FXCM slipage accountability - Good news for us

[WaveRider]

Below is a news release off Elite E Services website. (I'm not affiliated with that site.) I thought this a great victory for traders. How many times has a moderator or senior contributor on this site said that it's amazing how slippage always works in favor of the broker and never the trader. Not any more. FXCM has a decent reputation but the slips in the brokers favor trick is so easy and hard to prove, they couldn't pass it up. I gave a double fist pump when I saw this.

The original NFA link
Case Summary

The EES link
Elite Forex Blog - www.eliteforexblog.com: NFA levies $2,000,000 monetary sanction against FXCM and orders refunds to customers




Friday, August 12, 2011
NFA levies $2,000,000 monetary sanction against FXCM and orders refunds to customers
NFA levies $2,000,000 monetary sanction against FXCM and orders refunds to customers

August 12, Chicago - National Futures Association (NFA) has issued a Decision imposing a $2,000,000 monetary sanction against Forex Capital Markets LLC (FXCM) in settlement of a Complaint issued by NFA's Business Conduct Committee on August 12, 2011. The Complaint cited FXCM for retaining gains derived from asymmetrical positive price slippage; failing to adopt or carry out adequate procedures to ensure the efficient execution of all customer orders; failing to treat all customers equally when giving price adjustments; failing to adequately investigate suspicious activity in several customers' accounts; and - together with its principal Dror Niv - failing to supervise. FXCM is a Futures Commission Merchant, Retail Foreign Exchange Dealer, and Forex Dealer Member located in New York, New York.
In addition to the $2,000,000 monetary sanction, FXCM must credit the accounts of its customers the amount of asymmetrical positive slippage which its customers experienced on their trades from and after June 18, 2008 and provide verification to NFA of these credits. In the future, FXCM is prohibited from engaging in price slippage or margin liquidation practices, as described in the Complaint. FXCM must also enhance existing procedures to ensure efficient execution of customer orders and compliance with NFA's anti-money laundering requirements.

 

[WaveRider]

FXCM slippage accountability - Good news for us

I posted this elsewhere but this is probably the right spot for this.

This ruling by the NFA fined FXCM $2mil for slipping price in their own favor. They also have to credit all the accounts of those defurauded within 30 days. How many times have the moderators and senior contributors at FPA been amazed at how slippage always favors the broker and never the trader? This is a low trick and shame on FXCM and other brokers who do this to people. I'm glad to see this ruling and I hope to see this practice end. Congrats to all the traders who get their money back.


Here is the NFA ruling and link

Case Summary


Narrative Summary
Narrative for 0308179 - FOREX CAPITAL MARKETS LLC
COMPLAINT:

On August 12, 2011, NFA issued a Complaint charging FXCM with retaining gains derived from positive price slippage; failing to adopt or carry out adequate procedures to ensure the efficient execution of all customer orders; failing to treat all customers equally when giving price adjustments; and failing to adequately investigate suspicious activity in all customers' accounts. The Complaint charged FXCM and Niv with failing to supervise.

DECISION:

On August 12, 2011, pursuant to a settlement offer submitted by FXCM and Niv, FXCM was ordered, within 30 days of the effective date of the Decision, to make a good faith effort to credit the accounts of its customers the amount of positive slippage which its customers experienced on their trades from and after June 18, 2008. FXCM shall provide verification to NFA of these credits. In addition, FXCM was ordered to pay $2,000,000 to NFA as a monetary sanction. In the future, FXCM will not engage in price slippage or margin liquidation practices; and, in the future, when FXCM voluntarily gives a customer a price adjustment, it shall also determine whether or not it is appropriate to make the same price adjustment for other similarly situated customers.

Finally, within 30 days of the effective date of the Decision, FXCM was ordered to adopt and implement adequate procedures - or enhance existing procedures - to ensure the efficient execution of customer orders and to ensure compliance with NFA's AML requirements.

 

[Jason Rogers]

I posted this elsewhere but this is probably the right spot for this....

Hi WaveRider,

Today'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.

Please let me know if you have any additional questions. I will do my best to answer them as thoroughly as possible.

Jason
FXCM

 

[WaveRider]

Ok

I understand. It is a lousy system that only allows slippage that hurts the customer. I'm glad it's being rectified.

Are any of the reimbursed slips ones that occurred after August 2010?

 

[Jason Rogers]

Are any of the reimbursed slips ones that occurred after August 2010?

Hi Wave Rider,

FXCM US originally enhanced its trading execution policy in August 2010 to help ensure that clients benefit from positive slippage on all market, limit and limit entry orders. The policy was further enhanced in December 2010 to address all order types, including stop and margin call orders, through FXCM’s No Dealing Desk (“NDD") forex execution model. So it is possible that positive slippage credits could occur for trades up until December 2010. The largest portion of the credits relate to trades placed before 2009.

I would also like to share data FXCM has compiled from July 1, 2010 until now displaying 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


-Jason

 

[Pharaoh]

Just how much positive slippage was kept by FXCM and is now being refunded to traders? I know regulators can be harsh, but a 2 million dollar fine makes it sound like the NFA was very unhappy with FXCM's handling of the situation.

Thanks for sharing the slippage statistics. One small issue - it shows only the percentage of orders that got positive/negative slippage. I don't see a breakdown of the average amount of slippage for positive and negative. If the average slippage in one direction was greater, then the % of orders positive and negative isn't enough to show that FXCM is being fair.

 

[Jason Rogers]

If the average slippage in one direction was greater, then the % of orders positive and negative isn't enough to show that FXCM is being fair.

Hi Pharaoh,

This question assumes that FXCM can control the amount of slippage one way or the other. FXCM uses NDD forex execution and all orders are filled at the best price available based on liquidity. FXCM does not determine the amount of slippage that occurs. Volatility will play a role in slippage and therefore placing trades around these types of market conditions can play a big factor into the amount of slippage that can occur since liquidity is lower; however, FXCM cannot control when the market is volatile, when liquidity is lower, or what types of orders traders choose to use during these market conditions. That's why we promote the use of limit and limit entry orders for trading since
positive slippage is most likely to occur on these orders. But how much slippage occurs is all dependent on liquidity from the liquidity providers when the order is executed.

Just how much positive slippage was kept by FXCM and is now being refunded to traders? I know regulators can be harsh, but a 2 million dollar fine makes it sound like the NFA was very unhappy with FXCM's handling of the situation.

Here's exact amount from our press release:

Under the terms of the settlement, FXCM US has agreed, without admitting or denying any of the allegations, to pay a fine of $2 million to the NFA and to provide restitution, which the company estimates to be $8 million, to the affected clients. FXCM - Investor Relations - Press Release​

FXCM US worked to properly identify all the affected accounts and reviewed years of trade data in conjunction with the NFA. The focus was on trade data that uncovered instances in which FXCM US offset trades in the second step of the offsetting process at prices better than what was passed on to clients. The analysis excluded FXCM’s mark-up.

-Jason

 

[WaveRider]

The suit said you were retaining gains from positive slippage. As a NDD, you can't make profit from the traders losses but you were pocketing the positive slippage difference. Were you were passsing on negative slippage to the traders that came in the second step of the trading transaction or did the system not allow 2nd step negative slippage?

NFA: "On August 12, 2011, NFA issued a Complaint charging FXCM with retaining gains derived from positive price slippage; "


You: "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."


You: "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."

 

[Jason Rogers]

The suit said you were retaining gains from positive slippage. As a NDD, you can't make profit from the traders losses but you were pocketing the positive slippage difference. Were you were passsing on negative slippage to the traders that came in the second step of the trading transaction or did the system not allow 2nd step negative slippage?

Hi WaveRider,

The complaint pertains to positive slippage. Slippage experienced on the negative side was correct since these transactions went through at the best price available dependent on liquidity.

As mentioned earlier, FXCM enhanced the execution system in 2010 so that clients now benefit from price improvements in the second step of the transaction for all order types.

-Jason

 

[WaveRider]

interesting

Thank you for taking time to answer my questions.

I'm a little slow but I think I get it now. It seems like the old system you had let 2nd stage negative slippage through to hurt clients position but 2nd stage positive slippage wouldn't help the client but was pocketed by the NDD. I find that really fascinating. With all due respect, that doesn't sound unintentional. It sounds like a free money machine for FXCM and an intentional part of the business plan. By your own estimates, it took in an additional $8mill over 2 years. I can understand why the NFA was so hard on you. It sounds like they felt it was intentional too.

Again, I'm glad the situation is being rectified. To "enhance" your system means you had to remove the free money portion of the execution process that you intentionally put there in the first place. I hope this encourages other NFA regulated NDD's get honest or get nailed for it too. Shame on you guys for having done this to clients.