GameStop trading chaos, b-book FX platform outages and egg on face. FinanceFeeds intervenes
When retail brokers stop treating their valued clients as ‘leads’ and ‘deposits’ the sector will evolve to where it should be.
As last week drew to a close, FinanceFeeds became instrumentally involved in the fallout which occurred once again within some of the b-book market making FX brokerages as a result of what should be a normal market circumstance, that being increased volatility.
Throughout the last year, global markets in almost every sector have been affected due to endless lockdowns by obsessive governments hellbent on totalitarian power against their own good people, ensuing currency fluctuations affecting the spot FX markets, and varying prices of company stock and equities due to new circumstances based on PR and peacocking by big pharmaceutical companies over who can ride the miracle vaccine wave first.
All of these factors have restored volatility to a global financial markets structure after over 25 years of stability, during which retail FX firms rose to prominence and were able to gradually make profit based on the lack of drama and lack of political and corporate chaos in established regions where capital markets businesses flourish.
In 2013, Drew Niv, who at the time was CEO of FXCM, the company which he had founded and led to be the largest retail FX brokerage in the world, had said “We have not seen any volatility for over 20 years”.
That dynamic continued until March 2020, demonstrating the absolute security of the capital markets structure of the First World.
Now, as the nations which Chinese communism seeks to target and weaken submit and whose leaders do absolutely nothing except repeat the word ‘Covid’ all day ad nauseum, the uncertainty that was absent for so long is now back, and there are huge opportunities to make large sums of money in trading stock and currencies, however there is also the potential to lose.
It has become common knowledge that market making retail FX firms with warehouse execution models have generated huge revenues over the past year. Some of this has been demonstrated publicly as the retail FX companies that have their stock listed on London Stock Exchange have to publicly report their revenues. CMC Markets had a record year which was reported in the last quarter of 2020, for example.
With b-booking – that being a term for executing trades in house rather than sending them to a Tier 1 liquidity provider which executes them on a live market with banks and institutional partners such as non-bank market makers – the destiny of a broker is in the hands of those which operate its dealing desk, and the inevitable demise of a client is also determined by the exact same method.
During times of extreme volatility, it has been apparent that many FX and CFD brokers which operate the B-book model have suffered platform outages, which in some cases have left clients unable to access their account and close positions, only to find that their positions get automatically closed out once their trade goes into negative equity.
Last week, when British publicly listed CFD firm IG Group experienced yet another platform outage, leaving clients out in the cold, FinanceFeeds got involved.
This particular outage which took place on Friday last week occurred around the same time as North American video games retailer GameStop became the focus of a trading war between amateurs and Wall Street pros.
Both GameStop and AMC Entertainment have seen their share prices boom as amateur investors, fuelled by chat on social media, bought their shares.
This resulted in huge volatility on Friday, and at the exact same time, IG Group’s platform suffered an outage, and traders were unable to contact the firm by telephone or email.
FinanceFeeds is well aware that for many b-book companies, image and brand positioning is far more important than client wellbeing, therefore as soon as we published our report on this matter and began to discuss the issues with traders and FX industry professionals who have accounts with the firm, IG Group immediately responded.
IG Group’s approach to us was that our reporting contained ‘inaccuracies’, which is a well worn method of insinuating that their activities can be justified.
A senior executive at IG Group explained to FinanceFeeds “Where a client believes they have made a loss as a result of not being able to log into their account, they can raise that with IG and we seek to find a means of redress so they are not materially worse off.”
Yes, indeed they could if they could get through on the phone.
IG Group’s executive continued “The suggestion that we somehow profit from such instances is false. We also don’t run a B-book business model – we externally hedge positions and do not take the opposite side of a clients trade.”
This rather interesting refuting of the truth led to our involvement between clients and IG Group, which has now resulted in traders being able to be in direct contact with senior members of staff at IG Group, hence we can consider this to be a positive move toward transparency.
Today, IG Group management has spoken directly to a professional client who was locked out of his account on Friday, as a result of our intervention, with a view to rectifying the matter. The firm’s Director of Customer Services was extremely accommodating and apologetic, and is going to begin some research on the outage and the charts, and go over the positions that could not be closed or were closed at a loss due to the stop loss, and she would look to reinstate and compensate for the positions due to the outage and lack of phone call answering in the UK offices.
The trader explained his background that he is a very senior FX industry executive and asked where does this leave the smaller retail client who does not have the language and expertise to present his issues, and who can he speak to if nobody answers when needed. He said that it is very common to hide behind the screen and not speak to traders, and retail traders would have suffered with the outage and they don’t often know the terminology or how to navigate these matters.
All of this can only lead to the same important conclusion that has been drawn by many of the more forward thinking companies in this industry, that being the need to increase not only transparency between broker and trader, but to remove the opportunity for brokers to weight their platforms in the favor of the broker and against their own customers, intentional or otherwise.
Some of the retail brokers have very large accounts. Even so, regardless of size, this is a custodial issue that all brokers should consider.
The only way forward is via genuine multi-asset solutions that provide access to global markets and in which the broker acts as a facilitator and platform provider only, and connects clients to trading venues and tier 1 liquidity across listed and OTC products.
Of course, we can do our bit, but until all trades are conducted via high quality multi-asset solutions that enable traders to access all instruments via all venues and internalization with in-house prices becomes a thing of the past, we cannot progress to a fully advanced environment which empowers traders and equally brings them up to the same level as the institutional professionals of Chicago, New York and London.
No firm should be running affiliate style profit sharing. Especially if they consider themselves to be a prime of prime. FinanceFeeds has noted that even today, there are firms with FCA licenses that operate as prime of primes, yet offer revenue and profit sharing to their broker clients. This is a practice which must stop.
This is counter to what their licenses stipulate, and in the past has led brokerages which have trusted these firms to provide liquidity only to find that profit sharing has led them to bankruptcy, leaving brokers unable to return funds to clients if their provider goes bust. AFX Group, Fortress Prime and Boston Prime are examples of this, and should be held out as warnings.
Meir Velenski, a trader with over 30 years expertise who operates as a consultant to brokers in the FX industry and has held senior positions at London-based retail FX, CFD and spread betting companies told FinanceFeeds “We need to keep onto this matter and regularly investigate these retail firms who do not allow clients access to their accounts during times of high volatility and who close profitable positions and then argue later that it is all covered in the small print and that they are free from any liability. It is a disgrace and it is time that in 2021 we should all be far more advanced than that.”
We are aware that some traditional brokers were affected by the GameStop issue at the end of last week.
It is definitely time to up the Game, and Stop treating valuable clients as ‘deposits’ and ‘leads’.