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
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 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.
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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.
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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 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.
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How is this called ‘arbitrage’ ? I would call it hedging.
It also sounds like a perfectly legit strategy. The only one to fault are “brokers” taking too much risk by giving out free trading-credits and assuming everyone will blow up anyways. In my opinion its a stretch to call such operations brokers – they are more like bookies with a flawed businessmodel.
How is this called ‘arbitrage’ ? I would call it hedging.
It also sounds like a perfectly legit strategy. The only one to fault are “brokers” taking too much risk by giving out free trading-credits and assuming everyone will blow up anyways. In my opinion its a stretch to call such operations brokers – they are more like bookies with a flawed businessmodel.
I see this all the time. Brokers write deals with IB’s that just don’t make economic sense. Brokers offer bonuses that just do not make economic sense. In some cases, I have seen the brokerage model flipped on its head where IB’s are making the lions share, yet the broker holds the regulatory and capital risk. This isn’t sustainable and will go away when these types of offers catch up with a brokers bottom line. Volume and deposits do not equate to revenue. There are many more layers. I’d be happy to work with any broker that is experiencing these… Read more »
Ok ok – things are getting a bit personal here. Some of the agreed upon points are that overall, customers do seem to be satisfied with Pepperstone’s rates, as well as other Australian brokers that are offering ECN style prices with low commissions. So we cam figure they are all taking business from quite a few other brokers. In terms of Pepperstone, as posted earlier this year, their name did appear on the JFSA’s list of unauthorized brokers that were marketing to Japanese clients. This was an interesting topic in last years London Summit as the CEO of Monex referenced… Read more »
Ok ok – things are getting a bit personal here. Some of the agreed upon points are that overall, customers do seem to be satisfied with Pepperstone’s rates, as well as other Australian brokers that are offering ECN style prices with low commissions. So we cam figure they are all taking business from quite a few other brokers. In terms of Pepperstone, as posted earlier this year, their name did appear on the JFSA’s list of unauthorized brokers that were marketing to Japanese clients. This was an interesting topic in last years London Summit as the CEO of Monex referenced… Read more »
I see this all the time. Brokers write deals with IB’s that just don’t make economic sense. Brokers offer bonuses that just do not make economic sense. In some cases, I have seen the brokerage model flipped on its head where IB’s are making the lions share, yet the broker holds the regulatory and capital risk. This isn’t sustainable and will go away when these types of offers catch up with a brokers bottom line. Volume and deposits do not equate to revenue. There are many more layers. I’d be happy to work with any broker that is experiencing these… Read more »
i agree with andy here. these are bonafide market orders being placed at a brokerage. what specifically did the trader do wrong? and how would the trader rectify the problem?
i agree with andy here. these are bonafide market orders being placed at a brokerage. what specifically did the trader do wrong? and how would the trader rectify the problem?
For example, Oanda has it in their T&S that the account cannot go negative – and have in the past set negative balances to zero. I fail to see how this would be riskfree (without boni). When the margincall occurs in the negative account, you are +- zero pnl if you exit the other account at the same time. With a bonus it would be a profit. But – as far as i know, the bonus is only lunch money anyways. I dont think they give you a 50% bonus for a 6 digit deposit? Not to mention that there… Read more »
For example, Oanda has it in their T&S that the account cannot go negative – and have in the past set negative balances to zero. I fail to see how this would be riskfree (without boni). When the margincall occurs in the negative account, you are +- zero pnl if you exit the other account at the same time. With a bonus it would be a profit. But – as far as i know, the bonus is only lunch money anyways. I dont think they give you a 50% bonus for a 6 digit deposit? Not to mention that there… Read more »
http://www.amateurfx.com Brokers who are getting deceived by this method of trading are amateurs. Using “credit” as a bonus is a great concept. What the broker is actually doing is extending further leverage to the client, and it should be explained that way. A broker who gives a client a 100% credit in the form of equity in the client account, but then does not change his margin call levels to twice what his normal margin call levels are does not understand the use of “credit”. In the example cited, the client’s losing account should have been stopped out when they… Read more »
http://www.amateurfx.com Brokers who are getting deceived by this method of trading are amateurs. Using “credit” as a bonus is a great concept. What the broker is actually doing is extending further leverage to the client, and it should be explained that way. A broker who gives a client a 100% credit in the form of equity in the client account, but then does not change his margin call levels to twice what his normal margin call levels are does not understand the use of “credit”. In the example cited, the client’s losing account should have been stopped out when they… Read more »
Everything is simple , 10% or 20% can not attract beginners anymore so “brokers” have to increase bonuses up to 100% which has no any economical sense at all. Don’t forget that usually these “brokers” paying huge IB commissions and marketing expenses so the only way for them to make some money if the Clients will lose their deposits and lose them very fast. Another problem is an increasing amount of trading restrictions for high bonus brokers like minimum time for holding a trade ( 5 minutes) and be sure, they will delete any profitable trade closed before 5 minutes,… Read more »
Everything is simple , 10% or 20% can not attract beginners anymore so “brokers” have to increase bonuses up to 100% which has no any economical sense at all. Don’t forget that usually these “brokers” paying huge IB commissions and marketing expenses so the only way for them to make some money if the Clients will lose their deposits and lose them very fast. Another problem is an increasing amount of trading restrictions for high bonus brokers like minimum time for holding a trade ( 5 minutes) and be sure, they will delete any profitable trade closed before 5 minutes,… Read more »
I’ve never blown up an account to know exactly what happens and I guess it varies from broker to broker, but is the client not also taking quite a big risk themselves with such a strategy? It seems conceivable to me that the losing account gets closed out, but perhaps due to volatility the trader is unable to close out the winning account at the same price level, and price could then go against the “winning” position as well, leaving the trader with two blown up accounts. Perhaps a safer method would be to use somewhat lower leverage with OCO… Read more »
I’ve never blown up an account to know exactly what happens and I guess it varies from broker to broker, but is the client not also taking quite a big risk themselves with such a strategy? It seems conceivable to me that the losing account gets closed out, but perhaps due to volatility the trader is unable to close out the winning account at the same price level, and price could then go against the “winning” position as well, leaving the trader with two blown up accounts. Perhaps a safer method would be to use somewhat lower leverage with OCO… Read more »