A very detailed look inside FXCM’s operations, from a senior executive with 12 years at the company

Francois Nembrini

“Other LPs could have asked FXCM retail price as a reference too but none did as it did not fit their efx trading infrastructures based on servicing multiple clients. They were all pricing blind against each other. EFFEX was not”


Francois Nembrini, Global Head of Sales & Liquidity Management at Quantic AM

I have watched the entire industry indulge in FXCM bashing in the past days from CEOs supporting the CFTC/NFA decision to firms running ads attacking FXCM directly.

I can only say that I am disappointed with my peers and shocked by such a decision from a regulator who is seen as an example globally.

More importantly though, the industry misses the point once again: if you do not understand that this decision is highly unfair and if we do not rally as an industry against such gross misconduct from a regulator, our industry will suffer.

Let me start by asking the following question: If FXCM defrauded so many investors for so many years why such a small fine? $7 million is not even close to one month of FXCM revenues.

The fine is irrelevant. If the CFTC/NFA is so concerned about traders, why would they not want to give back money to investors & keep more choices for US based traders by keeping a reshaped FXCM in the USA?

Francois Nembrini
Francois Nembrini

With FXCM out, US traders really only have 2 choices now: GAIN Capital or OANDA Corporation. Customers will win nothing by having FXCM out of the USA as they will get no compensation for FXCM’s apparent bad behavior.

Customers will just have less choices. Is that really the behaviour of a regulator who thinks about customers first or is there an alternative motive here? Look at our industry in the USA in the past years and the growth of CME FX contracts during the same period. When you know where the CFTC & NFA come from, what does it tell you?

Let’s then look at what happened exactly and why FXCM is getting fined. The CFTC/NFA claims that FXCM failed to disclose to investors that it had an interest in a High Frequency market making trading company called EFFEX. It is apparently horrid for customers as FXCM was promoting a non dealing desk model at the same time.

I worked at FXCM 12 years and my understanding of the non dealing desk model was that the market maker with the best bid would be the bid displayed to clients, same thing for offers. In essence it was a real time auction between all LPs where the best prices would win. A typical aggregator. As you all know FXCM was (and still is) amongst the highest volume brokers in the industry.

It was extremely challenging for LPs to give a good service to FXCM. I remember many instances of FXCM melting bank’s risk management systems through the sheer number of tickets.

Triaiana even had to invent netlink to net trades before going to back office so the banks could service FXCM’s sheer trade volumes without blowing up their treasury systems.

I remember FXCM liquidity managers asking large liquidity from LPs on top of book, with banks forced to quote 50m in a 0.3 or to fill at 99% fill ratios or risk being kicked out. FXCM was a leading force in the industry and was testing the entire banks infrastructures to their limits.

In those conditions, wouldn’t it then make sense for FXCM to help support a market maker to cater to its needs so FXCM customers get a better service? Of course it would and this is why FXCM helped EFFEX trading get started providing infrastructure to a former Citibank efx team.

Is it a crime that FXCM asked for something in return? FXCM simply asked EFFEX for a rebate on flow which still is a common practice in the industry today. Just talk to any HFT tomorrow and they will tell you that they will pay you a rebate if they like the flow.

FXCM now had a good deal with an HFT and had someone with open ears to FXCM problems.

No more begging to banks, FXCM could just have a discussion with EFFEX to sort important liquidity issues. EFFEX was so committed to FXCM that EFFEX was using FXCM retail price as its main reference price contrary to most LPs who were using EBS or Reuters.

EFFEX cared about the reference market but cared even more about where its biggest customer prices were and built its entire pricing algos around servicing FXCM. EFFEX would read FXCM prices and would adjust its bid or its offer to be the top of book to capture flow when it wanted.

Other LPs could have asked FXCM retail price as a reference too but none did as it did not fit their efx trading infrastructures based on servicing multiple clients. They were all pricing blind against each other. EFFEX was not.

DB would be 10.3 best bid, UBS 10.5 best offer, EFFEX would know that and would show 10.4 bid or 10.4 offer, sure to get trades from FXCM according to its interest. EFFEX was as a result sucking up an enormous amount of FXCM flow and FXCM was making good money on the rebate. Can someone please explain to me how this is bad for FXCM clients?

They got sold, the best bid or best offer out of multiple LPs & FXCM was helping an HFT post better bids and offers compared to other LPs by working closely with them? Where is this an issue?

Again if this situation would have led to investors being defrauded, wouldn’t the CFTC/NFA want to give money back to clients? They certainly did last time around on their questionable stance on FXCM handling of clients’ price improvements. This brings us back to that $7m fine.

It is that small because there is no way for the CFTC/NFA to get any money back to investors as there was nothing wrong in the way FXCM operated its business. To strengthen their weak argument, the CFTC/NFA goes as far as saying that EFFEX held some orders and filled when in their favour and rejected when the trade was off market.

Whether those people have no idea how FX works or they are simply trying to justify themselves to the uneducated public. Could the CFTC/NFA please name just one last look price maker who does not apply this strategy? Again the fine is $7 million because there is simply nothing for customers to complain about.

I have known FXCM management for years and I disagreed with them many times about the way FXCM should manage liquidity. However FXCM partnership with EFFEX was an industry leading setup which any firm should be proud to achieve. Putting the smartest bank quants at retail customers’ service should be applauded and not vilified.

Seeing today the same industry leading management banned from the industry in the USA while 150 families are now missing a monthly pay check is disgraceful. The CFTC/NFA was out of line and we should all support FXCM in a very sad period for our industry.

Photograph: FXCM’s global head office, 55 Water Street, New York. Copyright FinanceFeeds

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