FXCM withholding client profits – just how prevalent is it in the industry?

The well-known foreign exchange trading firm FXCM last week agreed to pay fines and refunds totalling around £10 million to settle allegations that the company, shock horror, withheld profits from clients between 2006 and 2010. In a separate matter, the company failed to inform the British authorities about an impending investigation into its affairs in the US.

FXCM, a New York-based firm, offers trading services to both retail and institutional investors, claiming “best execution” of prices. The firm supposedly matches its client’s orders with quotes from several banks and market makers to assure the best deal for its clients, in the process earning a small fee from the high volume of trading.

Unfortunately for FXCM clients, it seems that the spread element they were earning on volume trading wasn’t quite enough. The regulator found that in the period from 2006 to 2010 the firm failed to provide the required best deal to its clients. What FXCM was actually doing was not passing the full profit onto clients from price movements occurring between the time the order was placed by its UK subsidiary and the time it was executed by another part of the group. Even though agreeing to settle the case, the company justified the procedure with the need to hedge its aggregate position.

At first flush, the justification seems reasonable save for one issue. That being that any unfavourable price movements were always passed onto the final client! This is known in the trade as “order slippage”. Essentially, when prices moved favourably for the client, the profit was kept by FXCM and when the opposite occurred, the loss was fully passed to the client. Does this ring familiar to you? We suspect that this is particularly prevalent throughout the industry. I certainly know of many firms that book a trade immediately if it goes against you and yet if it moves in your favour reject the trade and requite you. If you have been a victim of this, please email us at editor@spreadbetmagazine.com with example and your experience as we believe this is wrong and should be stamped out totally. A firm makes a price at a point in time as principal typically. If the price moves unless due to internet connection error, then the price should be held – win or lose on their part.

£6 million in profits from clients at an aggregate level is a significant profit. This type of practice is detrimental to customers and discredits the company and the industry and our suggestion at SBM is that if you are trading with a firm that appears to carry out a similar practice you should switch immediately.

FXCM in fact stopped this practice, but not because they believed it to be unfair, but rather due to the impending investigation at the time that was being conducted by the US regulator. In 2011, the company also agreed to pay $14.2 million to the US Commodity Futures Trading Commission to settle similar charges against it.

The UK regulator, the FCA, fined the company not only because of the wrong practice perpetrated against it clients but also due to the failure to communicate to the UK regulator the impending investigations occurring in the US.

“Not only did FXCM UK fail to treat its customers fairly or correctly apply our rules, I am particularly disappointed that it was not transparent in its dealings with the FCA,” said Tracy McDermott, the FCA’s head of enforcement and financial crimes.

There are prescriptive rules governing brokers and banks which require them to secure the best execution for the clients although firms based out of Cyprus and Malta manage to circumvent these rules.

Retail clients have very limited control over what happens behind the scenes of their trading activities with many “compliance” departments simply acting like “bulldogs at the gates” and taking a view right off the bat that the client is wrong. Markets are hard enough as it is without the executing firm making the mountain even higher just to get level…