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Finally Casino Brokers are going to be Out!!!

  • #21
  • Edited May 27, 2016 2:44am May 26, 2016 10:19pm | Edited May 27, 2016 2:44am
Quoting trader34
{quote} 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. {quote} In other words... any B- Booking activity should not be done in breach...
First of all, I NEVER said this ESMA proposal is all about b-booking brokers or removing them thereof. I have ALWAYS said that this proposal is about dealing with the issue of conflict of interest and lack of risk neutrality with some of the retail fx firms when handling customer transactions. And it's just that B-Booking brokers's business model do run afoul of the conflict of interest and lack of risk neutrality issues so this proposal will address them as well especially the fact that B-booking brokers use external factors even including the profitability of a client to determine the price and routing of an order and at the same time do not make clear disclosure of it.

Second, regarding Australian brokers and ASIC, I am NOT putting down Australian brokers or ASIC. They both do have merit BUT I am just pointing out the difference the fact that it DOES allow the brokers to use clients' funds in their hedging operations AND towards the margin used in hedging, two things that ARE explicitly forbidden by other regulatory bodies like FCA in UK does make it easier for b-booking brokers to exist and exist with more risk to the clients. And regarding speculations, I did NOT say brokers are allowed to use client funds in their own speculative operations. All I am saying is they ARE allowed to engage in speculative operations in general and NOT disclose about it which is true. I am NOT picking on IC Markets per se but their PDS and the PDS of any b-booking brokers in Australia is the standard that is allowed under ASIC which reflects exactly what is allowed under ASIC.

Third, with regards to regulators, I am aware of their aspirations and limitations and also many times their hidden agenda when it comes to regulating financial markets. And even though retail fx might not have been designated as a "legitimate investment product" to begin with, there is no reason WHY retail fx cannot be developed into one if it can be properly regulated with unfair dealing practices eliminated or mitigated just like with other financial instruments. Maybe this ESMA proposal can be a good start.
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  • #22
  • May 26, 2016 11:12pm May 26, 2016 11:12pm
Quoting leebsurag
{quote} 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
That will be a choice for us traders to make. Are we going to follow those brokers offshore knowing that they fuck with our trading and now they can fuck us even more now that they have moved into countries that have even more joke of regulations? Or are we willing to stay with legitimate brokers who choose to stay and abide by tighter regulations as long as it's reasonable in order to give us traders a fairer trading environment?
Make your losses in demo. Earn your profits live.
  • #23
  • Edited 3:41am May 27, 2016 3:29am | Edited 3:41am
Quoting Forexia
{quote}They both do have merit BUT I am just pointing out the difference the fact that it DOES allow the brokers to use clients' funds in their hedging operations AND towards the margin used in hedging, two things that ARE explicitly forbidden by other regulatory bodies like FCA in UK does make it easier for b-booking brokers to exist and exist with more risk to the clients.
I'd just like to point out that you named Gain Capital in your opening post here as an example of a broker who should be gone... they are FCA regulated.

I did understand what you were saying...but what I'm saying is that regulation is largely token, especially with a multi jurisdiction broker like gain or fxcm.

Also...Please refer to this section of the CASS implemented by the FCA in relation to client funds: https://www.handbook.fca.org.uk/handbook/CASS/7/14.pdf

The important part:

"A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold client money, but only if:
(1) the firm allows that person to hold the client money:
(a) for the purpose of one or more transactions for a client through or with that person;
or (b) to meet a client's obligation to provide collateral for a transaction (for example, an initial margin requirement for a contingent liability investment);
and (2) in the case of a retail client, that client has been notified that the firm may allow the other person to hold its client money"

It seems pretty clear that the FCA actually do allow client money to be used as margin.
I think you should re read the PDS of all the FCA regulated brokers.
Wealth comes from what you keep, not what you earn
  • #24
  • May 27, 2016 3:35am May 27, 2016 3:35am
Quoting trader34
{quote} I'd just like to point out that you named Gain Capital in your opening post here as an example of a broker who should be gone... they are FCA regulated. I did understand what you were saying...but what I'm saying is that regulation is largely token, especially with a multi jurisdiction broker like gain or fxcm.
So? I didn't say just because a firm is regulated that it shouldn't be gone. Any firms that trade against their clients and profit from their demise does needs to be gone as what this ESMA proposal is proposing. Under the current regulations, they might be allowed to operate but according this new proposal, they should not be. I think it's a move towards the right direction, token or no token. And different regulatory bodies are collaborating to make the same thing happen.
https://www.leaprate.com/2016/05/sec...-retail-forex/. I think you are already aware of this.

Quoting trader34
And the US keeps pushing... https://www.leaprate.com/2016/05/sec...-retail-forex/
The only thing that I hope for is they really do get rid of the RIGHT kind of firms, the firms that REALLY deserve to be gone, NOT the ones who have actually been operating more in the interest of the traders.
Make your losses in demo. Earn your profits live.
  • #25
  • May 27, 2016 3:43am May 27, 2016 3:43am
Quoting Forexia
{quote}Any firms that trade against their clients and profit from their demise does needs to be gone as what this ESMA proposal is proposing.
This is B booking and will not stop!!
Wealth comes from what you keep, not what you earn
  • #26
  • Edited 11:37pm May 27, 2016 3:49am | Edited 11:37pm
Quoting trader34
{quote} This is B booking and will not stop!!
Well we will see. One step at a time. Stock, futures, forwards, none of them were done over an exchange when they first started either.
Make your losses in demo. Earn your profits live.
  • #27
  • May 27, 2016 4:02am May 27, 2016 4:02am
Quoting Forexia
{quote} Well we will see. One step at a time. Stock trading wasn't done over an exchange when it first started either.

That's true.
But I think we need to remember why there is a difference...there already is an interbank market, where the institutions use inter dealer brokers to facilitate transactions in cash terms... no leverage. It's not a centralized exchange but it's functional for them.
What we see on our price feed is a reflection of those transactions, and we are allowed to bet on the direction of this real market via the portal of our broker and their LP pools.
We are not participants in the market we are trading, we are external players making almost no impact. Total retail trading volume is still only around 6-8% of total daily transaction value.
Given the size and scale of the transactions in the true interbank market, it's unlikely we will ever see conditions akin to an exchange because it's simply not worth it.

On that note, it's worth pointing out that in reality, the average account size of a retail Fx trader is actually insufficient for any regulated broker to maintain profitability in "true" STP/ECN conditions. Their transaction costs will likely outweigh the vast majority of standard trades form their average clients.
The profit model relies hugely on these little backdoor ways of profiting.

If the ESMA or anyone else decided to genuinely remove conflict of interests, and truly stopped any B booking or true market making by the broker itself, we would see retail Fx brokerages vanish overnight.
Then we'd be back to colossal spreads and prohibitive leverage!
Wealth comes from what you keep, not what you earn
  • #28
  • May 27, 2016 4:39pm May 27, 2016 4:39pm
Quoting trader34
{quote}Also...Please refer to this section of the CASS implemented by the FCA in relation to client funds: https://www.handbook.fca.org.uk/handbook/CASS/7/14.pdf The important part: "A firm may allow another person, such as an exchange, a clearing house or an intermediate broker, to hold client money, but only if: (1) the firm allows that person to hold the client money: (a) for the purpose of one or more transactions for a client through or with that person; or (b) to meet a client's obligation to provide collateral for a transaction...
Yes FOR CLIENT'S OWN margin obligation!!! Of course the broker should be allowed another entity to hold the client's money for margin requirement if the client entered a leveraged and collateralized transaction directly with them. But Australian brokers is using client funds to satisfy margin requirements for THEIR OWN hedging transactions with their own counterparty. Those hedging transactions is NOT the client's transactions; it's the BROKER'S OWN transactions to hedge against the position that they took as the opposite side of the transaction with the trader when they where b-booking. It's clearly firm operation. WHY are the brokers entitled to use the client's funds for their own hedging operation? If you want to hedge to appear to be risk-neutral, you should use your own god damn money and if the counterparty to the hedging operation requires collateral, you should put up your company's money NOT client funds!!

Client funds is client's money and should be completely segregated and separate and completely out of reach by the firm as set out by regulators like FCA and FCA is NOT the only regulator in the world that stipulates this. And from an operation point of view, if the broker hasn't traded against the client in the first place, it wouldn't need to hedge at all. It was because the broker chooses to b-book or just out right trade against the client that it needs to hedge to appear to be risk-neutral well then WHY are they entitled to use client's money to help them trade against their clients? It's ridiculous if you ask me that ASIC actually allows this. If the firm is even allowed to use client's funds to satisfy the firm's own operation, what's there to segregate?
Make your losses in demo. Earn your profits live.
  • #29
  • May 27, 2016 11:48pm May 27, 2016 11:48pm
Quoting trader34
{quote} That's true. But I think we need to remember why there is a difference...there already is an interbank market, where the institutions use inter dealer brokers to facilitate transactions in cash terms... no leverage. It's not a centralized exchange but it's functional for them. What we see on our price feed is a reflection of those transactions, and we are allowed to bet on the direction of this real market via the portal of our broker and their LP pools. We are not participants in the market we are trading, we are external players making...
If ESMA REALLY wants to eliminate trading against clients, they will just allow VERY VERY VERY high leveraged spot fx trading or mini spot fx contracts to be traded on an spot forex central exchange. They created highly leveraged mini contracts for the real products for futures to be traded on a central exchange. WHY can't they create something similar for spot fx to be traded on an worldwide central exchange? Especially if you say the existence of the retail spot fx was for the interbank players to make profit on the tiny movement of the fx movement on the side, well now they will have to do it on an organized central exchange. Nothing is changed just more efficient and and transparent trading environment for us retail traders.
Make your losses in demo. Earn your profits live.
  • #30
  • Last Post: May 30, 2016 12:36am May 30, 2016 12:36am
Quoting Forexia
{quote} Yes FOR CLIENT'S OWN margin obligation!!! Of course the broker should be allowed another entity to hold the client's money for margin requirement if the client entered a leveraged and collateralized transaction directly with them. But Australian brokers is using client funds to satisfy margin requirements for THEIR OWN hedging transactions with their own counterparty. Those hedging transactions is NOT the client's transactions; it's the BROKER'S OWN transactions to hedge against the position that they took as the opposite side of the transaction...
I almost didn't respond because I think you're just getting lost in the details which was a point made regarding regulations in general...but:

When an ASIC registered broker sets up; they run a line of credit arrangement with their LP's. That line of credit is set out so that when the clients place trades, the broker can execute the trade without any last look, and the LP takes collateral under the line of credit. That's why, if you refer to the previous table, ASIC regulated brokers have higher minimum operating capital requirements than, say the FCA...even more than a licensed B Book FCA broker.
B booking is permitted on both models, FCA and ASIC, so I just don't get how you come to the conclusion the FCA are on any higher level in terms of conflicts of interests?

What we're talking about here is the same thing, just differently worded...one says we take client money and use it as collateral, the other says we use our money for client collateral and use theirs to hedge. It's just a different way to come to the same outcome. In both cases, the client has margin removed, and the broker is hedging. So tell me which is more risk neutral? Provided the broker is seen to be hedging the trade, the regulatory body sees them both as risk neutral. B booking just requires an FCA broker to hold more working capital.

I can tell you on very good authority, if you actually looked at the cash flow of any broker, regardless of regulatory jurisdiction, you will see that this model is used as the standard.
Why? Because it's simply not the case that when you place a trade, the broker takes money from you, then sticks it with their LP. Then on resolution of the trade, money is passed back.
Think about how inefficient that is from a logistical standpoint. Client funds are held in trust accounts, they are not held at LP's...so how could the LP take instant transfer from the trust account for the sake of a trade?
Regardless of the wording, I can tell you unequivocally that trades are not settled this way! Trades are executed on the broker's line of credit/working capital, and settled later.
I don't care what anyone says...your trades are cleared with the broker...first and foremost. The broker and LP's settle after the fact.

Quote
WHY can't they create something similar for spot fx to be traded on an worldwide central exchange?


Ok, who's going to host it? Who's going to fund it? What regulatory body will oversee it? And...this leads me to the next point...


Quote
Especially if you say the existence of the retail spot fx was for the interbank players to make profit on the tiny movement of the fx movement on the side, well now they will have to do it on an organized central exchange. Nothing is changed just more efficient and and transparent trading environment for us retail traders.


Who says anyone wants this?! Once again I think you're under a false assumption regarding the place of OTC retail forex trading in the grand scheme.
This is still not considered a legitimate investment vehicle because unlike with things like stocks there is no physical value here...as the title OTC suggests!
When you buy stock in Apple, you have an asset..it's cleared through an exchange guaranteeing you certain rights.
This is NOT the case with Spot Fx! You can't pop into an FXCM office and pick up your Euros! It's all speculation!

I can't emphasize enough that the retail Fx market is off track betting! We are not participants in the real market. If all the retail volume dropped out of the market today, the institutions would not care! We are not critical to their business model with foreign exchange, we provide a side income at best, and not really a very large one!!

There is no central exchange in the true interbank market, they're allowed to seek the best price according to their needs.
In what way would they ever welcome any type of centralization of prices?! Think about the way hedge funds work dealing with foreign equities...they have much better chance at offsetting risk and maximizing gains from such ownership, by having flexibility with prices.
Do you think they would sacrifice that for the sake of retail traders, who in total comprise less than 10% of daily volume (and bear in mind that is leveraged!)?

After all, we're all welcome to trade physical currencies! You can pop into an exchange now and buy your foreign currency, and sell whenever suits you.
Of course we don't want that. We've chosen to trade a decentralized market with high leverage from the outset.
If you think the ESMA or anyone else is ever going to impose a centralized price feed on the most liquid market in the world for the sake of retail traders you will be disappointed!
Wealth comes from what you keep, not what you earn
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