It came as quite a shock that the CFTC decided to issue and order against Forex Capital Markets (FXCM). Given the massive size of FXCM in the U.S. it is sure to have big implications. They are the biggest retail forex broker in the U.S. and they were just fined over $7m for taking opposite positions from those of their clients.

Apart from the Financial settlement, FXCM also agreed to withdraw its registration and never seek registration again. This means that the company can no longer provide services to U.S. clients.

As the biggest retail trading dealer on the market in the U.S. with a 34% market share, many people are asking how this is happened and where FXCM traders should start trading.

The FXCM Allegations

According to the CFTC, between September 2009 and 2014, FXCM used misleading and false marketing by hiding its key relationship with its market maker. It also contends that FXCM made false statements to the National Futures Association about FXCM’s role in creation of this market maker. More alarmingly, the market maker was created by an ex-employee and director of FXCM. This Market maker was capturing the lion’s share of the trades coming through FXCM.

The Chief Counsel for the CFTF’s division of Enforcement recently issued a statement on the matter, “Full and truthful disclosure to customers and honest discourse with self-regulatory organizations such as NFA are vital to the integrity and oversight of our markets. Today’s action’s demonstrates that the CFTC is committed to protecting customers from harm in the markets it regulates.”

Given their co-operation on these issues, the National Futures Association also mentioned that the founders of the group, Dror Niv, William Ahdout as well as FXCM itself had to withdraw from NFA membership. The NFA has officially accepted the settlement amount of $7m with the directors neither admitting nor denying the allegations.

How the FXCM Allegations came out

FXCM was founded in 1999 and got FCM regulation in 2001. The broker provided retail Forex trading to clients globally. FXCM acts as the counterparty to these trades and allowed the clients to buy and sell currencies simultaneously.

FXCM used an internal dealing desk to provide its clients with the trading functionality by making a market in those pairs. However, in 2007, the broker decided to outsource its dealing desk to another agency. This was a departure from the principle model in which FXCM provided the liquidity to the clients.

In this “agency” model of dealing, forex quotations were not provided by FXCM but by other banks and external counterparties. The main reasoning behind this was that any potential conflicts of interest were eliminated as FXCM was not acting as the counterparty to the trader.

Enter the Algorithmic Trader

Algorithmic Trader FXCM

In 2009, FXCM decided to hire a High Frequency Trader who used an algorithmic trading model to execute trades for FXCM. The agreement was based on a profit sharing agreement whereby FXCM earned 70% generated from the system and the high frequency trader would get the remaining 30% as a bonus.

Then, in 2010, FXCM’s compliance department raised concerns about the broker taking the opposite position to its clients in trades through use of the algorithm. In order to circumvent this, FXCM decided to spin off the high frequency trading company with the trader creating his own entity (call it Algo Co). This external provider would be the liquidity provider for FXCM.

After setting up Algo Co, the trader agreed to resign from FXCM. They came to an agreement that the employment relationship originally struck between them should still be in force. This meant that on commencement of business with FXCM, Algo Co would pay FXCM $21m a month which was approximated to be 70% of the trading profits generated off of FXCM’s trading volume.

Establishing a High Frequency Trading Agency

In order to help the trader found Algo Co, FXCM provided him with a $2m loan (interest free) and granted Algo Co the authority to use its prime brokerage account. Even more disconcerting than this was the fact that this broker continued working from FXCMs premises even though he resigned from FXCM. In fact, Algo Co used the same office as FXCM until early 2011 when it moved to a new location.

Even though Algo Co relocated its office space, it continued to use FXCM’s servers, email system and trading algorithms. There were also employees who worked at FXCM who spent most of their time at Algo Co’s offices.

As agreed with FXCM, Algo Co kept on sending FXCM monthly payments for the use of their systems to provide market making off of FXCM’s flow business. Although this may have looked like an agreement between two companies, it was clearly a way for FXCM to make a profit every month on the back of its own retail clients.

So transparent was this arrangement that FXCM merely calculated the monthly payment due to it by subtracting the 30% from the Profit and Loss of Algo Co. In fact, in times when the Profit was down at Algo Co because of low trading volume, the payments reflected that with a reduced contribution. FXCM was able to keep a tab on Algo Co’s P&L because they received a weekly breakdown of it.

Upon creation of Algo Co, FXCM agreed that the new company would receive approximately 25-30% of overall trade volume from FXCM. This was clearly a favourable relationship that benefitted both Algo Co and FXCM.

False Communication with Clients

Despite the clear links between Algo Co and FXCM, they kept on telling clients that there was no conflict of interest. They claimed that all trades were sent immediately from the client to other market makers such as banks and other financial institutions.

FXCM claimed that these Market Makers would compete for the flow of orders coming from FXCM. They claimed that they selected these brokers based purely on the quotes given by these institutions. However, most of the trades were being directed to Algo Co and hence enriching FXCM.

In promotional material presented by FXCM, there was no mention of Algo Co as a liquidity provider. In fact, an executive at FXCM raised concerns about the compatibility of issues between the technology of the trading adapters at Algo Co and those of other banks. When passed via compliance, the officers there mentioned that they would prefer this was omitted in order to not draw “unwanted attention”.

There were also a few murmurs online that FXCM was using a counterparty market maker that was entirely owned by FXCM. They responded to these allegations by obfuscating the issue and claimed that they did not have authority to disclose this because of “non-disclosure” agreements with their liquidity providers. This was clearly false as they had previously disclosed a number of financial institutions in previous marketing material.

FXCM’s False Statements to the NFA


When the NFA started its investigation into FXCM, the directors completely omitted to mention anything about its relationship with Algo Co. The director merely mentioned that he and the Trader had worked together in previous companies.

There was also a false statement that was made to the NFA by the compliance department of FXCM. They seemed to deny that FXCM had any interest or ownership stake in any liquidity provider stating “FXCM LLC does not have any direct or indirect ownership, interest, or affiliation with entities that provide liquidity to retail clients.”

When the NFA kept on pushing for more answers on the role that the trader had at FXCM prior to running Algo Co, the compliance department claimed that he worked as a “consultant” of FXCM. This was false as there was clearly employment records that showed that the trader was a director of FXCM.

It was also clear to the NFA that the directors at FXCM were responsible for the misrepresentations to the agency.

Where to From Here

Given this clear breach of responsibility to both its clients and regulators, FXCM was handed with this large fine and can no longer do business with U.S. clients. This seems to be the best response to deal with brokers who deliberately misrepresent their positions to clients.

FXCM’s share price has collapsed in a response to this and all of its U.S. client accounts are reportedly being sold to Gain Capital Group in order to shore up liquidity. FXCM states that they will still service their clients for an interim period.

Although FXCM claims that its global operations will not be impacted and it wants to continue providing services to these clients. Whether FXCM’s other clients will continue to use them going forward is hard to tell.

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