Reading the details of this case you just can’t help but wonder what is NFA all about? NFA is simply doing what it wants, interprets the rules only in the way that suits it and basically does anything it can to impede its own members – the forex brokers.
If anything, NFA and CFTC (or as we call them ‘the post-factum regulators’) are jointly responsible for the American forex industry’s descent. American brokers could have, and should have, become the largest brokers in the world bringing worldwide customers to the US instead of scaring them off – which is what currently happens. Not only this, but both NFA and CFTC failed time and time again in preventing fraud by brokers they are in charge of regulating (MF Global and PFG) proving that they don’t have the skills to do their jobs.
American government would do a great job in bringing more business and money back to the US by disbanding those two failed bureaucratic apparatuses than by allowing them to continue operating.
In a case similar to FXDD’s suit, NFA agreed to settle with Alpari over charges that the latter cancelled trades done on its forex options platform (provided by FX Bridge) which malfunctioned and allowed clients to place trades when they shouldn’t have.
NFA actually accepts that the platform malfunctioned but still required Alpari to pay a fine and refund the clients!! It seems that no matter what the client does – they can always go the NFA and make sure that justice isn’t served.
It’s evident from this case that here, just like with FXDD, NFA spent countless hours checking trade by trade but couldn’t find the time in 2.5 years to verify PFG’s statements.
Alpari however indeed has to make sure its documents are up to date and state trading conditions clearly – otherwise they would be able to easily refute this NFA’s suite.
Details of the case:
9. On October 20, 2011, Alpari reported a “market event” through Fortress indicating that an error had occurred with the firm’s forex options trading platform. Specifically, Alpari indicated that a system malfunction had allowed five customers to place new option orders 24 hours before expiration on October 20, 2011, which Alpari executed as the counterparty. However, Alpari provided no information to NFA about whether the firm had adjusted any customers’ accounts and did not otherwise inform NFA about the malfunction.
10. Several days later, one of Alpari’s customers filed an arbitration claim with NFA alleging that Alpari had cancelled trades in his forex account because the firm claimed he had based his options trades on “wrong price quotes” resulting from technical issues with the trading system. NFA’s Arbitration Department referred the claim to NFA’s Compliance Department because of the nature of the allegations and NFA’s then pending audit of Alpari.
11. The arbitration claim prompted NFA’s Compliance staff to initiate a formal investigation into Alpari’s system failure. In addition to reviewing the information that Alpari had reported through Fortress, NFA staff requested further information from Alpari and interviewed Skowronski and Granholm. Skowronski represented that it was the firm’s policy to prohibit options’ customers from trading 24 hours prior to the expiration of options on the third Thursday of every month because the firm’s liquidity providers imposed a similar trading restriction on Alpari. Skowronski also represented that the firm’s options platform provider – FX Bridge – inadvertently enabled the system to allow the five forex options customers to place trades during the prohibited 24-hour period from Wednesday, October 19 through Thursday, October 20, 2011, which was the expiration date for October options. As a result, five customers traded about 26,000 contracts overall during the so-called prohibited timeframe and generated almost $230,000 in total profits. The customer who filed the arbitration claim accounted for almost 25,000 of the contracts traded and over $220,000 of the profits generated. (Does it really seem logical to the NFA that one clients will trade 25,000 times during 24 hours and it’s not a platform hack? Apparently it does. – MG).
NFA’s investigation revealed that the trading platform malfunction was not an isolated incident and, instead, had existed for several months without Alpari’s knowledge. Specifically, between May and September 2011, a few Alpari customers traded almost 500 forex options contracts during the 24-hour period before expiration, incurring total net profits during those five months of close to $4,500. The trading platform malfunction went unnoticed by Alpari until the incident in October 2011, when the five customers made almost $230,000 trading within 24 hours of expiration. It was this incident that finally caught the attention of Alpari’s trade desk.
After the October 2011 system error occurred, Alpert decided to classify the trades as “phantom trades” and instructed FX Bridge to “bust” them and purge them from the system. In addition, Alpert determined that the profits resulting from the trades were “illicit” and unilaterally decided to remove those proms from the five affected customers’ accounts, without contacting NFA in advance to determine whether this practice complied with NFA’s Forex Requirements.
Specifically, Alpari unilaterally made price adjustments that removed funds ranging from almost $153 to over $220,000 from the accounts of the five affected customers, though Alpari later provided a $55,000 credit to the customer who had filed for arbitration.
Alpari based its decision to take back profits from the five customers on the premise that the customers took advantage of Alpari and its trading malfunction and, therefore, were not trading in good faith. Alpari claimed the affected customers knew about the company policy prohibiting the execution of options trades 24 hours before expiration because the firm’s customer agreement disclosed the policy. However, the evidence does not support Alpari’s claim that these customers were not trading in good faith.
Specifically, in January 2012, NFA obtained what Alpari represented were the customer agreements for the five affected customers, but none of the agreements made any mention of the supposed 24-hour trading prohibition.
When NFA questioned Granholm about this, she admitted that the agreement used for the one customer who opened his account in May 2011 did not contain the 24-hour prohibition, but claimed that customers were bound by subsequent amendments Alpari made to the agreement in July 2011, which supposedly added the firm’s options expiration trading policy. When NFA asked how Alpari informed customers about the amendments to the agreement, Granholm told NFA that the firm had posted a July 13, 2011 notice in the “Company News” section of its website. However, that notice made no mention that the firm was imposing a 24-hour prohibition on the trading of forex options prior to expiration and failed to identify any of the specific changes Alpari had made to its customer agreement. Instead, the notice merely included a link to the section of Alpari’s website that listed forms. Furthermore, Alpari buried the trading prohibition in a one-line addition to an exhibit incorporated as part of Alpari’s nineteen-page customer agreement.
Other Alpari records, which included e-mails and tape-recorded telephone conversations with some of the affected customers, also demonstrate that these customers had no idea that the 24-hour trading prohibition prior to expiration existed prior to the October 2011 incident.
Alpari was unable to verify which version of its customer agreement applied to the four other customers (besides the customer who opened his account in May) who were affected by the October 2011 incident. Specifically, these four customers opened their accounts in August and September 2011, but the agreements Alpari initially produced to NFA for these customers did not contain the 24-hour trading prohibition that Alpari supposedly made part of its customer agreement in July 2011, After pointing out this discrepancy to Alpari, NFA learned that Alpari’s programmers had evidently made an error when they were uploading a revised version of the firm’s customer agreement in 2012 and overwrote data in Alpari’s historical data files, including the version of the agreement the four Alpari customers had “electronically executed” when they opened their accounts with the firm. Granholm admitted that the firm was unaware of this programming error until NFA raised the discrepancy with the firm in April 2012, almost three months after the programming error evidently happened.
on FSA with all the respect is no better: just look at the Barclays case
This is an interesting case however I don’t think we can entirely blame regulators for MF and PFG disaster. Firms who deal in high risk products should be aware of the guidelines and ensure they follow the rules, regulators cant assume that every broker has a saintly cell however advanced economies like UK and USA have certain standards in place that brokers should respect.
“but both NFA and CFTC failed time and time again in preventing fraud by brokers they are in charge of regulating (MF Global and PFG) proving that they don’t have the skills to do their jobs” I disagree, the regulators have been working hard to punish several firms who have been misusing derivatives products, you can’t look at these cases in isolation. I know many people who have worked in the FSA they have come from the banking/ broking industry and are aware of how products are traded.
Financial markets are constantly evolving and regulators have to adjust with the way the market is moving, implementing rules and regulations takes time and input from practitioners.