Former customers of FXCM insist slippage matters are serious

Maria Nikolova

It is not implausible that purchasing a currency at $1.3660 instead of $1.3650 as a result of FXCM’s abusive trading practices constitutes a loss for the customer, New York Court hears.

Former customers of FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR), have sought to reiterate the importance of slippage for Forex trading and the crucial role Effex Capital played in the perpetration of fraud by the broker.

In documents filed with the New York Southern District Court on Thursday, May 3, 3018, a number of former customers of FXCM – Vantalie Nguyen, Hien Tran, Quynh Pham, Arthur P. Cardi, and Bikram Randhawa, argued against the claims made by Effex Capital and its CEO John Dittami. Let’s recall that Effex and Dittami had insisted that they are not liable for FXCM’s alleged misconduct.

The plaintiffs have brought the action on behalf of themselves and all other former customers of FXCM Inc; Forex Capital Markets, LLC; and FXCM Holdings, LLC, in an effort to recover the damages they and the Class suffered as a result of the alleged fraud perpetrated by Effex Capital, Dittami and FXCM. In brief, the customers say they were led to believe that FXCM provided a conflict-free retail Forex trading platform, whereas, in fact, the opposite was true: FXCM had a hidden relationship with Effex, which held positions opposite to orders placed by the Class and could (unlike other liquidity providers) view non-public details of those orders, and then engaged in abusive practices—all to the benefit of Effex, Dittami and FXCM.

On Thursday, the plaintiffs argued that Effex was central to this misconduct, as it was the secret liquidity provider that FXCM was penalized for concealing from its customers. Effex and Dittami should be held responsible for the damages they caused to the Class during the seven-year Class Period—which far exceed those identified by the CFTC.

The ex-FXCM customers stress that Effex deprived them of positive slippage and gave them negative slippage—when it would benefit Effex’s and FXCM’s bottom line. Two of the most egregious practices were the Hold Timer, and Previous Quote functions. Effex used both of these abusive practices to harm FXCM’s customers. Furthermore, all trades that were routed to Effex were denied best execution and the possibility of a better price—i.e. positive slippage—because the other liquidity providers were not allowed to compete to provide a better price to the traders.

The plaintiffs note that FXCM did not mention: (1) that FXCM had an undisclosed interest in and agreement with Effex to route order flow to Effex and prevent other providers from filling orders; (2) that Effex engaged in price slippage including (i) using the Hold Timer for the benefit of FXCM and Defendants; and (ii) using the Previous Quote feature in conjunction with non-public information.

These misrepresentations and omissions were materially false and misleading because:

  • (1) FXCM had a direct interest opposite its NDD customers;
  • (2) in addition to markups, FXCM profited from Effex’s manipulation of NDD trades;
  • (3) orders on NDD were not anonymous and Effex used private order information to the detriment of Plaintiffs and the Class;
  • (4) Effex effectively had a right of first refusal on trades placed on NDD;
  • (5) FXCM did not route order flow based on liquidity providers’ pricing, but instead heavily favored Effex; and
  • (6) Effex regularly tampered with orders to benefit FXCM and Defendants by its use of the Hold Timer and Previous Quote.

Moreover, while FXCM’s 10-Ks disclose that FXCM receives payment for order flow and purports to state that the order flow payments ended in August of 2014, they fail to disclose that Effex was the only liquidity provider that paid for order flow and that FXCM allowed Effex access to confidential information about customers’ orders and encouraged Effex to use an asymmetrical price slippage practice to deprive customers of positive price improvements while giving customers negative slippage.

Furthermore, the disclosures themselves are misleading, the traders say, in that FXCM stated that it received payments from “market makers” to ensure that the payments did not “affect the routing of orders in a manner that is detrimental to our retail customers.”

The plaintiffs insist that Effex and Dittami knew FXCM intended to violate the CEA because they operated hand-in-glove. Also, without Effex’s participation, FXCM could not have violated the CEA. Because FXCM created Effex to secretly trade against its customers, Effex did more than “provide normal clearing services to a primary broker.”

The plaintiffs note that Effex and Dittami substantially and actively participated in FXCM’s breach of fiduciary duty because FXCM’s breach depended on routing customer orders to Effex. In fact, according to the plaintiffs, Effex existed separately from FXCM to allow FXCM to exploit its customers. Although Effex and Dittami have argued that they did not have control over FXCM’s routing, “it is uncontroverted that the platform by which trades were routed was designed by Dittami in order to favor the liquidity provider chosen by FXCM”, the traders say.

In addition, Effex’s assertions that the customers have no unjust enrichment claim because they were not “a counterparty” to Effex are dubbed to be erroneous. That is because the traders had “some relationship with a defendant.” And that is a clear relationship: Effex executed the plaintiffs’ transactions.

Effex and Dittami argue that the slippage suffered by FXCM customers identified in the Complaint cannot constitute damages as it is “implausible.” They fail to explain why it is implausible that purchasing a currency at $1.3660 instead of $1.3650 as a result of FXCM’s abusive trading practices constitutes a loss for the customer.

Also, Effex and Dittami claim that the FXCM customer agreements disclose the risk of slippage. The agreement warned of potential slippage only “under certain market conditions including, however, not limited to, when the trading desk is closed, around fundamental announcements, and at times of extreme market volatility.” Customers “can expect slippage during periods of thin liquidity, rollover, news announcements, and economic events.”

But the traders note that the Agreement did not disclose the risk of slippage as a result of abusive order routing practices and an undisclosed conflict of interest. And although Effex further asserts that FXCM’s customers waive all claims for slippage unless raised within two days, there is no such provision in the Customer Agreements.

The case, captioned Nguyen v. FXCM Inc. et al (1:17-cv-02729), continues at the New York Southern District Court.

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