The death knell for FXCM might be if the Commodities Futures Trading Commission (CFTC) order inspires other regulators to look in similar places and find similar corruption.
What did the CFTC find?
From the time it was founded until 2007, FXCM provided liquidity to its retail forex customers primarily through an internal dealing desk.
Starting in 2007, FXCM created their “No Dealing Desk” platform for its clients from which they promised that: “retail customers’ profits or losses would be irrelevant to FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely as a credit intermediary. According to FXCM, the risk would be borne by banks and other independent “market makers” that provided liquidity to the platform,” according to CFTC’s order.
What happened next will forever brand FXCM as taking advantage of their clients.
“In 2009, Niv, Ahdout, and others at FXCM formulated a plan to create an algorithmic trading system – an FXCM computer program that could make markets,” the CFTC order stated, “to FXCM’s customers and thereby either replace or compete with the independent market makers on FXCM’s No Dealing Desk platform.
“(Drew) Niv (former CEO of FXCM) and (William) Ahdout (Managing Director of FXCM) hired a high-frequency trader (hereinafter, “HF Trader”) to a Managing Director position at FXCM. HF Trader’s employment agreement, signed by HF Trader and Ahdout, provided that FXCM would pay HF Trader a base salary plus a bonus of 30 percent of trading profits generated by HF Trader’s algorithmic trading system, with FXCM keeping the remaining 70 percent. HF Trader began working for FXCM on October 5, 2009 and ultimately developed the algorithmic trading system for FXCM.”
That HF trader then formed his own company where: FXCM received a portion of profits, he rented space at FXCM for free, and used their no dealing desk to make trades, becoming the overwhelming user of the platform.
The algorithm then competed with customers for trades, thereby violating the terms FXCM had set with their clients: FXMC never disclosed this conflict of interest.
Dealing Vs. No Dealing Desk
The website Investopedia defines the difference this way: “By using a dealing desk, a forex broker who is registered as a Futures Commission Merchant (FCM) and Retail Foreign Exchange Dealer (RFED) can offset trades. If a no dealing desk system is used, positions are automatically offset and then transmitted directly to the interbank.”
Are FCA and ASIC investigating No Dealing Desk?
Because FXCM has thriving businesses in Britain and Australia, the Finance Conduct Authority (FCA) and the Australia Securities and Investment Commission (ASIC) are two regulators to follow.
The Industry Spread could not only find no investigations of No Dealing Desks by FCA and ASIC but any similar regulator globally.
Are FCA and ASIC investigating Forex
Both have had recent investigations into forex dealers.
In Britain, the Finance Conduct Authority (FCA) appears to have an epidemic of fly by night companies offering forex services without a proper license.
“We believe this firm has been providing financial services or products in the UK without our authorization,” is a common warning by the British regulator, with more than a dozen since 2015; the most recent such warning was against Rhodium Forex in December 2016.
An investigation which led to its biggest monetary fine- £284,432,000- against the forex desk of Barclay’s Bank had many of the same buzzwords as the order against FXCM: “Between 1 January 2008 and 15 October 2013, Barclays’ systems and controls over its FX business were inadequate. These failings gave traders in those businesses the opportunity to engage in behaviours that put Barclays’ interests ahead of those of its clients, other market participants and the wider UK financial system. These behaviours included inappropriately sharing information about clients’ activities and attempting to manipulate spot FX currency rates, including in collusion with traders at other firms, in a way that could disadvantage those clients and the market.”
ASIC has done far less investigations into forex dealers, with only a handful in the last three years.
The investigations are similar to what FCA generally investigates, warning consumers about forex dealers working without a license.
“First Forex and related entities Fifx and FiFX Global promote their services at www.fifx.com,” ASIC said in a 2014 investigation, “and falsely claim that their services are ‘under the regulation of Australia (Regulation No. 290600)’.
“ASIC Commissioner Greg Tanzer said neither First Forex, FiFx or FiFX Global are registered Australian companies, nor are their services regulated as a financial services business under Australian law.”
The Investigation into Forex Manipulation
The most significant forex related investigation was the investigation that FCA conducted in conjunction with the Commodities Futures Trading Commission (CFTC) into forex manipulation on the part of numerous banks which found that traders telegraphed trades to each other in secret chatrooms and used front running schemes to manipulate the market.
On November 12, 2014, FCA and CFTC announced fines of over $1 billion each to banks like JP Morgan Chase, RBS, Citibank, and others.
Besides being in forex, the forex manipulation scandal and FXCM’s No Dealing Desk scandal have little in common, except that that sophistication of the scheme and the investigation necessary to uncover are high in both cases.
Investigating Conflicts of Interest
One thing both FCA and ASIC have placed a focus on is avoiding conflicts of interest. Both regulators routinely release memos for guidance on avoiding the exact situation FXCM created.
The FCA released a memo in October 2016, on managing conflicts of interest of its board, a way of policing itself against conflicts of interest.
An example of how seriously the FCA takes conflicts of interests is the case of Angela Burns, who was banned from all investment work, when she failed to inform the mutual societies, Britain’s version of a mutual fund, she worked at that she was trading on their name to drum up consulting business.
RG 181 of the Australian Financial Services (AFS) license, the license to offer investment advice in Australia, is the section on managing conflicts of interest.