Ikon Global Markets sues CFTC for fining it for implementing the anti-hedging rule!
The folks at Law360 have done a good work by uncovering this story. Unfortunately I wasn’t able to get ahold
The folks at Law360 have done a good work by uncovering this story. Unfortunately I wasn’t able to get ahold of the court documents myself so I’ll bring a short excerpt from Law360’s story below.
If this wasn’t sad it would have been quite funny…
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Futures commission merchant Ikon Global Markets Inc. has sued the U.S. Commodity Futures Trading Commission for allegedly failing to enforce a ban on hedged customer transactions and even faulting firms that abide by the new regulation. The complaint, filed Monday in the U.S. District Court for the District of Columbia, claims the CFTC’s self-regulatory arm, the National Futures Association, has punished Ikon for complying with Wall Street reforms and prohibiting customers from simultaneously taking short and long positions on the same currency transaction.
For roughly two years Ikon has not only been barred by NFA and CFTC regulations from allowing its retail customers to maintain matched positions but also been required to close out such wasteful positions in customers’ forex accounts, according to the complaint. Following through on the NFA rule in 2009, Ikon identified customers who maintained matched trades and closed them out. The NFA audited the practice and found that Ikon had followed NFA procedure, according to the complaint. However, two forex retail customers asserted arbitration claims against Ikon alleging they lost money or opportunities for profits when Ikon closed out their hedged transactions. Arbitration led to openly contradictory results, with Ikon defeating one of the claims but the NFA arbitrator awarding damages in the second proceeding, according to the complaint.
“As a result of this unlawful NFA award, and its inconsistency with another NFA award denying such a claim, IKON is faced with an irremediable dilemma unless this court acts to set aside the NFA action,” the complaint said. “IKON has a regulatory duty to offset these types of positions, but as a result of the adverse NFA arbitration award, IKON may face further exposure and liability to customers in NFA arbitrations.”
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I suspect the question is, how can a customer lose money if ICON closes out a matching 100,000 EUR/USD sell and buy position?
(Beyond the perpetual rollover costs that the customer was facing with such a stupid position …)
AFAICS a loss can only happen if ICON did the two trades not at once and there was some (presumably small) loss on that close-out.
Is there anything to hedging that I’m not aware of?
I suspect the question is, how can a customer lose money if ICON closes out a matching 100,000 EUR/USD sell and buy position?
(Beyond the perpetual rollover costs that the customer was facing with such a stupid position …)
AFAICS a loss can only happen if ICON did the two trades not at once and there was some (presumably small) loss on that close-out.
Is there anything to hedging that I’m not aware of?
@Trader: most traders that use hedging don’t just open a long and short position at the same time. Myself, I use a hedging strategy where if a long position goes sour, I open a larger short position 30 pips lower than the price I opened a long position while leaving that first position open (if this doesn’t make any sense, have a look at the explanation here: http://www.forex-central.net/sure-fire-forex-hedging-strategy.php)
@Trader: most traders that use hedging don’t just open a long and short position at the same time. Myself, I use a hedging strategy where if a long position goes sour, I open a larger short position 30 pips lower than the price I opened a long position while leaving that first position open (if this doesn’t make any sense, have a look at the explanation here: http://www.forex-central.net/sure-fire-forex-hedging-strategy.php)
Doing an opposing buy and sale that way in the futures market not only generates extra unnecessary commissions for the brokerage house, it also artificially inflates open interest. Since the CFTC and the NFA are now regulating retail forex, they are treating it as the same type of non-competitive trading which could be considered fraudulent on the part of either the house, or the customer. I haven’t read the details of the arbitration cases, so they may or may not have a case to argue, but if they want to argue the underlying rule they will fall flat. Matthew Shelley… Read more »
Revenues per million are affected by the markup and conversion. Markup – if there are some IBs or affiliates where a different markup in the spreads is provided, this can affect the totals. In FXCM’s example, it seems that this is taking place with their Japan group based on Niv’s comments. Conversion – There are different markups for each currency pair. But, they tend to stay around the same. Therefore, if you are collecting a 1.4 pip markup in the EURGBP, that markup in dollar terms will depend on the price of the GBPUSD. So the revenue in GBP’s remains… Read more »
Revenues per million are affected by the markup and conversion. Markup – if there are some IBs or affiliates where a different markup in the spreads is provided, this can affect the totals. In FXCM’s example, it seems that this is taking place with their Japan group based on Niv’s comments. Conversion – There are different markups for each currency pair. But, they tend to stay around the same. Therefore, if you are collecting a 1.4 pip markup in the EURGBP, that markup in dollar terms will depend on the price of the GBPUSD. So the revenue in GBP’s remains… Read more »
Doing an opposing buy and sale that way in the futures market not only generates extra unnecessary commissions for the brokerage house, it also artificially inflates open interest. Since the CFTC and the NFA are now regulating retail forex, they are treating it as the same type of non-competitive trading which could be considered fraudulent on the part of either the house, or the customer. I haven’t read the details of the arbitration cases, so they may or may not have a case to argue, but if they want to argue the underlying rule they will fall flat. Matthew Shelley… Read more »
Mr. Greenberg, Today we live in a world that is overrun with inept non producers Ikon is just one example of the costly side effects of over regulation. “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” “The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.” “Unjust laws have to be… Read more »
Mr. Greenberg, Today we live in a world that is overrun with inept non producers Ikon is just one example of the costly side effects of over regulation. “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.” “The only power any government has is the power to crack down on criminals. Well, when there aren’t enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws.” “Unjust laws have to be… Read more »
Big Piping:
I really hope Randt is not supporting fraudulent business practices. The NFA, as reported frequently on this blog, has fined and sued countless shady Forex brokers – those were brokers not eliminated by the free market.
Free must not mean “free to steal”.
Big Piping:
I really hope Randt is not supporting fraudulent business practices. The NFA, as reported frequently on this blog, has fined and sued countless shady Forex brokers – those were brokers not eliminated by the free market.
Free must not mean “free to steal”.
John, As Matthew already mentioned it, your hedging strategy is donating money to your broker: opening a larger, opposing position has the same total profit as closing the original one and opening the “difference” as a smaller position. Most brokers will do this position netting automatically. Your solution means higher open interest, more margin used, thus a higher risk of a margin call and forced liquidation – in addition to the higher rollover costs. Hedging on the same instrument has no upsides whatsoever, and several downsides. It should be banned (newbies will often use it accidentally), just like other fraudulent… Read more »
John, As Matthew already mentioned it, your hedging strategy is donating money to your broker: opening a larger, opposing position has the same total profit as closing the original one and opening the “difference” as a smaller position. Most brokers will do this position netting automatically. Your solution means higher open interest, more margin used, thus a higher risk of a margin call and forced liquidation – in addition to the higher rollover costs. Hedging on the same instrument has no upsides whatsoever, and several downsides. It should be banned (newbies will often use it accidentally), just like other fraudulent… Read more »
Michael: Maybe, although in many concrete cases the “outrage” I have seen was based on incomplete knowledge of the countless innovative techniques brokers are using to defraud their customers and often based on incomplete knowledge of how the Forex markets work on the technical level. See the hedging rule for example, or the FIFO rule. But you can readily find actual empirical evidence as well: just check the bigger Forex community sites and look for broker recommendation/selection articles: one of the first advices is to select regulated brokers and avoid unregulated bucket shops at any price, and to explicitly check… Read more »
Michael: Maybe, although in many concrete cases the “outrage” I have seen was based on incomplete knowledge of the countless innovative techniques brokers are using to defraud their customers and often based on incomplete knowledge of how the Forex markets work on the technical level. See the hedging rule for example, or the FIFO rule. But you can readily find actual empirical evidence as well: just check the bigger Forex community sites and look for broker recommendation/selection articles: one of the first advices is to select regulated brokers and avoid unregulated bucket shops at any price, and to explicitly check… Read more »
Hi Michael, I’m not quite sure I understand the point @Trader is trying to make with his final paragraph either. However I think I understand his first point well enough. The “hedging rule” is not a “kind of nonsense rule”. The truth of the matter is that “Hedging on the same instrument has no upsides whatsoever, and several downsides” as far as a retail forex trader is concerned. Whilst it might make life difficult for MetaTrader brokers, not to mention less profitable, surely banning the practice is actually a really good thing, again as far as a retail forex trader… Read more »
Hi Michael, I’m not quite sure I understand the point @Trader is trying to make with his final paragraph either. However I think I understand his first point well enough. The “hedging rule” is not a “kind of nonsense rule”. The truth of the matter is that “Hedging on the same instrument has no upsides whatsoever, and several downsides” as far as a retail forex trader is concerned. Whilst it might make life difficult for MetaTrader brokers, not to mention less profitable, surely banning the practice is actually a really good thing, again as far as a retail forex trader… Read more »
The point wrt. regulated brokers is that some of the most regulated Forex markets (UK, Switzerland) host some of the most highly regarded Forex brokers. Forex traders like me prefer it when there’s a regulatory body a broker is registered with, which regulatory organization, basically on the behalf of the trader, tries to make sure fair execution, eliminates blatant cases of deceit and fraud, etc. In the Internet age, when a broker can be across several jurisdictions, preventive regulation is better for my interests as a trader than “hoping” that the free market will sort it out … or not… Read more »
The point wrt. regulated brokers is that some of the most regulated Forex markets (UK, Switzerland) host some of the most highly regarded Forex brokers. Forex traders like me prefer it when there’s a regulatory body a broker is registered with, which regulatory organization, basically on the behalf of the trader, tries to make sure fair execution, eliminates blatant cases of deceit and fraud, etc. In the Internet age, when a broker can be across several jurisdictions, preventive regulation is better for my interests as a trader than “hoping” that the free market will sort it out … or not… Read more »
“you need to allow traders to choose how they trade and with which brokers they trade” Well, yes, up to a limit. Where is the limit? The argument is similar to building codes and zones: sure, they are pesky, bureaucratic government regulations that increase costs – but also, a civilized society does not want to see a gas station built next to a fireworks factory, for obvious reasons. Being cheated in Forex has caused so much harm, such severe financial loss to so many citizens that IMO it’s all too natural to expect some ground rules of fairness enforced –… Read more »
“you need to allow traders to choose how they trade and with which brokers they trade” Well, yes, up to a limit. Where is the limit? The argument is similar to building codes and zones: sure, they are pesky, bureaucratic government regulations that increase costs – but also, a civilized society does not want to see a gas station built next to a fireworks factory, for obvious reasons. Being cheated in Forex has caused so much harm, such severe financial loss to so many citizens that IMO it’s all too natural to expect some ground rules of fairness enforced –… Read more »
Hi Trader, I’m still a bit confused I’m afraid. Here in the UK the combination of the “free market” and the FSA seem perfectly happy to allow MetaTrader brokers to proclaim things like “500:1 leverage” and “hedging allowed”. Are you advocating that the FSA should follow in the footsteps of the CFTC and make FX trading safer for us poor Britons by banning “hedging” and reducing leverage by a factor of ten? If those sort of things require a regulatory limit, where should that limit be? In addition, is it also in the best interests of US retail forex traders… Read more »
Hi Trader, I’m still a bit confused I’m afraid. Here in the UK the combination of the “free market” and the FSA seem perfectly happy to allow MetaTrader brokers to proclaim things like “500:1 leverage” and “hedging allowed”. Are you advocating that the FSA should follow in the footsteps of the CFTC and make FX trading safer for us poor Britons by banning “hedging” and reducing leverage by a factor of ten? If those sort of things require a regulatory limit, where should that limit be? In addition, is it also in the best interests of US retail forex traders… Read more »
Jim:
Introducing a maximum leverage limit and mandating best-price execution and position netting would seem sensible to me. Does it seem sensible to you?
I suspect you’ll agree that 1:500 is crazy – you can go bankrupt in a 20 pips move …
The FSA seems pretty good at filtering out the outright frauds: off-shore Forex firms that only accept incoming wires but never process outgoing wires 🙂
For maximum leverage – I’d suggest the kinds of limits that PBs use for bigger accounts applied to smaller accounts as well. 1:50 seems plenty to me.
Jim:
Introducing a maximum leverage limit and mandating best-price execution and position netting would seem sensible to me. Does it seem sensible to you?
I suspect you’ll agree that 1:500 is crazy – you can go bankrupt in a 20 pips move …
The FSA seems pretty good at filtering out the outright frauds: off-shore Forex firms that only accept incoming wires but never process outgoing wires 🙂
For maximum leverage – I’d suggest the kinds of limits that PBs use for bigger accounts applied to smaller accounts as well. 1:50 seems plenty to me.
Hi Trader, Position netting seems eminently sensible to me, but there are those who would disagree. How can you mandate “best-price execution” in spot forex? Persuade people to trade on a regulated exchange instead? 1:500 leverage isn’t necessarily crazy. You can certainly empty your trading account in a 20 pip move if you’ve no idea what you’re doing. However if you’re one of the mythical “5%” that supposedly do know what they’re doing it might well seem like a really good idea, as long as you’re prepared to forgo the luxury of margin calls! On the other hand if someone… Read more »
Hi Trader, Position netting seems eminently sensible to me, but there are those who would disagree. How can you mandate “best-price execution” in spot forex? Persuade people to trade on a regulated exchange instead? 1:500 leverage isn’t necessarily crazy. You can certainly empty your trading account in a 20 pip move if you’ve no idea what you’re doing. However if you’re one of the mythical “5%” that supposedly do know what they’re doing it might well seem like a really good idea, as long as you’re prepared to forgo the luxury of margin calls! On the other hand if someone… Read more »