CFTC orders Gain Capital to pay a client $10,000 for lost profits

CFTC just published its decision in a case of Robert West vs. Gain Capital and Glenn Stevens ordering Gain to

CFTC just published its decision in a case of Robert West vs. Gain Capital and Glenn Stevens ordering Gain to pay West $10,000 for lost profits. The whole case is a fascinating read of how a regulated forex broker handles a complete novice in the forex market and how this can sometime backfire. This particular client didn’t have any idea of what leverage and margin are and he didn’t really bother to learn or train before placing a trade. There are thousands and even tens of thousands of such clients and most of the time they lose and never complain, but West thought he deserved a compensation so he complained and was awarded $10k for lost profits. Considering that Gain returned him his initial deposit immediately after he lost his money fair and square – I find this decision outrageous.

On the other hand this goes to show that CFTC can help traders deal with large brokers. CFTC however needs to understand that if it allows brokers to on-board complete novices then such occurrences will happen time and time again.

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Just few interesting fragments:

This dispute arises from Gain Capital’s liquidation of a shoit two-lot Euro/Dollar forex position that it determined was under-margined. Gain Capital liquidated the position the day after Robert West, a first-time forex speculator, had funded his account and opened the positions.

West, an emergency room physician who resides in San Antonio, Texas, alleges a variety of violations in connection with the liquidation of the two-lot position, and seeks to recover approximately $20,000 in lost profits. West also alleges that Glenn Henry Stevens, the firm’s President and Chief Executive Officer, in a written mission statement on Gain Capital’s website, fraudulently promised various warranties which his firm breached when it liquidated West’s two-lot position.

Respondents assert that the liquidation was proper, assert that they have already compensated West for the $2,344 loss realized on the forced liquidation by returning his entire $5,000 investment, and assert that West is not entitled to recover speculative lost profits, Also, respondents deny that Glenn Henry Stevens’ mission statement was deceptive, and otherwise deny any violations. As explained below, after carefully reviewing the parties’ evidentiary submissions, I have concluded that West has established that an agent of Gain Capital failed to disclose to West that his account lacked sufficient margin to support a second Euro/Dollar lot, and therefore that West is entitled to recover $10,000 in lost profits on the first Euro/Dollar lot that Gain Capital also liquidated afler it unilaterally detennined that the account was under-margined.


“A couple hours later, after West’s deposit had been posted, he called Gain Capital and spoke to Jonathan again to place his first order. During this conversation, Jonathan informed West that the margin requirement for one standard lot of the EUR/USD would be $1,367, and that each pip wold be worth $10. When West mentioned that he was considering selling two lots, Jonathan advised him to limit himself to one lot, because while $5,000 should provide adequate margin for one EUR/USD lot, it would not provide adequate margin for two EUR/USD lots:

West: I basically want to short the euro against the dollar, I want to sell euros and buy them back again

Jonathan: $5,000 is in your account,

W: I thought I had $2,500. OK.

J: You have two for $2,500.

W: On each deposit of $2,500, you can make a trade of, what, $100,000?

J: It depends on the currency pair.

W: I want to short the Euro for U.S. dollars.

J: Each standard lot for the EuroDollar has a margin requirement $1,367.10.

W: If I want to trade 100,000, how much margin would it require for that?

J: It would be $1,367.10, one thousand, three-hundred sixty-seven dollars and ten cents.

W: So I have a surplus,

J: You do, you do. So basically you just have to maintain. If you have $5,000 in your account now, your margin balance has to maintain $1,367.10, You need it to enter the trade, and you have to maintain it in order to stay in the trade,

W: I mean as long as you’re trading you still maintain that margin?

J: As long as you’re trading , . ,well, you won’t maintain it. How it works is that if you enter a trade, say you have a required margin of $1,367,10, that’s what your required margin is going to be, even though your margin balance is going to read $5,000. You always have to remember: if a trade goes against you, your margin balance has to stay above $1,367.10.

W: So right now I’m in the green, so let’s trade 100,000, and see how this works. I want to sell 100,000 Euros, and buy back in US Dollars.

J: OK, so you said you want to do Euro versus Dollar, correct?

W: Sell Euros to buy back Dollars.

J: So that means you’re speculating the Euros are going to go down in price?

W: Correct.

J: And you want to sell one standard lot,

W: Which is 100,000, right?

J: That’s correct. I got you in at a rate of I .3677.

W: OK. So I have to give you the price I want to buy it back at, correct?

J: Correct.

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W: I want to buy it back at 1.2677.

J: So to confirm: I’m doing a single limit at I .2677. Is that correct?

W: Yes,

J: Your limit is too wide. It has to be within one and a thousand points.

W: You’re losing me on this. 1.36 to 1.25, that’s ten points.

J: No, that’s 10,000 pips though.

W: Ahhh. So my limit must be .?

J: Between 1 and 1,000,

W: OK, So I can only buy it at 125?

J: Yes. It wouldn’t even most likely close to that price for some time, probably a year.

W: What’s the duration of the transaction?

J: You can stay in as long as you wish.

J: If you move it [i.e. , the limit price] from 1.2677 to 1.2678 you be within the 1,000 points.

W: OK, let’s do that.

J: OK, so I set the order at 1.2678.

W: Very good. I think were done for now. Just to clear up, that’ll take $1,376 out of my margin account.

J: It’s not that it’s going to take it out. You could look at it like that.

W: You can only trade on that l0%?

J: Exactly.

W: I want to figure out what’s going to happen with my surplus money. Is it going to sit in my account, until I choose to make another trade, is that right?

J: No. Let’s say your margin is $1,367.10. You have five thousand [dollars] in your account. So your position is you only have $3,632.90 to risk to the market, For your position, each movement of points up or down [i,e. , “pip”] is going give or take away $10 out of your account.

W: Should I choose to make another trade in the same account, what are my restrictions based on my amount in my account?

J: So if you entered the trade at 1,3677, let’s say the price goes up one point to 1.3678, you’re going to lose ten dollars so your margin balance would go from $3,632 to $3,622.

W: OK, I understand. My question should I choose to maknother trade using the same account what are m restrictions based on the amount in my deposit account?

J: It would have to be basically the same you would just double your margin requirements. But you most likely wouldn’t want to do that because that would take you pretty close to getting out of the trade.

W: I see. So if it gets up to where it’s $5,000, you get taken out of the trade?

J: Correct.

W: I see what you are saying.

W: OK. Well, this is my first experience, so I’ll just see what happens.

J: You currently have a profit of 41.

W: Ghat’s good. So it’s moving in my direction,

J: That’s correct.

robert west vs gain capital
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