This day in history: July 29, 2012 – America leads the way by fining Alpari for canceling profits on trades

The furore that has recently engulfed a few retail brokers involving allegations that they cancel certain trades or delete profits from accounts if the trader is doing too well is not new to North America’s eagle-eyed regulatory authorities.

Only this year, firms such as IronFX, plus several binary options brands have been the subject of accusations by customers that they cancel profits and do not allow profit from what they consider to be trading activity that is against the terms and conditions of the contracts that customers have signed, regardless of the banality of the terms of business.

In North America, however, things are somewhat different as the National Futures Association (NFA) caught onto this practice four years ago, and began to censure retail firms engaging in such a practice, at a time during which the wounds were still open from the high profile demises of PFGBest and MF Global, and the general investing public were still recovering from the damage caused to the economy as a result of the sub-prime lending defaults.

On this day, July 29, in 2012, Alpari, which at the time had an office in the United States, was fined $200,000 for canceling the trades of customers and accusing them of ‘illicit trading activity.’

The cancelation of profits and pointing the finger at customers stating that they abused trading conditions is a dubious practice that some companies at the lower end of the market employ, often putting a subtle clause into the terms and conditions that allow the company to cancel trades at its discretion, meaning that if this occurs, the customer has no recourse over it.

In this case, Alpari reported an unusual market event via NFA’s Fortress system on October 20, 2011.

The specific event affected, according to Alpari at the time, the firm’s FX options platform, with Alpari stating that a system malfunction had allowed 5 customers to place new FX options orders 24 hours before expiration on October 20, 2011 which Alpari executed as the counterparty.

In America, things are somewhat different to many jurisdictions as all trading activity must be reported to the NFA’s central reporting system and a reason for differences in the norm must be given, thus Alpari attempted to provide this information as a reason why it canceled trades.

Alpari was unable to provide information to the NFA on whether the company had made any amendments to customer accounts and had not informed the NFA about the alleged ‘malfunction.’

In November 2011, A customer of Alpari came forward and approached the NFA, claiming that Alpari had canceled trades in his FX trading account, with Alpari’s reason being that he had placed the trades based on what Alpari considered to be the incorrect price quotes resulting from ‘technical issues’ with the trading system – an often used ruse to justify the cancelation of profitable trades.

Following this customer complaint, the NFA’s compliance department took this very seriously and added it to matters to investigate in the next NFA audit of Alpari’s operations.

When the audit took place, the compliance team at the NFA made a full and extensive investigation into Alpari’s alleged ‘system failure.’

The NFA then took a close look at the information that Alpari had reported, and the NFA then requested a full set of information from Alpari, even going to the lengths of interviewing at-the-time CEO Daniel Skowronski.

Mr. Skowronski, during the NFA interview, explained that it is company policy not to allow FX options trading 24 hours prior to the expiration of options on the third Thursday of every month, stating that the company’s liquidity providers had an agreement in place with Alpari which states that Alpari is not allowed to execute options 24 hours before their expiration on the third Thursday of every month.

At that time, Alpari’s options platform was facilitated by FX Bridge, and in his interview, Mr. Skowronski explained to the NFA that FX Bridge had allowed the options trading system to permit 5 FX options traders to place trades on Wednesday October 19 during the period that it is not allowed to execute trades.

Those 5 customers placed trades and generated approximately $230,000 in profits between them, and a complaint from one of the customers to the NFA stated that his $220,000 was legitimate profit and that Alpari should not have canceled it.

The NFA had found that Alpari had adjusted the prices, its interference removing amounts ranging from almost $153,000 to over $220,000 from the accounts of the 5 affected customers, however Alpari later provided a $55,000 credit to the customer who had filed for arbitration – Not capital that could be withdrawn, just a trading credit which is as valuable as a bonus – effectively worthless because credits can only be traded, not withdrawn.

Alpari at the time cited that the 5 customers abused the trading conditions and took advantage of this ‘malfunction’ in order to remove the profits from their accounts.

America’s astute authorities were early in catching firms for this practice, bearing in mind that this case occurred over four years ago, and indeed four years ago to this day, Alpari was censured for it, whereas in many other regions, this practice continues today unchecked.

FinanceFeeds spoke recently to specialist lawyers which have deep understanding of the electronic trading industry, in order to gain their perspective on this practice, which, outside of North America, is alive and well today. The lawyers put forward some very interesting and important points with regard to this matter that all customers should be aware of.

The NFA managed to get to the bottom of this case during its interviewing process of senior executives at Alpari.

Alpari admitted that the agreement which had been signed by one of the affected customers in May 2011 did not contain any information about a 24 hour prohibition, and it only contained information about the firm’s options trading policy.

The NFA even went to the extent of listening to recordings of conversations between Alpari staff and customers, and found that no mention of such a prohibition was evident.

Alpari’s presence in the United States is now a distant memory, along with several other companies from outside the US which had established offices there.

A few years ago, at the time during which many overseas firms cleared their desks and exited the US market, dissenters leveled this at the NFA, considering that new rules which included very strict compliance reporting methodologies, the requirement to have a $20 million net capital adequacy balance for regulatory purposes only (NOT operational capital) and that no non-US customers could be onboarded by NFA member firms, were too much for them to overcome.

Many dissenters considered that the NFA was purging companies and attacking the industry but indeed quite the opposite is the case. The firms that remained are well-capitalized North American firms that are able to abide by the rules which are in the interest of customer protection.

American regulators knew that they would not be able to supervise the activities of firms not based on American soil, and even more importantly would have no restitution powers over foreign firms bringing on board American customers.

This cleaned up the industry, and whilst this case of four years ago today involving the cancelation of trades was a victory for customers, it was well in advance of any other regulatory authority worldwide.

In January 2015, Alpari UK went insolvent due to exposure to negative client balances as a result of the Swiss National Bank’s decision to remove the 1.20 peg on the EURCHF pair.

It is very likely that the finger pointing would not be at the NFA if the regulator had saved customers from losing their money as a result of a company placing leveraged positions without having the capital base to cover them in times of volatility.