Exclusive: FX Firms Experiencing Arbitrage In Far Eastern Markets Due To Abuse Of Bonus Credits By Traders
- According to Forex Magnates research, a recent trend has developed in which FX brokers wishing to attract Far Eastern clients are offering large credits, and in doing so, exposing themselves to potentially catastrophic arbitrage.
The Asia Pacific region is home to some of the world’s most active financial markets, with FX being no exception. Spearheaded by Japan’s large-scale establishment of retail FX companies just a few years ago which even today produce between 35% and 40% of the total Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term volume internationally, other nations in the region are beginning to follow suit.
Whilst Japan has a sizeable and developed domestic FX industry serving domestic clients, Western firms are increasingly interested in garnering client bases in the region via strategic partnerships with local IBs and the establishment of offices in Hong Kong, Singapore and Australia.
Downtown Shanghai
A Hive Of Financial Market Activity
It is easy to see the attraction, as these are regions with highly developed financial markets economies, many knowledgeable traders and have been free from the financial crises and lack of technical awareness of some parts of Europe and the Middle East, and have until recently carried less expensive regulatory costs and capital adequacy requirements than those of the United States.
Arbitrage Or Genuine Trading Advantage?
It has come to the attention of two FX brokers in the region, one in Australia and another in New Zealand that there are a number of new FX companies establishing themselves in the region which have begun to experience a degree of success in acquiring clients from certain regions, in this case Vietnam, mainland China and Indonesia.
This particular success, according to Forex Magnates’ sources, is largely down to a specific promotional campaign used in these regions, which involves the active promotion of bonus credits.
Bonus credits are offered to clients equating to large percentages of the client deposit, often 50% and even in certain cases 100%.
Our sources - which asked to remain anonymous - explained: “Normally a broker giving a credit easily makes the money back by the increased volume or if they run a dealing room, by the client losing both their deposit and the bonus. But with bonuses of this level I am seeing a change that has risks for the whole retail industry”.
Concern over the risk to the broker itself was expressed, insofar as that a trader could use this system to create profit via arbitrage.
“If a new client opens an account with one broker and another account with a different broker, and then deposits $10,000 in each account, he then receives a bonus of $10,000 in each account.
“The trader can then go long on XAU/USD (or any other volatile product) at 400:1 with the first broker and short the same trade with the second broker. Eventually one of the accounts will lose $20,000 and the other will make $20,000” explained the broker.
“When the losing account reaches $20,000 the client will close the winning position and walk away. Subsequently he could withdraw the $20,000 profit and initial deposit from the first broker and leave the $10,000 credit loss in the account held at the second broker.
This constitutes arbitrage, and in most cases, especially if a dealing desk is in place and the firm is a market maker, the dealers will be able to notice a pattern and figure out that arbitrage has taken place, and in some cases, cancel all profitable trades.
In this scenario painted by our source, the client could accrue a risk-free profit of $10,000.
One particular expert in the Far Eastern market revealed to Forex Magnates that “a number of brokers are making these promotions to attract clients in the region. One such firm offered at one point a 100% bonus and as a result was the victim of mis-calculation errors”.
There is a further double-edged sword involved in this, in the respect that if a broker is a market maker and chooses not to send the order to market, then clients can arbitrage, whereas if they do send it to market, it prevents the broker from giving credit and exposes them to risk.
Our sources concurred that this could only be the case in lightly regulated markets, as if a broker engaged in this practice to lure clients into a false market, then regulators in more stringently controlled parts of the region such as Australia would likely take action, even without a complaint having been made. Australia is a case in point here, as its regulator, ASIC, employs a surveillance system which monitors all activities of brokerages as the Australian authorities continue to strengthen their overseeing of the FX market.
The Perspective Of The IB
For Western firms to enter the Far Eastern FX markets, it has become common practice to use either local representatives, IBs or to provide a firm in the region with a white labeled solution with revenue share.
One such company, which is a Chinese white label of said Australian broker explained this from the IB perspective. He said “I am not sure if that is legal practice, it is a play on margin Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term and therefore constitutes arbitrage. I have never actually seen that happening within the firm that I represent, but I am sure it occurs. It is plain and simple mathematics.”
“As a trader and portfolio manager myself, I never believe in credits or bonuses from a sales perspective, and from an introducing broker point of view, I don’t see how using tactics such as this would really help with sales, unless the traders taking it up are wanting to do arbitrage, or if the broker is not sending the trades to market”.
"If some of these brokers go bust and are found to have dipped into client funds it will hurt the reputation of the whole industry in the aforementioned Asian markets" was a further concern expressed.
This is quite clearly a sensitive issue as all sources which contributed to this research, including the one which brought it to light, prefer to remain anonymous at this stage. Forex Magnates will continue to research this should this pattern continue.
The Asia Pacific region is home to some of the world’s most active financial markets, with FX being no exception. Spearheaded by Japan’s large-scale establishment of retail FX companies just a few years ago which even today produce between 35% and 40% of the total Forex Forex Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Foreign exchange or forex is the act of converting one nation’s currency into another nation’s currency (that possesses a different currency); for example, the converting of British Pounds into US Dollars, and vice versa. The exchange of currencies can be done over a physical counter, such as at a Bureau de Change, or over the internet via broker platforms, where currency speculation takes place, known as forex trading.The foreign exchange market, by its very nature, is the world’s largest tradi Read this Term volume internationally, other nations in the region are beginning to follow suit.
Whilst Japan has a sizeable and developed domestic FX industry serving domestic clients, Western firms are increasingly interested in garnering client bases in the region via strategic partnerships with local IBs and the establishment of offices in Hong Kong, Singapore and Australia.
Downtown Shanghai
A Hive Of Financial Market Activity
It is easy to see the attraction, as these are regions with highly developed financial markets economies, many knowledgeable traders and have been free from the financial crises and lack of technical awareness of some parts of Europe and the Middle East, and have until recently carried less expensive regulatory costs and capital adequacy requirements than those of the United States.
Arbitrage Or Genuine Trading Advantage?
It has come to the attention of two FX brokers in the region, one in Australia and another in New Zealand that there are a number of new FX companies establishing themselves in the region which have begun to experience a degree of success in acquiring clients from certain regions, in this case Vietnam, mainland China and Indonesia.
This particular success, according to Forex Magnates’ sources, is largely down to a specific promotional campaign used in these regions, which involves the active promotion of bonus credits.
Bonus credits are offered to clients equating to large percentages of the client deposit, often 50% and even in certain cases 100%.
Our sources - which asked to remain anonymous - explained: “Normally a broker giving a credit easily makes the money back by the increased volume or if they run a dealing room, by the client losing both their deposit and the bonus. But with bonuses of this level I am seeing a change that has risks for the whole retail industry”.
Concern over the risk to the broker itself was expressed, insofar as that a trader could use this system to create profit via arbitrage.
“If a new client opens an account with one broker and another account with a different broker, and then deposits $10,000 in each account, he then receives a bonus of $10,000 in each account.
“The trader can then go long on XAU/USD (or any other volatile product) at 400:1 with the first broker and short the same trade with the second broker. Eventually one of the accounts will lose $20,000 and the other will make $20,000” explained the broker.
“When the losing account reaches $20,000 the client will close the winning position and walk away. Subsequently he could withdraw the $20,000 profit and initial deposit from the first broker and leave the $10,000 credit loss in the account held at the second broker.
This constitutes arbitrage, and in most cases, especially if a dealing desk is in place and the firm is a market maker, the dealers will be able to notice a pattern and figure out that arbitrage has taken place, and in some cases, cancel all profitable trades.
In this scenario painted by our source, the client could accrue a risk-free profit of $10,000.
One particular expert in the Far Eastern market revealed to Forex Magnates that “a number of brokers are making these promotions to attract clients in the region. One such firm offered at one point a 100% bonus and as a result was the victim of mis-calculation errors”.
There is a further double-edged sword involved in this, in the respect that if a broker is a market maker and chooses not to send the order to market, then clients can arbitrage, whereas if they do send it to market, it prevents the broker from giving credit and exposes them to risk.
Our sources concurred that this could only be the case in lightly regulated markets, as if a broker engaged in this practice to lure clients into a false market, then regulators in more stringently controlled parts of the region such as Australia would likely take action, even without a complaint having been made. Australia is a case in point here, as its regulator, ASIC, employs a surveillance system which monitors all activities of brokerages as the Australian authorities continue to strengthen their overseeing of the FX market.
The Perspective Of The IB
For Western firms to enter the Far Eastern FX markets, it has become common practice to use either local representatives, IBs or to provide a firm in the region with a white labeled solution with revenue share.
One such company, which is a Chinese white label of said Australian broker explained this from the IB perspective. He said “I am not sure if that is legal practice, it is a play on margin Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term and therefore constitutes arbitrage. I have never actually seen that happening within the firm that I represent, but I am sure it occurs. It is plain and simple mathematics.”
“As a trader and portfolio manager myself, I never believe in credits or bonuses from a sales perspective, and from an introducing broker point of view, I don’t see how using tactics such as this would really help with sales, unless the traders taking it up are wanting to do arbitrage, or if the broker is not sending the trades to market”.
"If some of these brokers go bust and are found to have dipped into client funds it will hurt the reputation of the whole industry in the aforementioned Asian markets" was a further concern expressed.
This is quite clearly a sensitive issue as all sources which contributed to this research, including the one which brought it to light, prefer to remain anonymous at this stage. Forex Magnates will continue to research this should this pattern continue.