Trading volumes and the truth – Op Ed

A longstanding practice among many prominent retail FX companies is to publish press releases every month which state their trading volumes, many of which are presented by marketing departments and contain metrics and figures which are not required to be reported publicly.

One particular question with regard to these monthly soundbites should perhaps be how useful they really are, and if not viewed by auditors from large professional services companies such as Deloitte, or Price Waterhouse Coopers, how accurate they are.

For the purposes of clarification and accuracy, there are certain categories that must be considered, and the rules and guidelines that apply.

• Publicly reporting companies which are listed on major exchanges in London or New York. These companies are most certainly reporting reliable information.
• Jurisdiction: Non-publicly listed companies in Britain, Australia or other recognized region that are either large, long-established spread betting companies or liquidity providers and prime brokerages would not be allowed to issue inaccurate volume figures because the compliance departments would have to approve all figures.

…..But thats about it really.

Every month, a whole host of retail FX firms from across the world issue press releases which indicate monthly trading volumes, however, how can these be considered accurate or a reference point on which to base genuine research if they are produced by marketing departments within non-listed firms and are not signed off by an auditor?

Companies which present correct volume figures

United States:

Within the retail FX sector in the United States, publicly listed firms dominate the retail market, and their information is, by law, publicly available and required to be reported to the exchanges on which they list as part of the listing requirements of broker dealers.

Interactive Brokers, FXCM, and GAIN Capital are all listed on the New York Stock Exchange, and must report their trading volumes accurately.

United Kingdom:

In London, CMC Markets, IG Group, and Plus500 are listed on the London Stock Exchange, and therefore must report their trading volumes accurately.

All of the brokers in those categories have their volumes issued by their investor relations departments, which are responsible for reporting to directors and shareholders.

Longstanding FinTech companies with an outstanding reputation:

Technology-led companies that are privately held, including Saxo Bank and OANDA Corporation, can be relied upon for reporting correct information as they are long-standing firms which have an extremely discerning audience and are continually at the cutting edge of electronic trading.

The practice of double-counting and triple-counting to ramp up volume figures

FinanceFeeds conducted research recently which demonstrated that there are 1,231 active MetaTrader 4 brokerages and white labels in current operation, many of which are relatively small firms, owned by private entities.

Every month, trading volume figures are released, often by marketing departments rather than investor relations, compliance or legal departments and are not issued by accountants, lawyers or public exchanges.

Indeed, many companies which operate in the retail FX sector and are privately owned exercise discretion and do not publicize their figures, however there is most certainly a question over the accuracy of those which do, and it is important that the monthly figures issued by marketeers relating to non-reporting companies are not taken at face value.

Today, FinanceFeeds spoke to a series of senior executives and compliance and regulatory officials in London, which work within prominent liquidity providers and prime brokerages in order to take a close look at this matter.

One particular senior institutional industry figure explained “I think that anyone that reports volumes that aren’t audited is probably not telling the truth.”

“At the very least they are likely to be double counting” he said.

“The ability to do this does also depend on their regulatory status, for example I wouldn’t be able to release anything like that without my compliance guys climbing all over it” he continued.

Then we got to the subject of double-counting. “You can still double count” said this particular executive. “Technically I could triple count my client volumes, because of the way that we hedge” he revealed.

“This means that you report both the client side, and the LP side. If a client buys 1 million EURUSD, and I buy 1 million EURUSD from my LP to hedge, I have technically transacted 2 million, but actually it’s only 1 million of client volume, so technically claiming 2 million of volume would be correct, albeit rather misleading” he said.

When asked if this is unlawful, the institutional FX executive said “No, because you’re not reporting inaccurate information, because you have actually transacted 2 million.”

Another liquidity provider explained “Even if the volumes are audited and signed off, I do not see value in it as there are many tricks in calculation of the volume”, thus concurring with the opinion of the aforementioned industry executive.

He concluded “Unless there is one unified method of calculating volumes, which does not exist, then it is all inaccurate.”

Indeed, there is only one unified method of calculating volumes, and that is via centralized exchanges rather than OTC transactions, meaning that those firms executing contracts via electronic futures exchanges would be unable to mask or alter the volume figures, as reports are publicly available from exchanges, however OTC transactions conducted by private firms are not subject to any scrutiny, and regulatory authorities do not concern themselves with volume reporting procedures in any jurisdiction as this is not a regulatory matter.

Neither is it a tax or auditing matter, because only profits for tax purposes or revenues for valuation purposes are. There are no stipulations for reporting volumes.

Back in the 1980s, car manufacturers used to pre-register surplus stock so that they could produce monthly reports on how many cars were ‘sold’, so that, for example, Ford and General Motors could compete over who had the biggest market share, however these were not real figures because many unsold stock and demonstrators were pre-registered, and the registration and licensing office provided the figures.

The real sales figures were only known internally, and were never published.

It is worth considering that the same should be taken into account with regard to trading volume information. Go figure!