FXCM banned for trading against customers.

FXCM, the largest foreign exchange brokerage in the US by market share, has settled with US authorities to cease its operations in the country. The brokerage reached a $7 million settlement with the US Commodity Futures Trading Commission.

Yesterday, in an official announcement, the Commodity Futures Trading Commission (CFTC) took the decision to ban North American electronic trading giant FXCM and its CEO Drew Niv from operating in the US market.

In its court filings and order instituting proceedings with regard to the Commodity Exchange Act imposing remedial sanctions, the CFTC has reason to believe that Dror (Drew) Niv and William Ahdout have violated the Commodity Exchange Act and the CFTC regulations to which both respondants have submitted an offer of settlement.

Trading against customers, whilst all the while maintaining that the firm used a no dealing desk model

From September 4, 2009 through at least 2014, FXCM and FXCM Holdings, by and through their officers, employees, and agents, including Respondents Niv and Ahdout, engaged in false and misleading solicitations of FXCM’ s retail foreign exchange customers.

FXCM represented to its retail customers that when they traded forex on FXCM’s “No Dealing Desk” platform, FXCM would have no conflict of interest. According to these representations, retail customers’ profits or losses would be irrelevant to FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely as a credit intermediary. According to FXCM, the risk would be borne by banks and other independent “market makers” that provided liquidity to the platform.

Contrary to these representations, FXCM had an undisclosed interest in the market maker that consistently “won” the largest share of FXCM’ s trading volume – and thus was taking positions opposite FXCM’s retail customers. That market maker was an FXCM-backed startup firm that was founded by a former FXCM executive while he was working at FXCM, that operated for the first year of its existence out of FXCM’ s offices, and that shared most of its trading profits with FXCM.

FXCM also made false statements to NFA staff to conceal its role in the creation of its principal market maker as well as the market maker’s owner’s previous role as an FXCM executive.

Mssrs Niv and Ahdout directed and controlled FXCM’ s operations throughout the relevant period and were responsible, directly or indirectly, for violations described herein. Niv was responsible, directly or indirectly, for the false statements made to NFA.

FXCM, which was founded in 1999 and became a registered FCM in 2001, provides retail a FX trading environment and acts as counterparty in transactions with its retail customers in which customers can buy one currency and simultaneously sell another, and as of July 31, 2016, FXCM had over 20,000 active retail customer accounts representing more than $170 million in liabilities.

Until approximately 2007, FXCM provided liquidity to its retail forex customers primarily through an internal dealing desk – a division of FXCM that determined the prices offered to customers and held positions opposite customers.

In or around 2007, FXCM transitioned from utilizing a dealing desk to transact with customers to using what it termed an “agency” model for the majority of its retail forex customers, which it described to customers as providing “No Dealing Desk” forex trading. (FXCM using its dealing desk to trade with retail customers, by contrast, was referred to as the “principal” model.)

Whereas a dealing desk broker “acts as a market maker” and “may be trading against your position,” FXCM claimed that its agency model “eliminated” that “major conflict of interest” between broker and retail customer.

In FXCM’s agency model, price quotations were provided not by FXCM’s internal dealing desk but by banks and other third-party “market makers” – sometimes also referred to as “liquidity providers” or “LPs.”

FXCM explained its agency model to its customers as follows: “When our customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker.”

FXCM claimed that trading on its agency model was different from a dealing desk broker because: “We earn trading fees and commissions by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses.”

FXCM Creates an Algorithmic Trading System to Trade Opposite Customers

In 2009, Niv, Ahdout, and others at FXCM formulated a plan to create an algorithmic trading system – an FXCM computer program that could make markets to FXCM’s customers and thereby either replace or compete with the independent market makers on FXCM’s No Dealing Desk platform.