Whether a broker is any good or not has nothing to do with the regulators

Why is IronFX still licensed when it owes a fortune in unpaid tax to the very country that licenses it and fails to pay withdrawals? Why does the FCA license undercapitalized firms? The real quality in this industry is the result of the excellence, hard work and dedication of the professionals that lead the electronic trading industry, not the impotence of some of the regulators. It is time for customers to look at firms on a meritocratic basis and not just who is regulating them


In today’s highly established retail electronic trading industry, an unwritten rule has manifested itself that accepted de facto regions for establishing an FX broker exist, despite this being a completely borderless industry.

Those regions are Britain, the United States, Australia, Cyprus and Australia, largely due to two factors, those being the high levels of expertise within the industry that is abundant in those regions, the other being the regulatory supervision that has become widely accepted as that of choice for retail traders.

Indeed, the first of these reasons is very valid indeed and has been instrumental in building the retail sector into the highly sophisticated ecosystem which emulates that of the institutional world and professional trading desks.

London is the world’s largest financial center, and is home to a number of extremely highly educated industry professionals with a wealth of experience, often spanning several years, within institutional firms, Tier 1 banks, technology consultancies, and professional services firms with global provenance.

Chicago and New York are the home of the electronic derivatives giants and the Wall Street market leaders respectively, their professionals being well versed in trading infrastructure and execution as an almost direct read-across from that of London, and Australia is the well organized gateway to the Asia Pacific region, with domestic firms and branches of Western companies enjoying a fine reputation for modernity, business ethic and accuracy of execution under Australia’s highly organized regulatory structure.

The question is, are we now at a point in the development of the entire component chain of trading infrastructure, market expertise and customer enlightenment that the actual behavior of the regulatory authorities in some cases is no longer a measure by which firms should be chosen by traders?

Yes indeed, the National Futures Association in the United States is by far and away the most comprehensive and well ordered regulator, and certainly the least open to any form of persuasion from outside forces such as government interest or pressure from any lobbying, the United States being the most customer friendly and least corrupt nation on earth.

A clear demonstration of this has been present over the last few years, especially during the exodus from the market by many non-American companies.

New York is the evergreen center of the world’s largest FX firms, with highly capitalized giants including GAIN Capital, FXCM, the technology-led OANDA Corporation and America’s most well capitalized OTC brokerage, Interactive Brokers, demonstrating that a domestic firm with global presence, operated by some of the world’s most astute electronic trading industry professionals, is not only a route to longevity but to dominance.

Between 2010, when the Dodd-Frank Act was sworn in and 2013, there was a wave of exits from the United States at the turn of this decade by major firms including Alpari, FXSolutions, GFT, IBFX, and ILQ to name a few, as well as vast consolidation with FXCM having bought the client bases of various firms, and GAIN Capital acquiring GFT, meaning that in the space of just three years between 2010 and 2013, the approximately 25 retail OTC FX firms that had operated in America became nine.

Now, it is quite simply dominated by just four domestic companies.

At that time, much clamor amassed and it was relatively common to hear conversations by industry executives outside North America as well as those on the retail sales side such as introducing brokers beginning to hail America’s FX business as a dead man walking.

How wrong could this be….

When examining the companies that took the option of leaving the US market post-Dodd Frank Act, they mostly no longer exist anywhere globally. ILQ left the US market with the NFA having administered a $225000 fine and a permanent ban from operating in the Federal United States in July 2014.

One of the main factors which prompted the NFA to probe into the commercial activities of ILQ at the time was that the regulator had serious concerns relating to the corporate structure of the company, as well as the NFA having conducted investigations into the provenance and business activities of a number of the company’s key figures, including the assertion that at the time that the NFA’s investigation began in March 2013, ILQ had approximately 1,300 customer accounts and over $13 million in total customer liabilities.

Nowadays, the firm has a small operation in Australia but is living in the shadows of Invast Global or AxiTrader, both of which have branched into Prime of Prime brokerage, as well as embarked on large scale commercial growth endeavors.

IBFX was banned from the US market in March 2016. The company, which is owned by Japanese giant MONEX Group, was fined $1 million by the CFTC a day before its ban, and OANDA Corporation then acquired its client base that were using the proprietary Tradestation platform – around 2200 traders – and migrated them to OANDA’s fxTrade system.

Previously, IBFX was fined $600,000 as a result of the NFA having found that IBFX used two models to execute its retail FX transactions. One was STP, and the other being a practice known as warehousing.

Warehousing occured whereby IBFX acted as the counterparty for trades whose value was less than the notional volume threshold level lnterbank had established for STP trades. Interbank would aggregate the “warehoused” trades for risk management purposes and earn revenue from the bid/ask spread and from beneficial market moves that the aggregated “warehoused” trades experienced.

For the vast majority of trades, IBFX would warehouse the trades, and for the remainder of trades, IBFX used the STP model, which accounted for a very small percentage of the firm’s trading volume and applied when the contract size was at or over the specific notional volume threshold set by the firm for its warehouse trades.

Under the STP model, after a customer clicked on the bid or offer price, which included lnterbank’s predefined markup, IBFX would fill the customer’s order but only after the firm had filled the offsetting position (contra-fill) with a liquidity provider.

Less than two years later, IBFX sold its MetaTrader 4 client base to FXCM for $4.4 million, before this year leaving the US altogether.

Strength and business ethic in the land of the free

Capitalization and execution are cornerstones of the American FX industry’s pedigree and quite simply, time has shown that those that cannot cut it in America, have been unable to do so throughout their business operations anywhere globally.

It was convenient to blame the inability to operate on over zealous regulation, or a net capital adequacy requirement of $20 million, however the US giants that remain do not find this difficult at all. Even FXCM, which was exposed to a vast and unexpected surge of volatility when the Swiss National Bank removed the 1.20 peg on the EUR CHF pair in January 2015, was not called up on its execution methodology, commercial leadership or capitalization.

It is fair to say that today, these factors that stand the four large American firms out as bastions of strength and professional conduct are not the regulatory criteria, but their own abilities to operate in a sophisticated manner and serve institutional and retail clients in an organized manner that continues to keep pace with technological change.

The same is true of London’s finest

In London, the large publicly listed CFD and spread betting companies that have been in operation for three decades are a continual reminder that Britain is a vast producer of high level talent and a top quality trading environment, often via carefully designed proprietary platforms that in some cases cost $100 million to develop.

A quick call to any customer service department of the major firms, those being IG Group, CMC Markets and Hargreaves Lansdown and even the representative which answers the phone will have a detailed understanding of the complex methodology behind the electronic trading environment, including liquidity aggregation, trading infrastructure, execution and the ergonomics of a platform. Not one of the employees of any of these firms need to have their hand held by a geography teacher-esque public servant in a brown jacket with patches on the elbows and shoulders who represents the regulator, because the firms themselves are who are leading the industry forward, not the regulators.

A thirty-year long loyal domestic client base is enough testimony to that.

So, bearing all of this in mind, it is fair to say that the companies themselves drive this industry forward, and not the regulators, therefore it is perhaps time to ask whether today’s retail customers really need to just simply ask where a firm is regulated and then proceed to deposit.

Many retail customers today understand execution practices, they know what internalization of trades is, they can ask who the liquidity provider or prime brokerage is, they can find out how trades are being priced and what matching engine is being used, and the companies that provide their customers with the highest level of service often work with them on this, and the regulators in most cases are not as au fait.

This is evident with regard to CySec’s recent impotence with regard to IronFX.

Cyprus is home to a massively buoyant FX industry that encompasses all components from prime brokerage right through to the major platform development firms and has a very high quality talent base. A broker can go to a software firm there and have a custom platform designed, and then just down the road there is a liquidity bridge firm that can link it to a live market via a local prime brokerage. This itself is testimony to the abilities that exist within Cyprus’ FX industry.

The fly in the ointment? CySec, which bends to lobbyists and allows companies such as IronFX to continue to be licensed.

To an uninitiated customer, what is the difference between a good quality firm with a CySec license, and IronFX? How would one know the difference without doing a series of searches on Google?

IronFX has a litany of blots on its copybook behind it, including massive allegations from Chinese IBs that it did not pay withdrawals, resulting in a national media campaign and police involvement in China.

The firm has an outstanding tax liability to the Cyprus tax authorities of over 1.5 million Euros, and has defaulted on withdrawals across most of its markets. The company has even been allowed to change the name of its registered entities in order to filter funds between the UK and Cyprus, and what does CySec do?

Nothing at all. 

According to much speculation, close ties to influential figures allow IronFX to go over the head of CySec and render any (limited) powers that CySec has completely irrelevant. Indeed CySec does not have criminal prosecution or customer restitution powers, however it can remove the license of IronFX, and has not done so, despite the firm’s absolute disregard for commercial practices which range from paying its tax to the refusal to pay withdrawals to customers globally, to the massive detriment of the name of Cyprus in general.

In China, where FinanceFeeds conducted a substantial amount of research among large IBs in second tier development towns, the general consensus is that Cyprus based firms should be avoided, largely because of the massive media attention that surrounded IronFX in China. Chinese IBs cannot check on companies due to the firewall that inhibits information from overseas, and therefore because of the behavior of one firm that is allowed to continue to operate, everyone else suffers.

CySec has removed licenses of companies in the past, and fined them for certain practices. ACFX had several license suspensions at the time during which it began to stop paying withdrawals and its senior management made for the hills to go and work for LCG in London, yet the extent of its failure to uphold any standard was much more protracted and far less grave than the allegations that surround IronFX.

Influential figures which have sway are a large consideration in this case.

FinanceFeeds recently asked CySec senior officials what is to be done about this, and the response was that whilst CySec does not have restitution powers, it advises all complaints to be directed to the financial ombudsman and does not condone the withholding of client funds against the clients will.

Really? So why not remove the license? IronFX has been told time and time again, and has been the subject of government-level concern, with three years of alleged non-payment of withdrawals. By association, CySec condones this by continuing to uphold its license, however we believe that somebody much higher up than CySec is pulling the strings.

FCA allowing under capitalized firms to fester

Britain, home to the world’s largest and most stable institutional FX industry, as well as some of the most esteemed publicly listed retail brokerages, which adorn the banks of the River Thames alongside six FX interbank dealers which handle over 49% of the entire FX order flow at Tier 1 liquidity provision level, as well as some of the most historic prime of primes in the entire financial world.

London, by a margin the size of the Hoover Dam, is the capital of electronic trading, global markets and a powerhouse of sophisticated technology and infrastructure that powers the global financial industry.

Its regulator, by contrast, is impotent.

The Financial Conduct Authority (FCA) has only the quality of London’s plate glass, highly polished financial markets ecosystem to thank for its own glowing reputation worldwide, as conversely to most regions, the FCA’s good name comes on the back of the companies that it oversees, rather than the other way round.

Indeed, the FCA has zero restitution or criminal prosecution powers should something go awry (which is very rarely indeed in the UK, such high quality is the entire business and the talent base in which executives dedicate their careers to polished accuracy) then the FCA simply offers a firm to settle via fiscal means, at a discount, and not so much as a compliance inspection takes place.

To exemplify this, between 2010 and 2013, 97% of the £943 million in penalties issued by the FCA to firms in all sectors of the financial services industry were settled by this means, with no official even entering the premises.

Whilst many regions including North America and Australia, both home to some of the most stringent and advanced regulators in the world concern themselves with regulatory capital and are subject to continual surveillance, with the shadow of being shut down and having client funds restituted should they go outside the parameters, the UK continues to allow the metaphorical minnows to swim among the heavyweights, unchecked and without recourse, despite flagrant flouting of rules.

In Britain, CFD trading is very popular indeed, due to the tax treatment of spread betting products by the British government, hence the proliferation of proprietary platforms for this purpose, many of which are the subject of several million pounds worth of development and continual support to millimetric accuracy.

Others, however, are quite simply a fly in the ointment and are allowed to operate despite having absolutely no capital whatsoever.

A case in point is an electronic trading firm called City of London Markets, which is an investment management and stockbroking service, which offers retail clients a range of assets tradable via an electronic retail platform.

The emphasis of City of London Markets’ offering is CFDs, the company’s website alluding to CFD trading in a massive capacity, taking precedence over the other assets it offers which are shares, SIPPs and ISAs (traditionally British savings systems which are aimed at retirement planning via alternative investments), FX , options and futures.

The largest firm in this sector in the UK is Hargreaves Lansdown, which has a market capitalization of over £6 billion and is a bastion of quality.

One thing that the FCA stipulates in order to gain a license is that, contrary to popular belief, an applicant must state how much regulatory capital is required, with a minimum of 730,000 Euros, the lowest amount permissible under MiFID regulations. Aside from the MiFID requirement, the FCA acts rather like a self regulatory organization in that a firm must submit how much is required, and then when the license is approved, must stick to those self-determined parameters.

However, in the absence of any compliance inspections, transgressions are easy to get away with.

A look at City of London Markets’ accounts makes for interesting reading.

At 3.41pm on November 9, AIM-listed Milestone Group (MSG) slipped out a “miscellaneous” RNS on the FCA’s regulatory reporting site. It may have won two big contracts recently but in terms of this RNS, there was nothing miscellaneous about it: this company is in serious trouble.

One day later, after MSG detailed that £1.25 million from a placing announced on 20 October had gone west, the shares for which were admitted to trading on 31 October had not turned up, with the firm responsible, according to ShareProphets, being City of London Markets.

Yes, trading errors occur occasionally, however this particular incident is perhaps more alarming when considering that City of London Markets completed the year ended 30 September 2015 with a turnover of just £25,674. Despite regulations set forth by MiFID requiring a minimum of 730,000 Euros for a market maker’s license, City of London Markets’ annual report for September 2015 showed cash at the bank of just £1396. Quite how an order for 1.25 million can be settled and processed bearing this in mind is a mystery.

The firm made a loss of £25,928 and net assets stood at £41,955 but included within current assets under the description of other debtors was in fact an amount due from James Douglas for £46,628 (2005: £23,193). This is described as being interest free and with no fixed repayment date. James Douglas is named as the sole shareholder.

As far as this is concerned, it is quite alarming that the FCA continues to approve this company as having sufficient regulatory capital.

Unlike the Australian Securities and Investment Commission (ASIC), the FCA has no real time surveillance system and does not perform continual checks on its market participants in order to find such parameters, however considering that this information is publicly available under the filed accounts at Companies House – a requirement for all British companies – it would not be difficult for compliance officers to go through the records and root this out.

Bearing all of this in mind, it is worth considering that the quality of British, Australia, Cypriot and American firms that has elevated them to the highest level of financial markets, FinTech and electronic trading leadership is their own abilities and corporate excellence, therefore in today’s world, those regions can be heralded for their success on a meritocratic basis, via their own self-earned prestige and customers therefore should consider that as criteria on which to choose a brokerage, not just base it solely on which regulatory authority covers it.

Those who led this industry via their own professionalism to this level should be absolutely proud of their achievements, and today’s astute customers, by their own loyalty, are quite clearly well aware of that.

The post-regulatory age is here.

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