Battle of the titans at Apple and Facebook where one could end the other: Will FX go the same way?
Facebook may well once again have shot itself in the foot. The difference is, FX brokers cannot afford to shoot themselves in the foot. It is our duty to iron out conflicts of interest and ensure that traders and brokers have access to genuine products via global markets
In a world in which the Silicon Valley multimedia giants are heralded as global voices on almost every aspect of human life, when they go head to head, literally billions of people from all walks of life pay attention.
In the case of Apple and Facebook, a corporate reliance on banishing customers to the status of being an inconvenience at best, and a target at worst, has been a facet of the too-big-to-fail mentality that pervades such entities.
In the FX and wider OTC electronic trading business, there is no such luxury as being too big to fail, and far from being influential among governments, regulatory authorities and high net worth investors, many – especially those who do not treat their customers properly – are indeed the bete noire of all of these important groups.
Thus, fairness and ensuring that all clients are treated fairly and properly is vital to the sustainability and growth of the FX industry, now more than ever.
Tim Cook, CEO of Apple Corporation, recently took a swipe – if you’ll pardon the pun – at Facebook and its senior management, to the extent at which one particular outlet made the ultimate statement that Mr Cook may “have ended Facebook”.
During his retort, Mr Cook said “Now is the time to ask yourself which philosophy do I want to pursue?”
“Do I want a business that serves my customers? Or one that takes advantage of customers to serve my business?” – Tim Cook, CEO, Apple Corporation.
Mr Cook continued by saying “In the end, only one of these philosophies is sustainable for the long term. The other will lead you to crash and burn, and while the long term solution may initially more challenging, remember the path of least resistance is rarely the path of wisdom.”
This caught the attention of one of the more astute executives within the FX industry, who considered this to be very much relevant to our industry.
Things have been very slow in moving in the right direction, despite those with the right objectives having advocated it for many years.
Back in 2016, FinanceFeeds noted that whilst the entire retail FX industry has evolved significantly over the last seven or eight years and trading platforms are now designed to be connected to liquidity providers which in turn have relationships with Tier 1 banks in order to provide aggregated liquidity and give retail traders a finely honed system which provides direct access to the world’s currency markets with pricing that reflects the live market , only then did many regulators began to take a close look at the method by which brokerages execute trades on behalf of clients.
Many brokerages which traditionally operated a ‘profit and loss’ model were unregulated, therefore creating a situation in which there was no jurisdiction, whilst those in regulated markets operated according to best execution practices.
This subject became a a priority for the European Securities and Markets Authority (ESMA) which issued a very direct statement in mid 2016 which read “Where a firm is adopting a dealing model under which the profit made by the firm is dependent upon the clients of the firm making losses, such that the execution of relevant transactions is inseparable from a material conflict of interest between the firm and its clients, NCAs should consider whether the conflicts of interest arising from such a model can be managed, and, as a consequence, whether such a business model can comply with firm’s obligation to act honestly, fairly and professionally in accordance with the best interests of its clients (Article 19(1) of MiFID), and to take all reasonable steps to avoid conflicts of interest.”
“For example, a firm offering CFDs or other speculative products acting as the counterparty to a retail client’s trade without any hedging arrangements in place has no incentive to execute orders in the best interest of the client, because if the client “wins”, the firm “loses.” Such a conflict of interest in all likelihood cannot be managed and should therefore be avoided, by not adopting such a business model” states ESMA.
At that time, it looked as though this may well have signaled the end of the profit and loss model among all brokerages in Europe, and therefore it became important to gain perspective from liquidity providers and prime brokerage firms as to how this impacts the industry. Many brokers that were asked for their opinion on this matter declined to comment, however the perspective from those who did is very interesting indeed.
Here we are, five years later, and the practice still exists, with very little recourse for clients, and no enforcement from regulators even after this bluster from ESMA years ago.
Just a few months later, the retail FX world was shocked when the National Futures Association (NFA), which is the most powerful and well organized regulator in the world, instructed the banishment of FXCM, the world’s largest retail FX brokerage from its home market in the United States, as well as its CEO and Founder Drew Niv, alleging that from September 4, 2009 through at least 2014, FXCM and FXCM Holdings, by and through their officers, employees, and agents, including Respondents Niv and Ahdout, engaged in false and misleading solicitations of FXCM’ s retail foreign exchange customers.
FXCM represented to its retail customers that when they traded forex on FXCM’s “No Dealing Desk” platform, FXCM would have no conflict of interest. According to these representations, retail customers’ profits or losses would be irrelevant to FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely as a credit intermediary. According to FXCM, the risk would be borne by banks and other independent “market makers” that provided liquidity to the platform.
Contrary to these representations, the NFA insisted that FXCM had an undisclosed interest in the market maker that consistently “won” the largest share of FXCM’ s trading volume – and thus was taking positions opposite FXCM’s retail customers. That market maker was an FXCM-backed startup firm that was founded by a former FXCM executive while he was working at FXCM, that operated for the first year of its existence out of FXCM’ s offices, and that shared most of its trading profits with FXCM.
Not much really happened. FXCM is still highly active in its core markets in the Asia Pacific region, is doing very well indeed, and Mr Niv is back at the forefront of the electronic trading industry with his new venture in the technology sector.
As long as there is no recourse, FX brokerages and some of the institutional liquidity vendors with an interest counter to that of their clients will continue to operate.
When FXCM was banned from operating in the United States, OANDA Corporation’s at the time new and unheard of CEO Vatsa Narasimha resorted to using FXCM’s situation as a PR exercise, a practice that FinanceFeeds frowns upon greatly. We examined this attempt to gain glory on the back of a commercial failure of a competitor and why it is absolutely not on.
The correct and proper commercial conduct would be to maintain dignity, carry on as normal and show some respect, even if the ruling by the Commodity Futures Trading Commission (CFTC) against FXCM’s US entity along with two of its senior directors, one of which is the company’s CEO Drew Niv, was extremely damning in that the US regulator concluded that the company had an undisclosed interest in an external market maker that was using algorithmic methods to actively trade against FXCM’s clients and then pay FXCM rebates, when all the while, the firm maintained in public filings and marketing material that it was executing trades on an agency basis.
In an abject display of vulgarity, Mr. Narasimha made a public statement in February 2017, just a few days after the FXCM banishment, which was distributed to FinanceFeeds via a public relations company operating on behalf of OANDA Corporation, championing the CFTC’s decision on FXCM’s fate and blowing OANDA Corporation’s corporate trumpet in an unpalatable fashion.
Entitled “OANDA supports CFTC’s move to protect the interests of traders, the diatribe was preceded by a message from the public relations firm stating “By now, I am sure you have seen that the CFTC has levied a huge fine against FXCM for engaging in false and misleading solicitations forcing its withdrawal from the US market.”
“OANDA’s new CEO, Vatsa Narasimha, supports the CFTC’s move to protect the interests of traders. He has some strong views on how the retail trading industry needs to shape up to become more transparent, fair and supportive of investors and traders. He believes a broker should be held accountable for making questionable statements or falsely disclosing their interests” continued the public relations officer.
We were then asked to read further to see the official statement from OANDA, and thanked accordingly.
The statement from Mr. Narasimha, was then provided, saying “At our very core, OANDA has always been an extremely client-focused organisation, dedicated to creating a fair and transparent arena in which retail clients can trade, safe in the knowledge that we have their best interests at heart. That’s why we believe the affirmative stance taken by the US Commodity Futures Trading Commission (CFTC) against the misrepresentation of interests to retail clients trading the global currency markets is an extremely positive move. Given our long-standing commitment to integrity, we believe the retail trading industry as a whole will benefit from a more transparent approach where brokers are held accountable for making questionable statements or falsely disclosing their interests.”
Yes, Mr Narasimha may have had a point, however all he really had to do was to sit back watch one of only two competitors leave the most lucrative and well organized FX market in the world.
There are two ways of looking at it. Mr Narasimha – himself a person with a very short leadership career – could be viewed as doing the right thing and trying to point out to retail clients that trust and transparency are vital, or that this was not necessary and simply showing good leadership by example and running a good, clean business in the US market would speak for itself long term.
Despite its headless leadership and poor internal decisions over the years, OANDA’s product range is very good and the firm has a longstanding quality reputation.
Going down the multi-asset route is one method that should be considered. This way, brokers can absolutely guarantee their clients excellent transparency as well as ensure that they are not treated with conflicting interests by their own service providers.
Roman Nalivayko, CEO of TraderEvolution Global Ltd is very much an advocate of brokers embracing the multi-asset method, for these reasons as much as other vital ones. “The way to ensure access to all products at correct market pricing is to attach your brokerage to global markets via multiple venues and Tier 1 providers by using a platform and brokerage solution that is designed specifically for that purpose” he said.
If the regulators do not address conflicts of interest, and there is still a degree of apathy when it comes to moving the retail sector forward away from the revenue sharing models and internalized warehouse trading which does not further the environment for retail traders, does not give them access to the correct market pricing and genuine execution via global venues, we, the leaders of the electronic trading industry itself, need to take that lead and bring into place systems and methodology to empower traders and remove such conflicts.
Thus, Apple’s CEO is correct, and Facebook may well once again have shot itself in the foot. The difference is, FX brokers cannot afford to shoot themselves in the foot.