NFA fines FXCM $2 million for slippage malpractices, FXCM will credit clients back

Apparently Non Dealing Desk doesn't mean you get the best execution - NFA has just announced that it heavily fined FXCM for slippage malpractices. FXCM will pay $2 million directly to NFA and will compensate all customers who suffered from this practice since June 2008. The details of this case are not much different from the similar fine of $459k which NFA imposed on Gain Capital for using the Virtual Dealing plugin and similar slippage settings.
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Apparently Non Dealing Desk doesn’t mean you get the best execution – NFA has just announced that it heavily fined FXCM for slippage malpractices. FXCM will pay $2 million directly to NFA and will compensate all customers who suffered from this practice since June 2008. The details of this case are not much different from the similar fine of $459k which NFA imposed on Gain Capital for using the Virtual Dealing plugin and similar slippage settings.

FXCM seems to have taken this matter seriously and already started compensating clients as one of them sent me the following email:

Dear Client:

 We have important news regarding your Forex Capital Markets, LLC (FXCM US) trading account(s). Last year, FXCM enhanced its No Dealing Desk forex execution by making Price Improvements (positive slippage) available on all orders. We have reviewed your past trading data and your account(s) has been identified to receive a price improvement credit.

Account Number(s): xxxxx

Price Improvement Credit(s): x

The credit will be deposited into your FXCM trading account(s) and will be available by August 28, 2011.

The details of NFA’s Complaint and Decision:

COMPLAINT:

On August 12, 2011, NFA issued a Complaint charging FXCM with retaining gains derived from positive price slippage; failing to adopt or carry out adequate procedures to ensure the efficient execution of all customer orders; failing to treat all customers equally when giving price adjustments; and failing to adequately investigate suspicious activity in all customers’ accounts. The Complaint charged FXCM and Niv with failing to supervise.

DECISION:

On August 12, 2011, pursuant to a settlement offer submitted by FXCM and Niv, FXCM was ordered, within 30 days of the effective date of the Decision, to make a good faith effort to credit the accounts of its customers the amount of positive slippage which its customers experienced on their trades from and after June 18, 2008. FXCM shall provide verification to NFA of these credits. In addition, FXCM was ordered to pay $2,000,000 to NFA as a monetary sanction. In the future, FXCM will not engage in price slippage or margin liquidation practices; and, in the future, when FXCM voluntarily gives a customer a price adjustment, it shall also determine whether or not it is appropriate to make the same price adjustment for other similarly situated customers.

Finally, within 30 days of the effective date of the Decision, FXCM was ordered to adopt and implement adequate procedures – or enhance existing procedures – to ensure the efficient execution of customer orders and to ensure compliance with NFA’s AML requirements.

Update – FXCM’s official statement:

NEW YORK, NY – August 12, 2011 – FXCM Inc. (NYSE: FXCM), a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers worldwide, announced that its U.S. subsidiary, Forex Capital Markets LLC (“FXCM US”), has entered into a settlement with the National Futures Association (“NFA”). The settlement terms principally pertain to FXCM US’s practice concerning the execution of price improvements or “positive slippage” in its trading execution system prior to August 2010. The Company is also engaged in ongoing discussions with the Commodity Futures Trading Commission (“CFTC”) regarding this matter.

FXCM US originally enhanced its trading execution policy in August 2010 to help ensure that clients benefit from positive slippage on all market, limit and limit entry orders. The policy was further enhanced in December 2010 to address all order types, including stop and margin call orders, through FXCM’s No Dealing Desk (“NDD”) forex execution model.

Under the terms of the settlement, FXCM US has agreed, without admitting or denying any of the allegations, to pay a fine of $2 million to the NFA and to provide restitution, which the company estimates to be $8 million, to the affected clients. As disclosed on August 11, 2011 during its Second Quarter Earnings Conference Call and in related filings, the Company is making a reserve for both the restitution and fine associated with this settlement and for its ongoing discussion with the CFTC. Certain partners of FXCM Holdings, LLC have agreed to reimburse the expense in substantially the amount of such reserve, resulting in no impact to the net income of FXCM Inc. All clients receiving restitution will be notified within 30 days. Details for FXCM US clients can be found at www.fxcm.com/clients.jsp.

“We are pleased to have reached an agreement that resolves the NFA’s concerns and that we believe is in the best interests of FXCM, our shareholders and most importantly, our clients,” said Drew Niv, Chief Executive Officer of FXCM. “We previously enhanced our execution system to pass along all price improvements on every order type and remain committed to providing the most robust forex trading platform available.”

FXCM’s platforms display the best bid/ask spread streamed from the firm’s liquidity providers plus FXCM’s mark-up. Every FXCM NDD forex trade is automatically offset in a two-step process, designed to ensure that FXCM does not profit from a trader’s losses. In the first step of the execution process, a trader clicks on the price and the order is sent to FXCM. In the second step, FXCM automatically sends the client’s order to one of its liquidity providers to offset the trade.

FXCM’s execution system prior to August 2010 only offered price improvements to clients in the first step of the process. If a better price became available on FXCM’s platform in the fraction of a second after the client submitted the order but before the order was received by FXCM, the client would benefit from the price improvement. However, FXCM’s previous execution system did not provide clients with price improvements in the second step of the execution process, even if FXCM was able to offset the order at a better price, excluding FXCM’s markup. FXCM enhanced the execution system in 2010 so that clients now benefit from price improvements in both steps of a transaction for all order types.

The occurrence of price improvements is based on market conditions, including volatility and liquidity. Of the approximately $8 million being credited to FXCM US clients under this settlement, approximately $650,000 represents trades placed in 2010, less than 0.3% of the company’s trading revenues during that period. The largest portion of the credits relate to trades placed before 2009. For the portion of clients who are receiving restitution, the median amount will be $17.40.

As part of the settlement, FXCM also agreed to enhance its existing procedures to ensure the efficient execution of customer orders, modify its adjustment practices and to ensure compliance with NFA’s anti-money laundering requirements.

Mr. Niv added, “FXCM continues to strengthen its compliance program and internal supervisory procedures.”

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