NFA says it is about to launch an investigation involving all US forex brokers in order to find out whether they cheat their clients.
The National Futures Association says it will begin analyzing trades executed by its 16 member forex firms. The regulator will search for signs these firms are designing computer systems to take advantage of what’s known in the industry as “slippage” —small price movements that happen between when a customer orders a trade and when that trade is actually executed. While some slippage is normal (currency prices naturally fluctuate 24/7), the NFA will be looking to see if trades are being executed only when the currency price moves in the firm’s favor. This would indicate a firm may be violating NFA rules mandating fair business practices, says spokesman Larry Dykeman. The group can then assess fines, and in some cases may suspend or expel a firm from membership in the organization.
Those with good memory will remember that only 6 months ago Gain Capital was slapped with $459,000 fine for abusing its Virtual Dealer plugin and configuring it to unfair trading settings. The plugin was configured to accept client orders when slippage moves unfavorably against them and reject client orders when slippage goes against Gain Capital.
Virtual Dealer plugin and the likes are pure risk management and dealing programs. These programs make a good job at reducing brokers’ risk by accepting or rejecting orders without broker intervention and according to preset configuration. The main idea behind these plugins is to protect the broker from being exploited by certain traders who will try to gain pips they shouldn’t gain when they give an order hoping that by the time the order is accepted by the broker the market already moved a pip or two in their favor. This obviously makes it not trading but exploiting loops in brokers’ systems. On the other hand, brokers (some would even say that most brokers) exploit the configuration of these plugins and set them to only accept orders when the market moves against their clients thus profiting a pip or two against a client in almost every trade. When you add those pips up you get quite a nice, zero risk, daily profit for the broker. NFA is concerned exactly with this.
I think you are fundamentally mistaken about the purpose and mechanism of the “Virtual Dealer” plugin.
Traditionally, the business risk of a market maker maintaining liquidity is being managed via the spread and via commissions. In natural, non-manipulated markets if the price moves fast then the spread will widen to express the increased risk to the broker.
If an NFA registered Forex broken claims irrealistically low currency spreads for marketing purposes (some even go so far as to claim and “guarantee” fixed spreads!) but then uses Virtual Dealer or similar software techniques to “manage risk” (i.e. to increase the spread artificially!) then that broker is bona fide dishonest.
This has nothing to do with retail traders “abusing” fast market moves. Fast moving markets are risky, full stop – and the abuse is the claim by some brokers that spreads are always low or always fixed.
The NFA is well within its rights to investigate such market manipulation practices.