NFA prefers market makers over ECN/STP brokers?
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In what seems to be an endless effort of the NFA to kick the Forex industry out of the US, it imposes more and more stringent, and some would say, requirements on the local brokers. Another latest requirement to be announced ties the NFA membership fees to broker’s revenues from forex transaction.
NFA Bylaw 1301(e) requires Forex Dealer Members to pay annual dues that are graduated according to the firm’s gross annual revenue from customers (e.g., commissions, mark-ups, mark-downs) for its forex activities. Profits and losses from proprietary trades are not to be included.
If I understand what I read this means that FDMs will pay high annual fees if they charge commissions or mark ups, but not when their clients lose money. Commission and mark ups is charged only by ECN/STP brokers, so this means that NFA actually encourages market making. Otherwise it would charge market makers a higher commission than what it charges the ECN/STP brokers. This means that ECN/STP brokers earning over $5 million a year will have to pay $120,000 more than their market making colleagues. This is also terrible from another perspective – making money from commission is much more difficult than from clients losses simply because commission can never be as high as the deposits and subsequent potential losses of a client. So instead of encouraging more objective brokers with not hidden interests and agendas the NFA goes and does exactly the opposite.
All this just to be able to solicit US clients? No thanks.
4 Comments on this post
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Stephen Leahy said:
i agree with your analysis, Michael. But remember that those firms taking on risk (and not a STP/ECN broker) have larger capital requirements from the NFA. So while the STP/ECN clearing firms pay more annually, the dealing desk firms need to hold more capital. It comes down to a math question for the owners of any NFA-based clearing firm…..more equity invested and less expense? Or less equity invested and higher expenses?
December 15th, 2009 at 11:36 am -
Michael Greenberg said:
That’s true Stephen, but larger capital is one thing and hefty membership fees is another…
December 15th, 2009 at 12:45 pm -
Forex Crunch said:
Thanks for this important analysis. This doesn’t help the forex industry to become more mainstream.
December 15th, 2009 at 1:14 pm -
jadoel said:
WTF is this? Oh well, business is business…
December 17th, 2009 at 10:35 pm
