CFTC gives NADEX a clean bill of health, but are they missing something?

Regulatory authorities in the US conducted a year-long rule enforcement review of the trade practice surveillance program at NADEX, concluding that all was in order. We look at how this stands with regard to NADEX being owned by IG Group and using it as a counterparty

The US Commodity Futures Trading Commission (CFTC) has today provided the results of its rule enforcement review of the trade practice surveillance program of the North American Derivatives Exchange (NADEX), which is one of the two officially regulated exchange-traded binary options venues which operates within the United States.

Following the conducting of the review, the CFTC has concluded that generally, the firm’s practices are in keeping with regulatory requirements regarding best execution.

Whilst the CFTC’s rule enforcement review concentrated on specific aspects of NADEX’s business over a one year period, it evaluated NADEX’s compliance with relevant CFTC regulations including the allocation of staff, information technology, and other resources to comply with Core Principles 2 and 12. Nadex also maintains a rulebook, and written policies and procedures for its staff.

Indeed, it is without question that NADEX, being an NFA member and CFTC regulated venue, will most certainly be running the operational side of its business with absolute aplomb, in keeping with that of its parent company IG Group, hence these aspects were listed by the CFTC as being highly satisfactory following a year’s observation.

Interestingly, however, the CFTC commended NADEX on an entry in its rulebook which prohibits the trade practice violations enumerated in CFTC regulation 38.152.

Further examination of this particular ruling by way of checking exactly what it stipulates with the CFTC raises a question, that being the classification of NADEX as an exchange.

CFTC rule 38.152 refers to abusive trading practices, and their prohibition.

Designated contract markets that permit intermediation must prohibit customer-related abuses including, but not limited to, trading ahead of customer orders, trading against customer orders, accommodation trading, and improper cross trading,

Specific trading practices that must be prohibited by all designated contract markets include front-running, wash trading, pre-arranged trading (except for certain transactions specifically permitted under part 38 of this chapter), fraudulent trading, money passes, and any other trading practices that a designated contract market deems to be abusive.

Andrew Saks-McLeod with NADEX CEO Tim McDermott in Chicago, 2016

Once again, it is very likely that NADEX does not partake in such activities, however the company does market itself as an exchange, and is licensed as an exchange, yet has one counterparty to all trades, that being its parent company, IG Group.

Instead of this, the CFTC concentrated on the detection of spoofing, stating that Nadex represented that it has the ability to use deleted order reports in ARC to detect spoofing by Exchange members. However, the Exchange explained that it reviewed ARC reports for spoofing only on an infrequent, ad hoc basis during the target period,” the review stated.

The CFTC also recommended that NADEX promptly complete its development of a surveillance program to detect spoofing on its markets. Nadex should provide the Division with a written description of the Exchange’s spoofing detection program once it has completed its development of such program, and that it should provide more training to compliance staff.

Although the CFTC is widely recognized as one of the most advanced and detail-orientated hands-on financial markets regulatory authorities that conducts thorough investigations on all of its members on a regular basis, publishing findings (and lawsuits if any irregularities are found) in great detail for public viewing, this particular focus on items which NADEX performs very well indeed such as compliance and surveillance of its customers’ trading activities yet paying no attention that it is an ‘exchange’ with one counterparty which happens to be its owner is at odds somewhat.

FinanceFeeds iterates that in this case, NADEX is upholding its business model correctly. Its commercial structure has always been clearly understood by the FX industry, and the firm is a bona fide company, however the point here is that the regulators consider it an exchange, yet OTC binary options (quite rightly) are not lawful in the United States.

Thus, the regulator needs to understand its position better, and look toward checking the execution of all entities, as it is clear that the execution model of NADEX is understood by the industry itself, but less so by the regulators.

FinanceFeeds contacted the CFTC’s commissioner directly today, with which we have a very good communication channel, however no official comment was made, and Tim McDermott, CEO of NADEX and a very highly respected industry figure, was contacted on this matter, however no comment was forthcoming.

 

 

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