In a letter to FXCM partners, the broker announced that it will begin to offer No Dealing Desk (NDD) execution for CFD instruments and stated “FXCM will soon be enabling No Dealing Desk Execution for many of our CFD instruments, such as global stock indices, Gold and Silver.” The message was part of an overall letter directed at automated trading strategy developers, of which may have offerings that are limited to NDD instruments.
Providing more information about the coming change, Jaclyn Klein, Vice President, Corporate Communications told Forex Magnates that “we do offer this for metals right now, although not all customers have been switched yet. This summer we hope to be launching it on all energy and index CFDs. The move to all NDD trading in CFDs will have to be gradual as the number of external liquidity providers willing to make markets in these instruments at the tiny increments that are well below the level of futures contracts is very limited, but we are encouraged that just as they have done in FX more providers will be coming soon.”
Interestingly, Klein she provided additional color about FXCM’s view and said “as you know we pride ourselves on our NDD technology and offering to the market place and have always wanted to offer CFDs on NDD as we believe this is the best execution method and as (FXCM CEO) Drew (Niv) mentioned on the Q1 conference call we also believe that the regulators are moving in this direction.”
While FXCM has been promoting itself as a ‘No Dealing Desk’ broker for quite a while and the benefits it can provide clients, they have begun to talk up the regulatory positives of it as well. First publically mentioned back in March during FXCM’s Q4 2012 conference call, in post we titled FXCM Conference Call Review – Striving for World Domination, Niv said that he believed the effects of post MF Global and PFG overhauls would lead the US regulators to ultimately ban market making, as Dodd-frank promote multi-dealer offerings. FXCM then mentioned regulations during FXCM’s proposed takeover of GAIN Capital which was rejected. At the time, FXCM stated that Dodd-Frank requirements “may have a greater adverse on GAIN as a standalone entity.”
During FXCM’s Q1 earnings call earlier this month, Niv stepped up the language and expanded his views beyond the US. During the Q&A portions, Niv expressed that it was a “virtual certainty” that agency business will become mandatory among major regulatory jurisdictions. He also said that he imagined some firms with a principal model would make the switch, but others wouldn’t be able to survive. Therefore, moving ahead with greater NDD solutions obviously fits FXCM’s views on the industry.
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Thinking out loud: Who’s talking, FXCM or Regulators?
As FXCM would be the biggest benefiter to an all agency model future, it makes sense for them to advocate it. The question that we have asked before, is whether FXCM is simply stating their preference in order to influence the public and lawmakers, or are they expressing what they are hearing from the regulators. If it is the former, then it means that FXCM is taking their battle against competitors to a new stage. However, if it is the latter, it is a little surprising that we haven’t heard other firms become more public about the benefits of market making, such as lower spreads (while not an exact science, retail profitability reports have skewed towards showing better results towards brokers with tighter pricing).
Another benefiter of any restrictions to retail market making could be MetaQuotes’ new MT4 to MT4 gateway. The product offers brokers the ability to connect liquidity from other MT4 servers. When launched, one of the initial views of the feature is that it would lead to more brokers offering NDD CFDs. In terms of CFDs, one of the difficulties of creating a STP solution are variances in lots sizes between broker products and their underlying futures contracts. For example, while an EMINI S&P 500 futures contract is valued at 50 times the value of the underlying index price, brokers often offer similar CFDs with a minimal lot size of only 1 times the value of the index. As such, this creates limits for brokers on how to process trades back-to-back with their liquidity providers (This issue was alluded to in the above statement from Jaclyn Klein that there are currently few sources for handling CFD liquidity).
Brokers though could use a system like the MT4 to MT4 gateway to connect to other firms providing smaller denominated CFDs. Therefore, in the advent of new rules limiting market making, CFD brokers in unaffected jurisdictions could be used to create NDD CFDs.
Bringing it back to FXCM, ‘where there is smoke there is fire’. Therefore the broker is correct to theorize that rulings that are being applied to the institutional sector may be applied to the retail space. However, there is the question of whether clients would actually benefit from restrictions to market making. As rules are typically driven by ‘client safety’, regulators may not be interested in applying changes that would lead to wider spreads and higher minimum trade sizes, and possibly less profitable customers. Regardless of whether retail forex is will ultimately be led in the direction of NDD, big changes can and do occur, as the recent proposal by the NFA to ban credit card deposits revealed.