Best Execution, Greece and How to Attract Investors #Askfinmag

Finance Magnates answers to readers questions about the Greek crisis, spread betting and how traders can attract investors

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The only company that can answer this question with certainty is IG itself, however they have not replied to any official requests for comments related to the Swiss National Bank (SNB) debacle on January 15th, when the central bank removed the 1.20 floor from the EUR/CHF exchange rate.

IG Group decided not to forgive negative balances as it did not provide any negative balance protection for its clients in its terms and conditions. Some other companies in the industry did have a clause in their contracts which warranted clients compensation if their equity dipped into negative territory.

The extreme event which hit the currency markets in January did prompt some companies not offering negative balance protection to waive the debts of their clients. However, they were not obligated to do so and it was their own choice on how to handle the situation.

The over-the-counter (OTC) classification of FX spread betting does not constitute an obstacle to the traditional best execution definition under the Markets in Financial Instruments Directive (MiFID). Spread betting is treated as a contact for difference (CFD).

Brokers are obligated to follow the regulatory definition about best execution, which in its current form is quite vague and tied to the unpredictability of financial markets. Firms offering spread betting are not allowed to make their own prices for the financial products they are offering. That said, what best execution means is merely that that the broker is obligated to provide the client with the ‘best possible result’.

The latter takes into account ‘price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of an order’. With such a vague definition, there is a myriad of possibilities for interpretation here, which results in many companies offering different prices for ‘best execution’ (such as the different fills post-SNB).

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While these results sound quite impressive, you have to realize that any investor in such a company will raise considerable doubts about how likely it is for this monthly return to be sustained. Aside from delivering returns you would also have to avoid substantial drawdowns on the account, that is to have a sound risk management policy.

Know that solid investors do not care about outrageous monthly returns as they know such are usually not sustainable in the long run. Ponzi schemes are also a common worry amongst investors and the return you mention can be classified as extremely suspicious.

The key to getting investors is providing them with proof of long- term performance on a sustained basis. Verified and audited financial statements from your broker are a must if you are seeking to secure an investment in your fund.

While Greek worries have been at the forefront of the industry we are seeing no particular reason to fear contagion of the Cypriot bailout progress and hence to Cypriot brokers. In fact, the island has adopted a rather strict path to austerity and most reputable brokers wouldn’t be holding their funds in Cypriot banks anyway.

The easiest way to determine where your funds are being held is to check which is the beneficiary bank on the wire transfer instructions for depositing funds into your account. Last Friday, the European Central Bank, the European Commission and the International Monetary Fund (IMF) issued a joint statement praising the efforts of the Cypriot government.

The Greek economy remains closely interconnected to Cyprus due to the lack of a language barrier and the real economy will undoubtedly be dependent on the state of Greece. If the current Greek government doesn’t manage to strike a deal with its creditors, this may only intensify the incentives for Cypriot voters not to cast a ballot against austerity.

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