This day in history: August 26, 2003 – CFTC and NFA first regulators to get very tough on unregulated FX brokers

We take a look back at “This day in history” within the world of FX taking a journey through annuls of time to look at the various groundbreaking developments that continue to take place in our fascinating industry.


Before the now ubiquitous MetaTrader 4 was even designed, off-exchange retail FX was a very under-represented sector of the electronic trading industry worldwide, and brokerages were relatively few and far between.

America led the way in the development of the retail FX industry, its origins being that of Matchbook FX, widely recognized as the very first retail OTC brokerage, co-founded by industry pioneer Josh Levy in New York.

Founded in 1999, Matchbook FX was the world’s first open and inclusive internet ECN for FX trading, available to all willing FX trading participants including hedge funds, CTAs, banks, corporations and, uniquely at the time, retail FX traders as well.

Matchbook FX was initially conceived by Daniel Uslander and Ron Comerchero, both of whom were commodity futures and equities traders, and former Goldman Sachs New York FX trader Josh Levy. Mark Smith of the Florida based equities-trading technology firm NexTrade ECN also joined their efforts and enlisted Nextrade to contribute technological know-how.

Several months later,, a NASDAQ-traded financial news and technology firm, bought in as the third major equity partner in a three-way joint venture.

As one of the earliest providers of open-access FX e-trading, Matchbook FX received considerable acclaim for its efforts to instigate change and level the playing field in the insular, closed, clubby and highly profitable domain of interbank Forex dealing, likely to the chagrin of the major international money center banks. Matchbook FX was recognized in 2000 as one of Silicon Alley Reporter Magazine’s “12 to Watch”, its annual listing featuring top internet companies.

From this very institutional background, North America’s lead was cemented and the companies that established operations and followed suit remain until this day as those of very high quality indeed.

Mr. Levy today maintains his entrepreneurial edge and continues to innovate. 12 years ago Mr. Levy founded Tactical Asset Management LLC which was one of the earliest pioneers of fully-automated algorithmic-FX trading via API (Automated Programming Interface). Prior to founding Tactical Asset Management, now part of the broader investment house The Tactical Group, Josh served as the President of CMC Markets in New York

FinanceFeeds met with Mr. Levy in the summer of this year, when he fondly reminisced about the exciting early stages of the retail FX industry that he helped to establish.

“Unfortunately we couldn’t finish, but I consider the work we did to be instrumental to the foundation of the industry” said Mr. Levy as he cast his mind back almost two decades.

“We began at a very pivotal time” he said. I started at Goldman Sachs in 1994 straight out of university. The entire FX industry was going through a pivotal shift from traditional voice brokerage to electronic execution at the time” he recalled.

At that time, EBS [now the electronic brokerage division of British interdealer brokerage ICAP] was just beginning to emerge as the mainstay of liquidity … but only for certain pairs” said Mr. Levy.

“The Reuters Dealing system had a dominion over certain other pairs, and certain voice brokers controlled others.”

Mr. Levy recalled that the sea-change transition from voice to electronic systems accelerated with the late 1990s / early 2000’s internet and e-commerce explosion.

“The whole game changed” said Mr. Levy. And amidst it all, firms such as Matchbook FX, as well as a few other pioneers such as CMC, GFT, Money-Garden (also known as MG Forex) Shalish Capital (now known as FXCM) and Midas (now known as Saxo Bank) where there at the very beginning.

In order to maintain a good framework whilst the retail FX industry gained enormous ground in the space of just a few years, the long-established Commodity Futures Trading Commission (CFTC) began to engage its commissioners in passing legislation to ensure that customers were protected and that the industry itself remained completely sustainable despite the rapid extension of leveraged OTC financial instruments to retail customers.

On this day, in 2003, some thirteen years ago, long before any regulatory authority anywhere in the world had even begun to concern itself with what OTC retail FX actually is, let alone create a framework for legislation, approved rulings set forward by the National Futures Association (NFA) to protect investors in the retail off-exchange foreign currency (forex) futures and option market. The new rules imposed tougher standards on firms that had registered as forex dealer Members of the NFA, those including at the time some of the pioneering, and now vast and widely respected, companies including GAIN Capital, FXCM, Interactive Brokers and OANDA Corporation, those firms today representing America’s electronic trading mainstays for the retail market.

Unregulated chancers not welcome in America!

On August 26, 2003, the Chairman of the CFTC at tha time, James E. Newsome stated “The CFTC fully supports the NFA’s rulemaking. We feel strongly that these rules represent a significant step in our joint effort to protect investors from fraudulent and illegal activity in the retail off-exchange forex markets.”

The Commodity Futures Modernization Act of 2000 (CFMA) made clear the CFTC’s authority and jurisdiction to investigate and take action to close down entities selling illegal off-exchange foreign currency futures and option contracts to retail customers. Since the CFMA became effective in December 2000, the CFTC has been very active in applying the statute to retail forex activities and has filed 41 cases against forex entities, involving approximately $75 million taken from at least 3,500 victims.

Since the passage of the CFMA, however, a problem remained up until August 2003 with unregulated individuals soliciting retail customers for forex transactions, particularly where a futures commission merchant (FCM) is a counterparty to the trade. NFA’s new rules address this problem by, among other things, making FCMs take responsibility for the activities of these unregulated individuals.

The NFA began to address this problem in June 2002 when it created a separate membership category for CFTC-registered firms that offer off-exchange retail forex products to the public and prohibited them from engaging in fraudulent business practices. Since that time, NFA has taken emergency enforcement actions against three Member firms for forex activities.

“The rules we adopted last year served as an effective starting point for protecting customers,” said Daniel J. Roth, the incumbent President and Chief Executive Officer of NFA at the time. “We believe, however, that additional regulatory requirements are needed to protect investors from any fraudulent practices in the area of off-exchange retail forex trading.”

No such thing as a free lunch!

The American authorities were the first in the industry to issue customer warnings relating to how OTC products offered by unregulated brokers were advertised, especially those promising very high returns with no track record to back the claims up. This was a very early effort, compared to most other jursidictions that only began to take a look at this as recently as 2011.

In an effort to educate customers about the risks of forex trading, in February 2001 the CFTC issued a Forex Consumer Advisory cautioning the public to be skeptical of newspaper advertisements, radio and television promotions, and Internet Web sites that tout high-return, low-risk investment opportunities in forex trading. The CFTC also issued an Advisory in March 2002 on how firms may lawfully offer forex futures and option trading opportunities to the retail public.

To complement the CFTC’s efforts, NFA has prepared an Investor Alert highlighting some of the risks involved in retail off-exchange forex trading. The NFA also produced an educational brochure to help customers make informed decisions about investing in the retail forex market and a regulatory guide to help its forex Member firms understand their regulatory responsibilities. Both of these publications became available in the fourth quarter of 2003.

This was a remarkable leadership, and took place two years before the MetaTrader 4 platform was launched which empowered a vast number of small FX brokerages and white label partners to establish operations all over the world, garnering a global client base, often on an unregulated basis during the first five years of the MetaTrader 4’s existence until respected national regulatory authorities in regions that are now synonymous with good quality retail FX brokerages including Britain, Australia and Cyprus began to reform their rulings on retail electronic trading and ensure that a good customer protection method was in place and that the industry can be sustained in these particular retail FX centers.

In 2011, American authorities outlawed the solicitation of retail customers in America by any overseas brokerage, regulated or not, and simultaneously issued a ruling to prevent American brokerages from soliciting overseas clients, thus cementing its ability to exercise jurisdiction over firms and restitute customers should something go awry. Subsequently, the vast majority of FX brokerages from overseas that had branches in the United States pulled out altogether, finding the daily reporting duties, the $20 million net capital requirement and constant scrutiny too much.

Today, America’s giants soldier on, and the consumer environment is regarded as being the most risk-free in the world, however the trader demographic is somewhat different as there are a large number of retail traders in America that trade exchange-listed derivatives via specialist platforms such as Trading Technologies or Tradovate, connected to Chicago’s vast and technologically focused derivatives venues.

These customers often have a larger portfolio which is diversified in asset class, execute trades with much lower leverage than those in the OTC sector, and have an average deposit size of approximately $50,000 per client.

On the OTC side, the average deposit in the US is $6,600 compared to $3,800 in the rest of the world and customer loyalty is infinitely longer.

Quite clearly, those early days in which the CFTC and NFA brought forward a framework to protect the good, the pioneers with their proprietary platforms at a time that preceded the deluge of all-encompassing, offshore registered, cross border MetaTrader 4 warehouse shops of the latter years of the last decade, the quality of America’s retail trading environment was cemented, the result of which is more than visible today, thirteen years on.

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