1 more thing: i found the following here:
http://www.sec.gov/Archives/edgar/data/1499912/000114420412015385/v305274_10k.htm#TOC
now, the devil is in the details, as always. when you read the following or the whole SEC filing, a few key points to keep in mind to understand that even though the text refers to the broker as using an agency model (ie not trading against its own customer) it does not mean this is the case all the time:
1- market conditions can change at any time, and usually do, and this means that the exact nature of how trades are executed on behalf of retail traders can also change without any advance notice to retail traders even if the change turns out to be detrimental to them due to inherent conflict of interest
2- relationships between LP (liquidity providers), PBs (prime brokers), and the retail broker are not set in stone, that is to say, they are conditionally subject to change according to market conditions change, which is to say, that there are no legal guarantees between all these parties to provide the same and unchanging level of service for all time, which means: should a LP or PB decide to withdraw or disappear because of adverse market conditions, the broker in order to avoid going under (bankrupt) will have to step in as a market maker against its own customers; since this kind of eventuality could happen any time and fast, the question is: would the customers be notified in time of such a change?
furthermore, and recognizing that under normal market conditions, the hypothetical event described above is rare, the situation for those trading CFDs is radically different than for those trading SPOT FX, ie CFD trading uses a market maker model due to industry limitations as explaining in the filing.
3- and finally and most importantly, the key to all this is in how the customer order flow is being managed, meaning: for those times when retail order flow is handled according to the agency model, who is upstream? in other words, when you look at the corporate structure of the broker and see how many different companies are under the holding company, who is to say that order flow does not get redirected to a LP that is just another company held by the same broker's holding company, thus achieving in technical terms an agency style execution, but with all the conflict of interest inherent in a market maker model since the information flow on both ends is controlled by the same entity ultimately; i am not saying it is the case, only that it is possible; sure, for institutional and professional (non-retail) clients, the broker has plenty of agreements with well known LPs and PBs to provide best pricing to those customers; one needs to keep in mind that institutionals will also feed off the order flow coming from retail brokers as it is easy picking for them; many loopholes are available: the question is: are they being actively exploited or not?
here are the most salient quotes--didn't have time to read/analyze everything, so if you so feel inclined, follow the link above and do your homework:
on page 8, we read: '
Agency execution represented approximately 86% of our retail trading volume in 2011. All Standard and Active Trader account trading is done on an agency model basis. Prior to August 2010, our FX market makers did not accept trade lot sizes smaller than $1,000, the size of some trades executed by our Micro accounts. Although we always offered the best buy and sell quotes from our FX market makers to all accounts regardless of size, we did not immediately offset certain Micro account trades with our FX market makers. For these transactions, we acted as the principal to the trade. Starting in August 2010, all Micro account FX trades, regardless of size, are executed on an agency basis. Similarly, market makers for CFDs are not yet capable of processing orders in sizes required for agency execution. We currently act as the principal on all CFD trades. We are working with our network of market makers with the goal of moving our CFD volume to agency model execution.
For our agency trades, we are not subject to market risk as every trade is hedged immediately at the market price offered to our customer. For the remainder of our volume for which we do not create an offsetting hedge trade automatically, we are exposed to a degree of risk on each trade that the market price of our position will move against us. While our exposure is minimal relative to the size of our balance sheet, we have established policies and procedures to manage our exposure. These policies are reviewed regularly by our executive management team and include quantitative analyses by currency pair, as well as assessment of a range of market inputs, including trade size, dealing rate, customer margin and market liquidity. For example, we have a policy that places a binding limit on the size of our open exposure to protect us against market risk. To date, we have not had a situation where our exposure exceeded our limits. Our risk management procedures require monitoring risk exposure on a continuous basis and determining appropriate hedging strategies in order to maximize revenue and minimize risk.'
on page 29, we read:
'
As a riskless principal between our customers and our FX market makers, we provide our customers with the best bid and offer price for each currency pair from our FX market makers plus a fixed markup. When a customer places a trade and opens a position, we act as the counterparty to that trade and our system immediately opens a trade between us and the FX market maker who provided the price that the customer selected. In the event that an offsetting trade fails, we could incur losses resulting from our trade with our customer.In addition, whether as a result of exceptional volatility or situations affecting the market, the absence of competitive pricing from FX market makers and/or the suspension of liquidity would expose us to the risk of a default by the customer and consequently, trading losses. Although our margining practices are designed to mitigate this risk, we may be unable to close out customer positions at a level where margin posted by the customer is sufficient to cover the customer’s losses. As a result, a customer may suffer losses greater than any margin or other funds or assets posted by that customer or held by us on behalf of that customer. Our policy is generally not to pursue claims for negative equity against our customers.'
on page 30: '
Because our customers’ funds are aggregated with our own, they are not insured by the Federal Deposit Insurance Corporation or any other similar insurer domestically or abroad, except to the extent of the maximum insured amount per deposit, which is unlikely to provide significant benefits to our customers. In any such insolvency, we and our customers would rank as unsecured creditors in respect of claims to funds deposited with any such financial institution. As a result, we may be subject to claims by customers due to the loss of customer funds and our business would be harmed by the loss of our own funds.' <-- which is pretty much the same for all other retail brokers with a few exceptions in the UK, EU, and HK.
on page 33: '[h=3]Reduced spreads in foreign currencies, levels of trading activity, trading through alternative trading systems and price competition from principal model firms could harm our business.[/h]
Computer-generated buy and sell programs and other technological advances and regulatory changes in the FX market may continue to tighten spreads on foreign currency transactions. Tighter spreads and increased competition could make the execution of trades and market-making activities less profitable. In addition, new and enhanced alternative trading systems have emerged as an option for individual and institutional investors to avoid directing their trades through retail FX brokers, which could result in reduced revenue derived from our FX brokerage business. We may also face price competition from our competitors. Many competing firms using a principal model can set their own prices as they generate income from trading with their customers. In contrast, the prices we provide to our customers are set by our FX market makers which vary based on market conditions.' <-- that last part is not the case 100% of the time for retail customers
on page F-16: 'Retail Trading Revenue
Retail trading revenue is earned by adding a markup to the price provided by FX market makers generating trading revenue based on the volume of transactions and is recorded on trade date. The retail trading revenue is earned utilizing an agency model. Under the agency model, when a customer executes a trade on the best price quotation presented by the FX market maker, the Company acts as a credit intermediary, or a riskless principal, simultaneously entering into a trade with the customer and the FX market maker. This agency model has the effect of automatically hedging the Company’s positions and eliminating market risk exposure. Retail trading revenues principally represent the difference of the Company’s realized and unrealized foreign currency trading gains or losses on its positions with customers and the systematic hedge gains and losses from the trades entered into with the FX market makers. Retail trading revenue also includes fees earned from arrangements with other financial institutions to provide platform, back office and other trade execution services. This service is generally referred to as a white label arrangement. The Company earns a percentage of the markup charged by the financial institutions to their customers. Fees from this service are recorded when earned on a trade date basis. Additionally, the Company earns income from trading in CFDs, payments for order flow, rollovers and spread betting. The Company’s policy is to use futures to hedge its CFD positions with other financial institutions based on internal guidelines. Income or loss on CFDs represents the difference between the Company’s realized and unrealized trading gains or losses on its positions and the hedge gains or losses with the other financial institutions. Income or loss on CFDs is recorded on a trade date basis. Income or loss on rollovers is the interest differential customers earn or pay on overnight currency pair positions held and the markup that the Company receives on interest paid or received on currency pair positions held overnight. Income or loss on rollovers is recorded on a trade date basis. Income earned on order flow represents payments received from certain FX market makers in exchange for routing trade orders to these firms for execution. The Company’s order routing software ensures that payments for order flow do not affect the routing of orders in a manner that is detrimental to its retail customers.
[h=3]Institutional Trading Revenue[/h]
Institutional trading revenue relates to commission income generated by facilitating spot foreign currency trades on behalf of institutional customers through the services provided by the FXCM Pro division. FXCM Pro allows these customers to obtain the best execution price from external banks and routes the trades to outside financial institutions for settlement. The counterparties to these trades are external financial institutions that also hold customer account balances. The Company receives commission income for customers’ use of FXCM Pro without taking any market or credit risk. Institutional trading revenue is recorded on a trade date basis.'
PEOPLE BEWARE FXCM IS A FRAUD.
Read the article below and find out for yourself. I still experience all that everyday with FXCM. Keeping all my screenshots and I will urge everyone to do that whoever is with FXCM when you can't close a trade or your MT4 is running slow or no connection at all especially during news times.
The article is right here...
Full details of FXCM's class action suit - Forex MagnatesForex Magnates
For screenshots visit the scam alert folder thread
https://www.forexpeacearmy.com/forex-forum/scam-alerts-folder/36191-fxcm-big-time-scam.html
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