The b-book pretense: Chinese brokers alleging CFH provides demo feeds to deceive clients. We investigate

Conducting business with China’s vast and well organized introducing broker network is a commercial methodology that is very much favored by not only retail FX firms, but also institutional liquidity providers wishing to provide Tier 1 price feeds to companies in the mainland wishing to be in control of their own trade execution.

Whilst this is a very important commercial synergy and some of the West’s most prominent prime of prime brokerages have established themselves very well in mainland China, FinanceFeeds has become aware of an important matter that cannot be ignored.

Having conducted substantial research in London among the Tier 1 institutions that provide FX liquidity to prime of prime brokerages, it has become clear to FinanceFeeds that there is a practice taking place in which a London based, FCA regulated institutional provider is providing demo price feeds to Chinese firms.

Speaking to an interbank FX dealer this morning in London, the matter was expanded on to FinanceFeeds. “We have now come across 3 Chinese brokers who are taking a demo feed from CFH, and executing live client trades in it. The reason for this is so that they can b book the trade, but show their client an execution on CFHs back office to prove that the client’s trade was STPd (processed straight to the bank – Ed). CFH are actively offering this service.”

The bank executive continued “Effectively, this is an encouragement to deceive end clients.”

An opinion provided to FinanceFeeds today is that CFH provides this option only to larger prospective clients, however with many IBs in China having client books which represent $300 million in assets under management and 90,000 lots per month as quite normal, it is likely to have some legs.

In order to gain complete clarity on this, FinanceFeeds investigated the corporate stance behind this in order to see whether CFH is actively doing so.

Speaking this morning to Alex Iakobachvili, VP FX Sales at CFH, FinanceFeeds was able to dissect this matter clearly.

When asked if a demo feed can be supplied to a Chinese firm, the answer was “If you are referring to the MetaTrader 4 feed, then absolutely yes.”

“It may be difficult, but you should arrange the relationship so that you are receiving real price feeds, not demo price feeds, and then set it up so that trades will go into the B Book environment” he said.

Refuting the need for a demo price feed and actually countering what we were told by an interbank dealer, CFH’s representative explained “We have built tools for brokers to do this properly, you don’t need an imitation feed. You can b book the trades yourself if that is your model, we cannot do so as our license and standing as an institutional provider will not allow us to do so, but you can.”

This is inline with many providers of liquidity, as the norm is to allow brokerages to choose whether to pass flow to the liqudity provider or to internalize it, and will be allowable under MiFID II as long as the firm is registered as a systematic internalizer.

In November last year, CFH was acquired by Teddy Sagi’s gaming software company Playtech. FinanceFeeds understands that this took place largely due to the need to raise capital to maintain prime brokerage relationships. FinanceFeeds’ opinion on the structure of the deal can be viewed here.

CFH has made strides in this area, this morning explaning that the firm has two prime brokerage relationships, one is BNP and the Jeffries International. “We also have direct providers for liquidity which are non-bank liquidity providers” explained the company’s spokesman.

With regard to the allegations of using demo feeds, CFH concluded “Using demo feeds can be done as a temporary solution, as you would not be able to use a demo feed for real price streaming. At some point we would have to ask the question for you to switch to live feeds.”

“If you pay a monthly minimum or small commisison on $10 million trades then we can help. On a demo feed, the trades would still have to be executed, and you would be losing as it has not got real market access” said the spokesman.

“What you need is a live feed from us, and a live feed has to be connected to a live market so you can decide to A or B book. EAs are always winners on demo feed, they only lose money on real feeds” he said.

Mr Iacobishvili concluded by confirming the entire conversation by providing clear detail on the firm’s ClearView technology, in which it is possible to sort positions according to type to obtain desired view of b-book positions, in b booking all net positions, dealing with client net positions on an incoming basis, or hedging trades on an outgoing basis.

Accoding to CFH, it is possible to hedge directly on the b-book by closing the position and partial hedge by right clicking and click on “trade” – a trade ticket will appear, which is in congruence with many providers in the industry.