw is a flight to offshore brokers.
All that would happen if this article comes to pass is the usual 100% deposit bonus, 1000:1 leverage brokers will step up their marketing campaigns, and will likely have a decent boost in clients.

And also, as the article clearly states:

“I disagree that ESMA are putting a blanket ban on B booking. Instead, there is a growing effort to make sure that B booking is done within the providers’ financial means and that firms seeking to engage in risk management do so in a transparent manner that does not cause conflict with clients or regulators.”

The devil will always be in the detail, and there will always be scope for legitimate B-booking even according to the toughest regulatory enforcement.

Besides, all this assumes that there is no chance to profit from a broker who B-books or similar. This is simply false. A trader can be profitable at any brokerage.
Their model isn't dependent on them making all their traders lose trades...retail traders are great at losing all by themselves...they only need to let the majority do what they do, and they will always make money, even if they have clients doing really well.

The only regulation that would make retail traders truly safe would be something that will never happen...a centralized price feed whereby the broker is obligated to execute trades according to that feed...
And also cross jurisdiction authority to pursue dodgy brokerages who outright steal money from clients by way of refusing withdrawals etc.

Wow a clearly written and ACCURATE post.

Hats off to you, as this is hard to find online these days.

Overall, the ESMA proposal is more about resolving the issue of conflict of interest when brokers trade against their clients than anything else. It's this issue of brokers not remaining risk-neutral when dealing with clients that they have this incentive to gain from clients' losses that this proposal has problems with. I don't think this proposal is really scrutinizing on a specific business model per se. So whether you are a pure market maker or b-booking, as long as you engage in trading against clients without hedging to remain risk-neutral, this ESMA proposal once implemented will be hopefully prosecuting more severely. It's just normally it's the market-making and b-booking model that has the highest tendency to profit from clients' losses so that's why these two business models seem to be scrutinized more under this proposal but as long as they can show mechanisms to maintain risk-neutrality, I think this proposal will leave them alone. That's why I say only Casino brokers will be out but the other kind, they might still remain.

The most ideal of course is central exchange with the highest level of price and transaction transparency but given the fierce desire for anonymity, I am not confident that this will be implemented soon although it is entirely doable but whether they will want to do it is another story especially when there is so much more money to be made by the LP's, the highest level of market makers and the brokers when everything is under the table.

Thank you for showing this!

It actually helps sum up why the debate about broker selection is mostly absurd, because the information is out there if you search, and I'm not talking just about FPA reviews.

Whenever searching brokers you come across the standard buzzwords: MM, ECN, STP, Regulation, domicile ...and a few more.
It's easy to get caught up in the detail, but ignoring that for a moment and looking at the chart supplied, let's look from a common sense perspective.

Choosing a broker isn't like choosing a gym membership...these guys are holding your money...and, they are also a factor in your ability to trade successfully.

So, who do you trust?
Someone who spends the absolute bare minimum on establishing their brokerage, in the cheapest domicile available, with the least regulation, least capital requirements?
Or would you prefer to know your money is safe with a company who have invested heavily in the establishment of their brokerage, who operate in their own native country, and abide by the highest regulatory standards applicable?

This answer may seem painfully obvious but day in, day out people are lining up to "take advantage" of the wonderful conditions and bonuses offered by these offshore guys, then come complaining : "I lost my money...or the broker reversed my profits, and because they are in "nation x" I have no way to fight them because I have no jurisdiction and their regulatory body doesn't help!"

Well, what do you expect?!
I feel lucky to be based in Aus where the brokers have among the toughest conditions and requirements for opening a brokerage. Why the hell would I go to a broker in Belize?!
Common sense people!

Of course US citizens face tougher battles...the oppressive legislation there means US clients will invariably look offshore to be able to trade with better conditions and normal leverage.
Still, prudence in selection shouldn't go out the window! How many n/a's do you need to see in the requirements columns before something seems unwise?

I have to point out that NZ has had it's fair share of criminal brokers establish themselves there due to the factors listed in that chart! If you lurk around the forums for a bit, you'll see a good couple of brokerages who establish themselves cheaply in NZ, then allow their regulatory authority to expire and continue to solicit (and rob) clients while the FMA are powerless to assist. All they can do is post that broker on their periodically updated warning list.

I'm not claiming Mr. Murcko @fxpig is one such person, and I thank him for his comment regarding my previous post, but what I'm trying to point out is that due diligence is solely your responsibility. Do you really believe that a broker in NZ is more trustworthy than one in the BVI? On what basis? Have a look at the chart @RoelsMajor posted... NZ has in many cases less requirements than many of the domiciles people run a mile from by name alone! That should make you think.

The paradox here is that a trader can have a wonderful seamless experience with a seemingly unregulated and dodgy broker, just as much as someone can have a terrible experience with a seemingly reputable broker.
I could go on for ages about broker selection, ECN vs MM and so on, but it's not the topic here... the topic is so called casino brokers, and the effect any EU legislation will have on them..I put it to anyone reading that this legislation will have no effect on the operation of such brokers. As I said, the devil really is in the detail!

Which leads me to this:

@Forexia


No, and that's why this move will have no net effect on the operation of brokers, because it's down the the regulatory body to determine the threshold for risk neutrality and fair practice.
Look at FXCM and the times they've been successfully prosecuted for unfair execution! And they were in the tightest regulatory body around.
"But, yes they were prosecuted, so the system works right?"
No...they were caught...on a massive scale!!! That's the only reason! How many times daily does it happen??

One simple fact exists...we are not interbank market participants... none of us! If anyone thinks that a list of prestigious LP's means we're dealing with the big boys, I'd suggest further reading!
Our trades are first and foremost executed and accepted by the broker...who then will either hedge or not with their LP, depending on their preference. All of them will B book to some degree.
Cue the cries of "no, x or y doesn't b book" but I'm sorry...you are simply wrong, and actually don't understand the multiple mechanisms available to effectively B book a client.

But...I want to reiterate... just because you work with a MM, or B Booker...it has very little bearing on your ability to succeed!! So what if the broker is losing a bit on your trades? Believe me they are making pretty good money on an overwhelming majority of their clients!

The basic broker model is actually far closer to a casino than a financial institution, and we all need to make peace with that!
Provided the sizes are manageable, any broker can tolerate a few good winners, while still making good money from their losers.
The only time you can come unstuck..and the time you want to have domestic jurisdiction to fight your broker is if for some reason you win very big very fast, and the winning becomes toxic flow to the broker(BTW, toxic to a broker could be any trader winning or losing large amounts! it's the volume that matters to them, not the result to you).



I actually wan't to draw attention to another post by Kevin@Fxpig.. this was in answer to a question regarding if brokers will allow you to make too much profit. And Kudos here for an honest response! http://www.forexfactory.com/showthre...17#post8936517


This is a crucial thing to remember, and should re emphasize why the broker trader relationship is so important if you want longevity in this game!

Choose any broker you like...trade wise, small risk, decent capital protection...and be consistent and you will largely be under the radar and exist nicely and profitably!

But...if you keep coming on with your $10k account and dropping 50 lot orders 2 minutes before the NFP release...you will become toxic!!
If you win...good luck withdrawing or surviving without the broker reversing the trade based on LP complaints.
If you lose...you void your account as compensation for your recklessness!

All brokers are essentially accepting off track bets on the true interbank market.
They will use their LP relationships to hedge said bets...or not.
Casino brokers are not going away, because essentially the entire business model is akin to a casino...it's based on the ratio of losers to winners being large!

No regulation will stop that. Even the CFTC with all their ridiculous limitations have only managed to slow the bleed of retail accounts.... they haven't changed the ratios.

Very interesting post T34.....thanks for sharing mate :-)

Thank you Mr C.
Mainly for reading through despite my long winded tendencies!

Very informative post.
Thanks.

And the US keeps pushing...

https://www.leaprate.com/2016/05/sec...-retail-forex/

hopefully they can remove the mafia and organized criminals who launder money too

Well risk-neutrality should be something relatively simple to define. You sold your client directly $100K USD worth of FX contracts, then your risk of losing on that $100K USD worth of contract is directly dependent on your client's position going into profit or not and how much so you have a direct incentive to make sure your client's position does not go into profit so you are NOT risk neutral; you have a clear conflict of interest. You owe a fiduciary duty to your client are supposed to act in the best interest of your client; you shouldn't be wanting to make money on your client's demise. And this is what this ESMA proposal is trying to ban. On the other hand, once you sold your client $100K USD of FX contracts, you turn around and buy $100K USD worth of FX contracts to be in the same position as your clients then whatever you lose with the first transaction that you engaged in with your clients, you will gain back exactly with your hedging transaction thus your risk is neutralized. Whether your client wins or loses from his/her FX transaction, you won't gain or lose anything and thus there is no or at least lot less conflict of interest. Your interest is lot more aligned with your client. And this is something that I believe would be allowed under the ESMA proposal and that makes sense.

Client profitability is completely irrelevant here. If you are savvy and lucky enough, you can make money even with the most unscrupulous pure market-making casino brokers so does that make it OK for those brokers to exist? To make money at the expense of somebody who gave you money? The answer is obviously no and regulations proposed by ESMA just confirms that. It shouldn't and is NOT going to use client profitability as a criteria to address this conflict of interest issue that's inherent in this direct-dealing market-making model with no hedging.

And with regards to B-booking, this is also an issue of client faireness and transparency. Is it fair that a client who has larger trading size from A-book gets his orders executed with less conflict of interest, and another client who is trading the same instrument but with smaller trade size gets his order filled at worse price more delays and with the possibility of the broker trading against him and thus with the potential of profiting from his losses? Sure the broker can spin it and say it's due to different cost of doing business: the A-book clients have higher trading volume thus generating higher commissions and the smaller trading volume clients would need to be charged with higher commission in terms of spread and etc. to compensate. Ok then, you need to PUBLISH this!! At what level of trading volume, size or whatever the client gets to be on the A-book and below what threshold, the client is going to be on the B-book and what is the spread differential and execution differential between the A-book and the B-books. And you need to specify WHAT is exactly the order routing route of client orders for A-books and B-books? You can't just keep the clients in the dark and you just take advantage of the lack of information and profit. Clients deserve to be treated fairly and equally regardless of their trading size or volume and if that can't be accommodated then the clients have the right to know how much they are being penalized. This is the standard with trading in all other financial instruments, it's about time that the same is implemented with Retail FX if you want to regard Retail FX as a legitimate financial product and not just online gambling. And if any brokers have any problems with it, they can just get out!!

And lastly don't be fooled by Australian FX broker scene. Yes Australia does have one of the strongest financial regulations in the world but its regulation with regards to transaction and price transparency, disclosure and even usage of client funds is EXTREMELY lax. There IS a reason WHY it's littered with B-booking brokers.

1. Just with regards client funds, even though the client funds are supposed to be segregated from firm operating funds but in reality, the brokers in Australia are allowed to use client funds in their hedging operations when they are b-booking, lodge client funds towards margins towards it hedging counterparties, and since client funds are pooled together in ONE account instead of being segregated from each other the accounts that are making profit can even be used to cover those that are in shortfall, all of those practices explicitly forbidden by other regulatory bodies like the FCA but they are all allowed and tolerated by ASIC. If you don't believe me, just pick up any standard PDS (Product Disclosure Statements) that all of those B-Booking brokers in Australia (IC Markets, Pepperstone, Global Prime, anyone) publish on their websites and go to the section "Client Funds" and you will see all of those stated there.

2. Disclosure: Australian brokers are allowed to speculate and engage whatever high-risk investments that they wish on their own and if they go belly up and lose all of the money then the whole firm goes down. And those speculative activities do NOT ever need to be disclosed to the clients or anywhere and nor are they required to publish any financial statements under ASIC.

3. Transaction and price transparency: Under ASIC, if you are B-booking, all you need to do is disclose that you DO trade against your clients and that's it. You don't have to disclose the order routes, what were the best available prices that order could be filled...

So all in all, yes ASIC does does have regulations and enforcement actions against brokers that are downright fraud. And even for those all ASIC does is revoke its registration and put up its name on the website to warn potential investors and that's it. For the existing brokers, as long as you are registered, meet the capital requirement, pass its annual audit and you are all good. However you do business, as long as you plaster a standard PDS on your website and you can basically do whatever you want.

Moral of the story: NOT all financial regulations are created equal. Not putting ASIC down or Australian brokers down but just outlining the difference and showing exactly how it is. Behind the word "Regulations", there is a LOT of things that are just left unregulated, that if oversaw would've actually protected the traders further.

So it's a good thing that ESMA is taking things further and for the first time doing something that will truly steer the retail FX in the right direction for the investors.

As the article said, it's not an attempt to remove B-booking. By definition: any time the broker is fully exposed to your trade, there is a conflict of interest.
Once again, this will come down to the details, the keywords used in definitions and the general process of legislation which will be a consultative process involving both sides of the debate.

When you dissect even the vague comments in this article, you can already see where the grey areas will be fought.

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there is a growing effort to make sure that B booking is done within the providers financial means and that firms seeking to engage in risk management do so in a transparent manner that does not cause conflict with clients or regulators

In other words... any B- Booking activity should not be done in breach of minimum capital requirements for such activity so as to hopefully reduce the number of brokers becoming insolvent due to toxic order flow in their execution model.

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Market making firms who deal on account should make all efforts to act as a systematic internalizers by matching clients positions with each other

This is something that goes on in the bigger MM's and is very effective for the most part...matching incoming order flow as best as possible using the clients themselves. Basically it is free hedging. However, there's room for brokerages to exploit this by using the very unregulated LP's to create a dummy order flow to match the client orders, and that would be difficult to detect.

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whilst the b-book model is likely to continue to be the execution model of choice across many retail brokerages, it is clear that the regulators are accepting to this of course it has certain risk management and execution speed benefits, however maintaining a facility to provide true market pricing is becoming an increasing focus of the regulatory authorities, as is ensuring that brokers do not view client deposits as their profit

This would suggest a further scrutiny of the execution which is great...but the conflict of interest always remains,

With regards to ASIC, absolutely right...they do allow B booking etc. But I think you are under an illusion that other authorities are doing much better.

The truth of all regulation in Fx is exactly as you said: it is a loose term and all are certainly not equal.
The reality of regulation, even in the highest tiers, is that the governing body will enforce client fund segregation. Beyond that it's only after huge protests and mass action that anything is done about execution and unfair pricing behavior, as with FXCM.

As far as your assertions regarding Aus brokers: In IC's PDS it clearly states client funds are segregated from operating capital. http://www.icmarkets.com/wp-content/uploads/IC-Markets-CFD-PDS.pdf

Specifically section 4.21:keeping all surplus funds paid by Clients of IC Markets which are not paid to the Hedge Counterparty, in the Client Trust Account.These funds can only be used for hedging or managing the hedging of its hedge contracts for those Clients or for paying fees and charges due to IC Markets (and not for general working capital).​

In that it also clearly states that IC don't engage in speculative actions using client funds.
I'm not sure where you get the idea they or others are are using the pooled (but segregated from operating capital) client funds for anything other than hedging the current open positions for those clients.

You seem to think they are speculating and allowed not to disclose it? Well, anything fraudulent in a PDS is heavily punished so I'm not sure how you think this is possible when it clearly states they are not speculating with client funds.
If they choose to speculate with operating capital that's a different matter, but provided the client funds are segregated as enforced by ASIC then the client funds cannot be used to bail out any bad trades they engage in separately. If they become insolvent as a result of bad speculation, client funds would not be claimed to cover their bad trades.
Anyway, the PDS is there...maybe I missed something.

And no...ASIC doesn't prohibit B Booking...but it does enforce disclosure. IC make no such disclosure.
But...this alludes to an earlier point of mine...there are very easy ways to create dummy order flow in order to effectively B book a client, so regardless of your regulatory body, FCA, ASIC, NFA..there is always potential for a broker to B book, and you would never know.

Personally I believe there's too much focus on this B book issue, and generally through lack of understanding of the broker business model.

You're mistaken in believing that trading volume/account size is the sole determinant factor for A or B book.
I have it on very good authority that the selection is done algorithmically, and is based on your win % and risk model.

Look at it this way...
2 clients.
One has $1k, the other $50k.
Under your assumption the lower balance guy is B booked based on value right?
Well...
What if the $50k guy consistently trades small lot sizes and consistently loses, while the $1k guy essentially goes "all in" every trade and has wild fluctuations of wins and losses.

In the above scenario, who is a safer option for b booking? A guy who loses 70% of his 0.1 lot trades and has a bleeding account? Or the guy that trades close to margin call each time and could quadruple his account in a week?
We have to remember that the broker profit model is based on little and often... b booking can add to their profits for sure, but they don't just base it on your size. They need to know you won't suddenly drop 100 lots on just before news!
So in this way there will never be a transparency... never a statement saying "we take the other side on 25% of client trades."
This process is dynamic, and will change depending on the behavior of the client, not their account size. And they will be able to legitimately argue this point with any regulator.

Also you are mistaken when you assume B booked clients will receive poorer prices and execution. If anything, they can receive better pricing, because the broker will likely just algorithmically accept your market orders using the same program used to execute demo account orders, knowing that the odds are in their favour to profit form your loss. It makes no sense for them to delay your fill, moreover it's in their interests not to draw attention to any fill delays so as to keep you as a client!

I don't want to sound like I'm defending unfair practice here. I'm not.
Yes I would like all these deposit bonus ultra leverage brokers to be put out of business...mainly because they sully the name of Fx in general.
But I am aware of my place in the food chain here, and I am acutely aware that this is an unregulated market!


You said this:

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Clients deserve to be treated fairly and equally regardless of their trading size or volume and if that can't be accommodated then the clients have the right to know how much they are being penalized. This is the standard with trading in all other financial instruments, it's about time that the same is implemented with Retail FX if you want to regard Retail FX as a legitimate financial product and not just online gambling.

Who said anyone wants this? Retail Fx was never created as a legitimate investment product.
It was created for the benefit of brokers and LP's to profit from the smaller moves in currency prices outside of the true interbank market! That is the reality.
If we want to trade on a centralized exchange, there are plenty out there. Fx is not one.

I'm not sure of the term there, but here a normal person with some kind of equity/decent income can take out a geared investment loan... a loan which is to be used for the sole purpose of investing in some kind of managed fund or investment instrument.
But... go and try to take out a loan for Fx trading. You'll be laughed at.

As it stands.... retail FX trading is still more akin to online gambling than it is a true investment vehicle. Why? For the very reasons we all participate!
*Low minimum initial investment
*Unregulated
*High leverage
*Low transaction costs
etc

There are plenty of more "legitimate" ways you could effectively trade currencies...but most retail Fx traders simply don't have the available capital to engage in such action for any discernible gain!
And unfortunately, the stats on profitable traders year to year emphasizes why Fx is still considered gambling.

I'm not having a dig at you per se here, but I think you are under an illusion as to what regulatory bodies can or will do to make this more "transparent."
These are mostly just token gestures, and more often than not are counterproductive.
The CFTC legislation in the states proved that. With all their restrictions...all they have done is push clients into less regulated, less secure environments where losing money can come from trading or fraud almost impossible to challenge due to jurisdiction.

I think they'll find how to get around that restrictions or simply will jump from FCA or CySec to deep offshore..But lets see