FinanceFeeds detailed review of 2017 – July to September. FinanceFeeds instrumental in NFA defense, taking a broker to task, CFD pricing, last look and London’s finest
As 2017 draws to a close, we look at the important details that shaped the industry this year, continuing with April to June as the first part in a four part series this week. FinanceFeeds remains committed to detailed reporting from within the industry’s major centers and continuing to work closely with the most important companies that shape the entire future of this business internationally.
2017 has been another very eventful year, however there have been some distinct differences between the past twelve months and the developments that have formed the commercial landscape for the majority of this decade.
In particular, the entire spectrum of the FX industry does not resemble its structure at the end of the last decade, when MetaTrader 4 was in its relative infancy and a plethora of small brokerages made their way onto the retail market, as nowadays, a combination of consumer wisdom, regulatory understanding in some of the more important regions, and a need to elevate the standard of smaller brokerages with third party solutions away from the ‘second tier’ status that they have held until now in the shadow of the large, publicly listed companies in the world’s most technologically advanced major financial centers.
FinanceFeeds has committed vast resources to reporting and conducting research from within the companies that lead this industry worldwide, a matter which we consider as vital as working with our esteemed and high level partners whose expertise and engagement assist us in providing the absolute detail on every aspect of developments in this business globally.
In this four-part series this week, FinanceFeeds takes a detailed look back at the events of the year that have been influential and changed the direction of our industry, in chronological order:
A long used practice by Tier 1 banks which has created a polarizing of opinion between liquidity takers and liquidity providers was at long last challenged by a retail FX brokerage, albeit a very unlikely contender.
Last look, which is a practice in which Tier 1 FX liquidity providers are able to literally take a ‘last look’ at a trade that has been passed to the banks to see if they want to accept or reject it, has been a moot point among prime of prime brokerages and their retail FX broker customer base for several years.
In July this year, Alpari (US) filed a case against Citigroup Inc (NYSE:C) and Citibank at the New York Southern District Court. The Complaint, seen by FinanceFeeds, states that the case is a class action brought to recover the damages that the plaintiffs suffered as a result of the alleged practice of Citigroup of reneging on orders that it matched and accepted through its own and third-party electronic trading platforms.
The class members include “all persons in the United States who, between January 1, 2008 and June 30, 2016 (the “Class Period”), placed an order either on a Citi proprietary platform or a third party ECN that (1) was matched to Citigroup’s streaming price; (2) was rejected by Citigroup; and (3) was subsequently filled at a price less favorable than the original Citigroup price to which it was matched.”
- Proprietary platforms
According to the Complaint, when dealing with Plaintiff and the Class, Citigroup programmed an unnecessary delay of up to several seconds into its execution algorithms. This delay has been dubbed the Last Look period. The plaintiffs allege that Citigroup first used Last Look on CitiFX at least as early as January 1, 2008, and on Velocity beginning with its launch in 2009. The complaint also states that on CitiFX, Velocity, and the rest of the Citi proprietary platforms, Citigroup further applied Last Look to all API/FIX and ECN trades, as well as a portion of those customers using Citigroup’s GUI.
In addition, Citigroup is alleged to have used the information derived from the order (quantity, buy or sell, etc.) to its trading advantage. Also, Citigroup is accused to have “significantly and artificially increased its FX trading profits at the expense of buy-side counterparties”.
- ECN “hostages”
The plaintiffs’ complaint alleges that Citigroup used the same Last Look practices on third-party ECNs. The document says that although buy-side market participants can (and do) execute trades directly with each other on ECNs, Liquidity Providers, such as Citigroup, still act as counterparties in most FX trades executed on ECNs. According to the Complaint, as a condition of providing liquidity to ECNs open to buy-side market participants, Citigroup required ECNs to permit it to use Last Look when trading through those platforms.
“Granting such concessions to Liquidity Providers, such as Citigroup, was essential to any start-up ECN’s economic survival: ECNs were hostage to Citigroup’s demands.”
Importantly, Alpari (US) admits that it has no access to the underlying facts relating to Citigroup’s alleged improper activities. The plaintiffs note in their complaint that they believe further evidentiary support for their allegations will come to light after a reasonable opportunity for discovery.
The Complaint mentions similar cases involving “Last Look” practices, including the events from 2015. In March 2015, it was reported that the Department of Justice and the Securities and Exchange Commission asked Barclays for information relating to BARX and its Last Look practices. In November 2015, Barclays entered into a Consent Order with the New York State and Department of Financial Services. The bank admitted it used Last Look, agreed to pay a $150 million civil monetary penalty, as well as to terminate a Managing Director and Global Head of Electronic Fixed Income, Currencies, and Commodities Automated Flow Trading.
The plaintiffs in the case ALPARI (US), LLC v. Citigroup, Inc et al, are, inter alia, seeking that the Court award Plaintiff and Class members damages, punitive damages, and/or restitution in an amount to be determined at trial.
Alpari (US) LLC was dissolved in September 2015, however FinanceFeeds demonstrated allegiance with the ideology of taking the banks to task over this practice, largely because it is a one-sided matter that is only allowable by Tier 1 banks. If an OTC firm engaged in such practice during trade execution, the non-bank regulators, and customers, would raise the proverbial roof.
FinanceFeeds had investigated the perspective within banks, regulatory authorities and trade bodies just a few months prior to this unparalleled action by Alpari (US), having reported that regulators had begun scrutinizing FX dealing platforms that contain last look, a controversial practice that enables market makers to delay or reject trades from customers after they’ve agreed to a quoted price.
In January 2016, the Foreign Exchange Professionals Association (FXPA), held a webinar on examining the implications of last look for the FX markets.
Attorneys with Steptoe & Johnson on the ‘last look’ webinar, advised market makers to be more transparent about how their last look systems operate.
“Regulators take a very dim view of institutional practices that emphasize a lack of transparency and that encourage employees to give either misdirection or less than complete information to counterparties when direct questions are asked,” said Mike Miller, litigation partner at Steptoe & Johnson, who spoke during the webinar.
In one high-profile case, a global bank used its spot FX trading platform to reject unprofitable trades. When customers asked why the trades were rejected, the bank reportedly gave “vague or misleading answers,” said attorney Jason Weinstein who analyzed the case during the webinar.
After a regulatory settlement, the bank posted detailed disclosures on its web site and also paid a steep fine, setting a precedent that could impact other banks, brokers and market-making firms.
Because the practice is not disclosed by FX trading platforms, the issue of last look has generated headline attention and worries on the buy-side over rejected trades and information leakage.
However, investors may not be able to avoid last look.
“Last look is still prevalent in the industry. In fact, it’s accurate to say that almost all single dealer platforms employ last look,” said Chip Lowry, who chairs the FXPA Professional Committee.
Vestige of an Earlier Era
However, last look is not new, noted Lowry. It originated in the early years of electronic trading in the FX market, and was originally intended to ensure the market maker’s price wasn’t based on stale market data information for the purposes of price formation and also that they had the credit available to trade with the client. As it evolved, last look has been programmed into automated FX dealing systems.
Some critics argue that banks are utilizing last look less as a risk management tool and more to generate profits as they compete against high frequency traders and other non-bank liquidity providers.
The practice has led to uncertainty on the part of buy-side customers as to why they are receiving high rejection-rates on their FX trades.
“The fact that liquidity providers can give traders orders a last look before accepting the order is something that frustrates many traders, as it can often result in a certain amount of slippage,” according to website TheFXView.com. As such, they wait for the next best price. But if a customer’s order is rejected by a number of different liquidity providers, it can experience a significant amount of slippage, noted TheFXView.
Another issue is the lack of standardization and transparency into FX trading on various platforms, noted the Financial Times. In addition to single-dealer platforms, some multi-dealer platforms also allow last look including Bats Global Markets’ Hotspot and Thomson Reuters FXAll. However, some platforms view last look as outdated.
ParFX, an FX venue owned by Tradition, does not utilize last look, the firm’s CEO told the Financial Times, citing advances in trading technology and the need for firm prices.
Pros and Cons of Last Look
FX experts contend that market makers need access to last look to protect against trading on stale prices due to latency and from high frequency trading clients that have asynchronous information advantages. Over time, last look was also a factor that allowed for non-bank liquidity providers to enter the market, noted Lowry. Some supporters contend it allowed for more liquidity and more competitive pricing.
“Last look came about as a protection for the banks against latency arbitrage because they didn’t have the speed of technology. The rules were you could have last look. It’s kind of morphed into some places where it’s actually a free option,” said David Ogg, CEO of Ogg Trading at Market’s Media’s Global Market Summit in December.
Yet, others question whether last look is necessary since market makers now have faster technology and sophisticated risk management systems that can automatically hedge their spot FX exposures.
Others suggest that last look is a way for the market makers to reject unprofitable trades. “All in all, the purpose of the last look equation is to eliminate unprofitable trades for the liquidity provider, to maximize profit opportunities and provide a mirage of liquidity,” said David Ullrich, Senior Vice President of FlexTrade. The footprint for last look occurs through above average reject rates and excessive holding times, he explained.
“Last look also opens up the potential for front running currency orders in the sense that the customer is sharing its intentions with the liquidity provider. A more meaningful electronic trading process would probably widen spreads a touch, ironically improving overall liquidity due to reduced drop rates, and lessening a negative outcome for the liquidity providers” – David Ullrich, Senior Vice President of FlexTrade
Bank of England Questions Fairness
The debate over last look falls into a broader industry conversation about the fairness of wholesale markets and the regulatory push for more transparency in FICC markets.
After a series of scandals over manipulation of Libor and FX benchmarks, the Bank of England (BoE) published the final “Fair and Effective Markets Review” on June 10, 2015 with 21 recommendations to restore trust in the wholesale FICC markets and to develop a global code of conduct for FX trading. In the final report, published last March, the BoE said the global code should address the practice of last look and whether it should remain an acceptable market practice. At a minimum, the UK central banks called for clearer standards regarding the practice.
The BoE’s review also cited the lack of timestamps in FX trading. “The absence of time stamps on some client orders can make it difficult for investors to assess the efficiency of their FX executions, creating potential opportunities for abusive practices,”
The Buy-Side Speaks Up
Buy-side firms are also raising concerns about last look. In January 2015, during the consultation period for the BoE’s fairness review, BlackRock, one of the world’s leading asset managers, called the practice “problematic.”
In written comments, BlackRock drew comparison with indications-of-interest in equities, adding that in FX markets it created “phantom liquidity,” and that it would prefer “liquidity on which we can deal, even if this comes at a higher cost.” “Moving away from indications of interest to streaming prices would be fully consistent, we believe, with outcomes that are both fairer and more effective,” wrote the asset manager.
In December, Steven List, head of trading for AlphaSimplex, speaking on an FX panel at a Markets Media conference, said, “It’s an anathema to a fair market where the banks want the last look or the automated traders want the last look. I don’t see how that’s going to pass the smell test,” said List,
Banning last look could backfire too. “Eliminating last look will effect liquidity,” warned a former e-trading professional at the Markets Media conference in December. The reason is that some bank liquidity providers are quoting prices on 20 or 30 platforms. It’s possible that one customer will try to hit their price on 10 platforms at the same price. The bank could let the customer have one or two of those trades, but “reserve the right to protect symmetrically,” said the former electronic trading executive.
In August this year, FinanceFeeds conducted the first ever FX industry documentary inside a prime of prime brokerage in London. Taking a detailed look inside the full operational activities, here is the documentary:
FinanceFeeds was established with a view to being the reference point for the senior executives of this industry, globally, and to be a leader in assisting the development and direction of the industry.
It is therefore one of the tenets of this company to be a source of vital information to industry leaders at the very upper end of the business structure, and to global regulators.
On this line of thinking, in August this year, the National Futures Association (NFA), referred to FinanceFeeds exclusive and comprehensive research when building defense against Effex Capital, involved in FXCM’s exit from the US market.
In an article dated August 16, 2017, FinanceFeeds stresses that “FinanceFeeds is closely examining all filings in the case, however many of the documents are sealed”.
In its filin in the case in August this year, the National Futures Association (NFA) refers to this particular remark by FinanceFeeds, as the Association seeks to keep more of the information on the case public.
“This lawsuit has gotten public attention, and Effex’s efforts to seal publicly-available information has impeded the public from learning basic facts about the case”, the NFA notes before referring to FinanceFeeds’ article.
“Effex has therefore filed an overbroad sealing request which would require NFA to seal almost everything it files”, NFA concludes.
NFA notes that some of the exhibits that Effex is trying to seal have been publicly available for months and will stay there. Second, the couple of paragraphs in the NFA Complaint against FXCM from February 6, 2017, which allegedly reveal Effex’s trade secrets, are dubbed insufficient to justify a blanket sealing order on everything NFA will file in the case. Then, there is the administrative burden on the court and NFA as a result of reviewing each document with regard to its possible sealing/unsealing.
NFA refers to Hicklin Eng’g, L.C. v. Bartell, 439 F.3d 346, 348–49 (7th Cir. 2006):
“What happens in the federal courts is presumptively open to public scrutiny. . . Any step that withdraws an element of the judicial process from public view makes the ensuing decision look more like fiat and requires rigorous justification.”
Of course, it is not a part of professional journalism to take sides when covering a legal action. However, providing a comprehensive picture of a legal action is an essential part of professional journalism. The fact that a substantial portion of the documents in this case are sealed prevents a journalist to provide the public with impartial and detailed coverage of the legal matters at hand.
Even more stunningly, the large majority of documents filed in this case are all related to requests/motions for sealing (and leave to file sealed) exhibits. As NFA puts it:
“This case is about the exhibits that Effex seeks to seal—specifically, whether NFA’s publication of those exhibits is defamatory, tortious, or a due process violation.”
One question to consider is whether this sealing drive does not deflect the court and the public attention away from the real problem at hand – the nature of the business relationship between Effex Capital and FXCM and whether this relationship justified the mentioning of Effex’s name in the NFA public releases dated February 6, 2017. This matter is now drowning in motions to seal/unseal exhibits.
FinanceFeeds is committed to assisting the longevity of this industry by ensuring detailed and accurate reporting that can be used in developing the business and furthering its cause.
August this year was a month during which litigation plagued another high profile firm, this time Smartstream Technologies.
The company, which provides institutional software and managed services has been engulfed in a legal fight with former CEO Philippe Chambadal over trade secrets, confidential information and compensation payments.
The legal action which names Philippe Chambadal as Defendant, seeks injunctive relief to enforce an agreement containing a return of information and confidentiality clause and to enjoin Defendant from further misappropriation or dissemination of SmartStream’s trade secrets and confidential information.
The company alleges that Mr Chambadal who was provided with a 90 days’ notice of termination of his contract with SmartStream on January 5, 2017, retained corporate property and access to confidential information after this notice was issued. In particular, the company states that Mr Chambadal did not return a computer and a phone provided by his employer within the time frame requested. Furthermore, he made visits to cloud storage, used TimeMachine and deleted files on the computer after having been given notice of termination from SmartStream.
Following notice of termination, Mr Chambadal is also alleged to have threatened to “destroy the company’s market position and pipeline” by issuing disparaging letters to SmartStream’s clients.
Mr Chambadal, of course, has a different story to tell. In his response to the Complaint, he has denied all claims against him made by SmartStream and has filed a Counterclaim, seeking damages in the amount of at least $25,000,000, saying that this sum represents the total value of the granted, earned and unpaid awards and equity based options due to be paid to him, plus attorney’s fees and costs.
Mr Chambadal insists that he was refused proper compensation because of the intentions of SmartStream, Khalifa Daboos (chairman of SmartStream) and ICD to maximize returns from an anticipated sale of the company. “Upon information and belief, Daboos and ICD have decided – as of late 2016 – to sell SmartStream in 2017, and are currently preparing to SmartStream for the sale to a strategic buyer for $500 million”, the document filed by Mr Chambadal says.
Haytham Kaddoura, who succeeded Mr Chambadal, as a CEO of SmartStream, is labelled by Mr Chambadal as “a figurehead, sycophant, and “yes man” for Daboos”. “Kaddoura was a cheap placeholder until Daboos decided to sell SmartStream”, he says.
Earlier this week, SmartStream responded to the Counterclaim filed by Mr Chambadal, saying that his unpaid award claims are futile, because awarded options cannot be exercised unless and until a specific “Exit” triggering event (i.e., an acquisition or initial public offering of the company) has occurred. And no such triggering exit event has taken place when Mr Chambadal purported to exercise Plan options on January 23, 2017. Furthermore, even if a requisite triggering exit event had occurred, the Plan states an individual’s options lapse as soon as he is given notice of termination of his employment.
As part of our responsibility toward good practice, FinanceFeeds took retail FX brokerage AvaTrade to task in August this year over an email sent to its affiliate network in which a competitor and its service provider were the subject of derision in an attempt to onboard clients. In a victory for transparency, the company responded and has made steps to rectify the matter.
One of the key aspects of detailed research within all sectors of the FX industry that is performed by quality FX industry news sources is the increased transparency between B2B partners, this being a very central part of FinanceFeeds ethos globally.
On August 21, FinanceFeeds reported that the affiliate marketing department of European division within retail FX brokerage AvaTrade had made an attempt to onboard strategic partners and affiliates by way of an email circular which bashed a small, Cyprus-based brokerage, cast doubt over the business environment in Cyprus and also made negative references to the broker in question’s service provider.
To read the full account, click here.
As a result of FinanceFeeds having brought this to the attention of senior management at AvaTrade, at the company’s head office in Ireland, the company has addressed the matter at board level and has taken mitigating steps in order to minimize impact on any affiliate networks.
The company today addressed its affiliate network, denouncing the initial communication, as follows:
Yesterday you received an email in which one of our representatives informed you about rumors about a competitor StockSTP, a client of Leverate Financial Services Limited.
This mail does not reflect in any way the opinion of the AvaTrade Group, which has always strived to maintain its mission and policy to act as a regulated and respectable broker, this applies to our competitors, customers, & partners.
We apologize on behalf of AvaTrade and hope to continue working together.
In a telephone conversation on August 21 between a senior executive at AvaTrade and FinanceFeeds, it was conveyed that the company does not support the type of competition-bashing that had been perpetrated in the initial communication to affiliates.
The member of senior management explained to FinanceFeeds “The email sent by one of our Affiliate Managers does not reflect the opinions of AvaTrade and we do not seek to compete with other Brokers in this manner. As a side point the email was not sent to a Database but rather a small list of partners that the Affiliate Manager was in contact with, and we are shortly issuing a formal apology to that same list.”
Affiliates are of very significant value to AvaTrade, its roots being firmly planted in the affiliate marketing sector, as defined in FinanceFeeds original article today on the matter.
This response represents the professional method of dealing with an internal and potentially damaging matter, and although competition-bashing is a rare occurrence in this business, demonstrates greater mettle than some of the other firms that have taken this line in order to attempt to onboard clients.
In the case of OANDA Corporation’s similar diatribe in the aftermath of FXCM’s high profile exit from many regions apart from China where it flourishes, when FinanceFeeds approached OANDA Corporation’s at the time newly instigated CEO Vatsa Narasimha in order to reproach the company with regard to its vulgar attempt to jump on a competitor rather than demonstrate its value proposition, the firm upheld its stance right through the ranks of all operational sectors spoken to by FinanceFeeds.
On this basis, FinanceFeeds continues to maintain that a genuine business environment should be paramount among all aspects of the industry, whether it be the conduct of news and research portals, banks with their last-look execution procedures on single dealer platforms, affiliate marketers with regard to intellectual property, and of course retail brokerages competing for market share in the MT4 white label arena in which over 1230 similar offerings exist.
There is no excuse for infantile misconduct, and thankfully it is usually only expected of one-man-band entities in remote, irrelevant geographical regions, and therefore FinanceFeeds considers this to be an upstanding outcome by one of the larger retail FX brokerages.
From China to the world, and back again.
In a world first, FinanceFeeds accomplished a milestone in FX industry research, resourcing and value provision to the entire global FX industry in September this year.
FinanceFeeds China officially went into service, with www.financefeeds.cn having gone live, representing the opening of our office in Shanghai.
The very first ever B2B FX industry resource to have successfully registered a .cn top level domain (TLD) via the Chinese government, FinanceFeeds is proud to be able to assist the global FX industry in its endeavors to work closely with critical Chinese partners across all sectors of the industry, and to bring the Chinese FX industry, which is the way of the future, to you and your company.
With over 250,000 initial unique viewers per month in mainland China, all of which are key members of the FX industry’s massive community in China, garnered via several years of detailed research and relationship building by FinanceFeeds CEO Andrew Saks-McLeod in China alongside critical Chinese leaders throughout the entirety of the country, FinanceFeeds China is a resource that is now positioned as a mainstay of the FX industry’s reporting entities.