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NFA fines FXCM $2MM plus orders refunds to customers
Friday's action from the NFA primarily concerns positive slippage, and I would like to shed more light on how positive slippage with FXCM's NDD forex execution system used to work prior to August 2010 and how it has worked since then.
FXCM’s platforms display the best bid/ask spread streamed from the firm’s liquidity providers plus FXCM’s mark-up. Every FXCM NDD forex trade is automatically offset in a two-step process, designed to ensure that FXCM does not profit from a trader’s losses. In the first step of the execution process, a trader clicks on the price and the order is sent to FXCM. In the second step, FXCM automatically sends the client’s order to one of its liquidity providers to offset the trade.
FXCM’s execution system prior to August 2010 only offered price improvements to clients in the first step of the process. If a better price became available on FXCM’s platform in the fraction of a second after the client submitted the order but before the order was received by FXCM, the client would benefit from the price improvement. However, FXCM’s previous execution system did not provide clients with price improvements in the second step of the execution process, even if FXCM was able to offset the order at a better price, excluding FXCM’s markup. FXCM enhanced the execution system in 2010 so that clients now benefit from price improvements in both steps of a transaction for all order types.
It is important to note: By the end of 2010 FXCM enhanced its execution system to offer price improvements on all trades. You may remember from my forum posts last August that I announced positive slippage for limit and limit entry orders on this thread. All orders now eligible to receive positive slippage, and all price improvements are subject to available liquidity.
The settlement amount and the client price improvement credit will have no negative impact on FXCM's financial balance sheet because several founding partners of FXCM have reimbursed the company for the credit and the fines. As of June 30, 2011, FXCM Inc. had over $200 million in cash and no debt.
FXCM's goal is to have a fair and transparent system, and we are proud to offer an execution system that passes on any price improvements. FXCM has compiled statistics from July 1, 2010 until now to display the percentage of orders positive slipped and negatively slipped, and which orders most frequently experience each. The percentage of orders between positive and negative slippage has been roughly equal.
And we have broken this down even further to display the number of orders on a monthly basis positively and negatively slipped:
Limit and limit entry orders are the most likely to experience positive slippage which is why we highlight using limit and limit entry orders in the execution center on our website. You can find even more data on slippage broken down per order type in the complete report here: Slippage Statistics
Please let me know if you have any additional questions. I will do my best to answer them as thoroughly as possible.
Jason
FXCM
If you have questions about our services at FXCM please send me a Private Message.
The fine is pretty serious and I am sure the NFA spent a long time in producing this fine.
Your reasoning sounds fine as a good 'pitch' on the event, but my question would be, why would they hit you for NOT passing on a transactional benefit to the end player. I don't believe that is within any guidelines that you have to pass any positive slippage when transacting?
I have worked and seen plenty of businesses, and I guess I am a bit hard pressed for a entity that receives a benefit due to timing while holding the asset is now responsible for passing that benefit onto the customer. (unless they are always hit with the negative and never the positive!)
For instance, a mortgage lender (bank in this instance) creates a transaction (mortgage) and then market moves in their favor so they can sell it for more to Fannie Mae, etc. or private entity. Now the government is going to go after them to provide the end customer a capture of the benefit?
hmmmm. Sounds good, but that doesn't sound like the whole story.
It goes to the element of reasonable expectation and consumer protection.
You can't pass on the negative slippage and then keep the positive slippage to yourself. And unless I'm misreading, that's what was ocurring. They'd pocket the difference when orders were purchased at an advantageous price, but pass along the pain when they couldn't get an even or advantageous price.
Or I guess you could, and simply let the chips fall where they may (with respect to negative consumer sentiment).
As a libertarian and a fan of free markets, I usually abhor regulations and oversight. But in this instance, unless the customers were EXPLICITLY aware that they were to receive only negative slippage, then I think the ruling is fair and just.
Now, if FXCM had up front told it's customers "hey, we're going to make money off your great trading entries, and then we're going to stick it to you on your poor entries....just be aware" then I'd say the monkey is on the dumb customer.
I will agree with you on the overall sentiment though. Seems to me that if FXCM was willing to try to get away with this...why wouldn't they try to get away with other ways to screw their customers.....
The response tells me that it's typical corporate business mentality where the fines and penalties don't outweigh the benefits of screwing someone. (this is how an auto manufacturer justifies not conducting a recall, and killing people, because the negative effects of the recall outweigh the certain lawsuits of a non-recall).
I won't mix threads, but watching the "stop hunting" video with respect to Metatrader platform is enough to keep me away. When a broker has the ability to freeze your charts and manipulate your lag/entry/exit efficiencies, then no thanks.
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."