The FCA’s spreadbetting shake-up is long overdue

Initially this morning, I saw Plus500 (LON:PLUS) collapse. The accompanying RNS covered a disposal of 6m+ shares by JP Morgan. This struck me as strange given that the underlying trade seemed unaffected. However, a few minutes later it transpired that IG (LON:IGG) itself along with CMC Markets (LON:CMCX) had collapsed by roughly the same percentage. This is all because the FCA is challenging how these companies offer their products/services to the public. This is overdue.

On several occasions I have been margined out by a sudden adverse move in my position at City Index this last year. I have found it very galling since, time and again, I have had the loot to hand but no notice. I have also noticed that the price which moved against me sprung back very smartly. Inevitably, conspiracies sprung to mind. However, I have simply concluded that City Index have merely been implementing their own rules to which I had agreed.


Certainly, City Index typically have lower margin requirements than, say, ETX. And there are simple-minded folk such as I who regard that as a come on invitation. What has not crossed my mind is that City Index may well induce position-taking through low margin requirements and therefore find themselves much more likely to be able to close out these positions at a profit to themselves. This is because these close outs are so fast in practice that the punter has no chance to see the prices at which the business is done.

However, last week, I was taken through a close out by Spreadex of a long GBP/USD position held by a chum. This chum is much more knowledgeable than I and much better at digging into the heart of a transaction. Here is his exchange with Spreadex:

“Matt,

On October 7th, there was an explosive move in currency markets, and my £6 per point position on December GBP/USD was closed out at a price to me of 1.2284.  The position was closed out because there were insufficient funds on my account to cover the sharp move that occurred at 00.07 on that morning.  The closing bet was booked on to my account 108 minutes later at 01.55.  These are the facts.

My position exhausted the margin I had lodged with you once the market price of December GBP/USD was below 1.2354.  This has been confirmed to me a member of your staff (Ian Horsley), and is a calculation which I can reconcile, so is accepted.  There is a trade printed in the market at 00.07.15 at 1.2359.  The next market print of a trade occurred ten seconds later at a price of 1.2301 (there were several prints at this price), followed less than a second later by a print of a trade at 1.2285.  It appears that this second price was used as a reference price for my closing bargain. 

The trader made a mistake in using this second price, subsequently acknowledged by another trader.  But I shall give him his due: he did not charge me the full spread which he could have done, and booked my closing trade just one tic lower than the price printed in the underlying marketplace.  I can only assume that he felt some sympathy for his clients (I am sure that I was not alone) as they were paying enough of a penalty for market turbulence without then burdening them with any additional costs.  He deserves credit for the sympathetic service he provided for his customers.

A critical factor is whether a market hedge was executed in the market to hedge your company against the risk your company incurred from the execution of my stop loss.  If you did execute an order in the market, then the ‘slippage’ of 70 tics you are charging me is a reflection of the costs that your company has incurred in dealing with my order, and has some legitimacy (although the question of whether you did as well as you could have done would still be open).   However, if you did not execute an order in the market, then your company is using the opportunity created by the turbulent conditions of the market at that time to charge me arbitrarily for costs which your company did not incur.  I do not think that this constitutes fair treatment of clients, and would ask you to consider whether you agree with my assessment.   I have many reasons to suspect that no market hedge was executed against my stop loss order.  Ultimately the only people who can know are yourselves and any independent body with the authority to look into your books and records. 

I called in later in the day and asked Ian Horsley to look into the matter.  He did and we finally spoke again on October 11^th.  He suggested that my stop loss order should have been filled at a market price of 1.2301, rather than 1.2285, an improvement of 16 tics. That improvement would have translated into a cash adjustment of £96.  However, he chose to add £83 to my account, now billing me for the full spread on the bargain.  I think he could have exercised similar discretion to the night dealer last week, and added £96 instead.  Rather, he chose to lace this adjustment with a charge that the trader who had previously looked at the matter had foregone, and ‘rinse’ me of a further £15.

But I am more concerned with what happened between the two market prints of 1.2359 and 1.2301.  These two prices are ten seconds apart and the market fell over half a cent between these two times.  You have a trigger to execute my stop loss once the market price has fallen below 1.2358.  The market price is a function of live bids and offers, not of market trades.  Market trades only happen when live bids and offers occur at the same price.  It is the bids and offers which afford the opportunity to execute business, and therefore to ignore live bids and offers gives an incomplete picture of the marketplace.

I enclose an Excel spreadsheet with data imported from Bloomberg.  Here are listed all the bids and offers on the underlying futures contract between the two market prints of 1.2359 and 1.2301.  In all cases, both price and number of contracts are listed.  The market is of course a very fast market, but there are lots of prices listed here, most of which are much better than the price used for the fill I was given for the execution of my stop loss.  In my view this shows that the execution of my stop loss was deleterious (to my position). 

I would welcome an opportunity to discuss this.  Please let me know when there is a convenient moment.

Andrew”

I was wholly unaware that it was/is possible to dig into the order book and thus query the price at which a close out trade has been done. I am far from alone.

The conclusion that one reasonably arrives at is that it is quite possibly the case that tens and tens of thousands of these close outs have occurred at not only Spreadex but other firms as well such that enquiry would lead to many customers getting a lot of money returned to their accounts.

I hesitate to reckon that IGG has been guilty since I do not hold any evidence to that effect. PLUS has long since been written off by me as essentially profoundly deceitful and long overdue to get spifflicated. It could all be quite a carve up. Could it be that the FCA might be able to investigate on an industrial scale? The FCA has the powers. In the meantime, the spread firms are uninvestable.