End of the retail FX boiler room - The only way nowadays is sophistication

End of the retail FX boiler room – The only way nowadays is sophistication

The boiler room and bucket shop have existed in stock trading for 146 years. Our industry, within just 10 years, is completely free of it within top quality jurisdictions whilst major stock venues still battle against it. The FX industry’s commitment to development, modernity and delivering best execution is to be praised for this achievement.

Perhaps rather unbelievably, traditional, non-electronically traded asset classes remain to this day, a vehicle which enables operators of the stereotypical old fashioned boiler room.

Stocks and shares, not modern, electronically traded retail FX, has been the preserve of ‘bucketeers’ and high pressure sales tactics which involve the cold calling of potential customers by bryl creamed, moustache-toting members of blue collar society with ill-fitting suits in order to offer them worthless, overpriced or even non-existent shares.

Yet despite this dubious history which dates back to the 1870s, a time period which stretched 50 years until the 1920s represented the era of the ‘bucket shops’ which specialized in stocks and commodity futures, and actually flourished.

These entities relied on the esteemed reputation of listed investments on what until today remain some of the most prestigious exchanges in the world, listing today’s blue chip stock.

In a practice that has been existent for a remarkable 146 years, operators of bucket shops place the transaction “in the bucket”, thus it is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator literally ‘plays the bank,’ as in a gambling house, against the customer.

Operating a bucket shop in the United States would also likely involve violations of several provisions of federal securities or commodity futures laws.

In major stock trading centers such as London, New York and Chicago 100 years ago, this practice became relatively common, and with the invention of the telephone during the industrial revolution, became a practice that went hand in hand with the ‘boiler room.’

The classic image of a boiler room is that it has an undisclosed relationship with the companies it promotes, or an undisclosed profit motive for promoting those companies.

Once the insider investors are in place, a boiler room promotes (via telephone calls to brokerage clients or more recently via spam email) these thinly traded stocks where there is no actual market.

The brokers of the boiler room actually “create” a market by attracting buyers, whose demand for the stock drives up the price; this gives the owners of the company enough volume to sell their shares at a profit, a form of pump and dump operation where the original investors profit at the expense of the investors taken in by the boiler room operation.

A very famous description by the US Securities and Exchange Commission (SEC) many years ago describing this practice was:

“The brokers sat “cheek by jowl” in a room the size of a basketball court. All of their desks were lined up side by side in rows. The firm held mandatory sales meetings every morning at 8:30 a.m. at which time sales techniques were demonstrated and scripts for the firm’s “house stock” were distributed. Brokers were expected to follow the scripts and only give customers the information they contained.”

If the supposedly upstanding stockbroking businesses actually purpetrated this business model, whilst the major exchanges looked the other way and maintained their prestigious reputations as wood-paneled, cut-glass institutions, then why does the extremely sophisticated retail FX industry, which is far more modern than the traditional stock business, has a greater understanding of how to innovate in order to connect retail customers to the best possible liquidity and provide them with the most accurate and instantaneous access to live market pricing and best execution whilst ensuring that good risk management procedures are in place, have to bear the burden of part of this reputation?

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Whilst electronic trading leads the proper way forward, the ‘barrow boys’ are still prevalent in the stock trading world

Yes indeed, during the latter years of last decade, and the early part of this one, there were some unregulated retail FX brokerages with a MetaTrader 4 white label licence, operating from offshore jurisdictions and intentionally basing their business model on profiting from customer deposits, their operations having no connection to the outside world and no liquidity stream or market pricing facility.

Indeed, that is how MetaQuotes designed the MetaTrader 4 platform. Its subsequent popularity then took it into the mainstream and here is the case in point. The mainstream meant brokerages that demanded real access to correct market pricing, the emulation of the institutional trading world whilst keeping the cost down for retail customers, the business model that utilizes trading capital properly, rather than as the basis of revenues and sales commissions, leading to the development of liquidity bridges and integration software that connected MetaTrader 4 to the outside world, with prime of prime brokerages being able to provide real, Tier 1 aggregated liquidity to retail brokers.

Who requested this? The brokerages themselves, NOT the traders. Still think stockbrokers have the moral high ground?

It has been several years since any unregulated FX boiler rooms have been censured by bona fide regulatory authorities. The most recent examples of such cases have not been brokerages, but instead have involved individuals selling dubious trading software for inflated prices and then using high pressure techniques to persuade customers to buy the software, then deposit into an unregulated brokerage with which the vendor has an IB or affiliate agreement.

The most recent example of a boiler room operator having fallen foul of the long arm of the law was some three years ago in New Zealand.

A gentleman – and I use that term loosely – called Mark Brewer operated a scheme called OakFX which was the trading system devised by his company, Phoenix Forex, had used aggressive techniques and foul language in sales meetings within Phoenix Forex, and pressured sales staff into selling the product under any circumstances. According to a recording of a sales meeting conducted by Mr. Brewer that was obtained by the Sunday Star-Times, Mr. Brewer used expletives and told his colleagues: “You can go and give them a f…ing reacharound, mate, I don’t care. Be creative. Get the deal done, now. Take the money, now”.

Of course, the software, which cost several thousand New Zealand Dollars, was useless and investors lost their money.

Mr. Brewer hired and fired staff, and operated a very pressurized environment however it came to an end when New Zealand’s authorities put a stop to his activities once and for all.

A few ponzi schemes have come to light over the past few years, but again, they are mainly orchestrated by sole individuals pretending to be FX portfolio managers, NEVER by brokerages themselves.

Today’s retail environment, especially in Britain, Singapore, Hong Kong, United States, Cyprus, Canada and Australia, emulates the institutional world to such a degree that retail customers have never had it so good.

Top quality leadership among the mainstream firms and continual quests for improvement, whilst working with the best regulators in the world on a daily basis to maintain sustainability which even has extended to the need for compliance officials and regulators to use what is now being termed as ‘regtech’ – literally regulatory technology – for electronic trading firms to be able to report their activity digitally to dedicated sections of regulatory organizations. Indeed, specialist companies such as MAP S Platis, Cappitech and Abide Financial are experiencing booming business at the moment due to the will for FX firms and regulators alike to operate an efficient and ultra-modern compliance environment.

Do you see traditional stock and equities brokers doing this? No. They lag behind

A 30 minute meeting with any senior executive within one of London, Sydney or New York’s mainstream retail brokerages will reveal a very detailed understanding of how to provide best execution, what products to offer to which clients, how to structure a Prime Brokerage arrangement, and how liquidity and risk management should be structured in order to offer the best possible environment to retail clients whilst safeguarding their assets and the risk to the company itself.

I have yet to meet one FX industry executive who is not a respectable, highly educated, well connected professional with an all-encompassing duty to his or her work which means constant dedication with regard to how to continue to improve the trading environment.

Competition is indeed a major factor today, however the best firms in this business do not try to take shortcuts to trounce their competition. Indeed quite the opposite, they raise their bar, pushing the boundaries of quality, user experience and sophistication all the time, often at great expense.

Yet the analog world continues to be dogged by the bryl cream brigade with a penchant for mock Georgian homes in Essex. Just this year, Britain’s Financial Conduct Authority (FCA) published a comprehensive document warning of share fraud and boiler room scams.

The regulator, which has its own FinTech sandbox and is very much at one with today’s highly advanced electronic trading industry whose institutional providers are largely based in London and are FCA regulated, encourages the development of the electronic financial services industry, however it is aware that there are still some analog firms that have business practices which date back to the days of the Victorian street urchin.

“These scams are sometimes advertised in newspapers, magazines or online as genuine investment opportunities. They may even offer a free research report into a company in which you hold shares, or a free gift or discount on their dealing charges” says the FCA.

Newspapers? How quaint.

“You will often be told that you need to make a quick decision or miss out on the deal” continues the warning. “The scammers might also try to sell you shares in a company you have never heard of, often because it does not exist. If you buy these shares, it is likely you will be left with a worthless investment” it concludes.

When considering the difference between that sector and what our top quality environment has morphed into over the years thanks to dedicated and unfaltering commitment by our industry’s experts in liquidity provision, prime brokerage, bridge and integration technology, and how to structure a retail brokerage and maintain relationships with what have become much more demanding and educated clients and partners, it is fair to say that the quality and integrity of today’s FX industry is the leading edge in financial markets infrastructure and environment.

The multi billion dollar retail FX companies with their own sophisticated proprietary platforms that continually bring the trading environment into new dimensions to the point at which the product speaks for itself should most certainly be proud of their massive and ongoing achievements.

#boiler room, #Bucket Shops, #forex, #fx, #regulation

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