NFA's lack of intelligence strikes again: Alpari fined $200,000 for cancelling illicit traders
Reading the details of this case you just can’t help but wonder what is NFA all about? NFA is simply
Reading the details of this case you just can’t help but wonder what is NFA all about? NFA is simply doing what it wants, interprets the rules only in the way that suits it and basically does anything it can to impede its own members – the forex brokers.
If anything, NFA and CFTC (or as we call them ‘the post-factum regulators’) are jointly responsible for the American forex industry’s descent. American brokers could have, and should have, become the largest brokers in the world bringing worldwide customers to the US instead of scaring them off – which is what currently happens. Not only this, but both NFA and CFTC failed time and time again in preventing fraud by brokers they are in charge of regulating (MF Global and PFG) proving that they don’t have the skills to do their jobs.
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American government would do a great job in bringing more business and money back to the US by disbanding those two failed bureaucratic apparatuses than by allowing them to continue operating.
In a case similar to FXDD’s suit, NFA agreed to settle with Alpari over charges that the latter cancelled trades done on its forex options platform (provided by FX Bridge) which malfunctioned and allowed clients to place trades when they shouldn’t have.
NFA actually accepts that the platform malfunctioned but still required Alpari to pay a fine and refund the clients!! It seems that no matter what the client does – they can always go the NFA and make sure that justice isn’t served.
It’s evident from this case that here, just like with FXDD, NFA spent countless hours checking trade by trade but couldn’t find the time in 2.5 years to verify PFG’s statements.
Alpari however indeed has to make sure its documents are up to date and state trading conditions clearly – otherwise they would be able to easily refute this NFA’s suite.
Details of the case:
9. On October 20, 2011, Alpari reported a “market event” through Fortress indicating that an error had occurred with the firm’s forex options trading platform. Specifically, Alpari indicated that a system malfunction had allowed five customers to place new option orders 24 hours before expiration on October 20, 2011, which Alpari executed as the counterparty. However, Alpari provided no information to NFA about whether the firm had adjusted any customers’ accounts and did not otherwise inform NFA about the malfunction.
10. Several days later, one of Alpari’s customers filed an arbitration claim with NFA alleging that Alpari had cancelled trades in his forex account because the firm claimed he had based his options trades on “wrong price quotes” resulting from technical issues with the trading system. NFA’s Arbitration Department referred the claim to NFA’s Compliance Department because of the nature of the allegations and NFA’s then pending audit of Alpari.
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11. The arbitration claim prompted NFA’s Compliance staff to initiate a formal investigation into Alpari’s system failure. In addition to reviewing the information that Alpari had reported through Fortress, NFA staff requested further information from Alpari and interviewed Skowronski and Granholm. Skowronski represented that it was the firm’s policy to prohibit options’ customers from trading 24 hours prior to the expiration of options on the third Thursday of every month because the firm’s liquidity providers imposed a similar trading restriction on Alpari. Skowronski also represented that the firm’s options platform provider – FX Bridge – inadvertently enabled the system to allow the five forex options customers to place trades during the prohibited 24-hour period from Wednesday, October 19 through Thursday, October 20, 2011, which was the expiration date for October options. As a result, five customers traded about 26,000 contracts overall during the so-called prohibited timeframe and generated almost $230,000 in total profits. The customer who filed the arbitration claim accounted for almost 25,000 of the contracts traded and over $220,000 of the profits generated. (Does it really seem logical to the NFA that one clients will trade 25,000 times during 24 hours and it’s not a platform hack? Apparently it does. – MG).
NFA’s investigation revealed that the trading platform malfunction was not an isolated incident and, instead, had existed for several months without Alpari’s knowledge. Specifically, between May and September 2011, a few Alpari customers traded almost 500 forex options contracts during the 24-hour period before expiration, incurring total net profits during those five months of close to $4,500. The trading platform malfunction went unnoticed by Alpari until the incident in October 2011, when the five customers made almost $230,000 trading within 24 hours of expiration. It was this incident that finally caught the attention of Alpari’s trade desk.
After the October 2011 system error occurred, Alpert decided to classify the trades as “phantom trades” and instructed FX Bridge to “bust” them and purge them from the system. In addition, Alpert determined that the profits resulting from the trades were “illicit” and unilaterally decided to remove those proms from the five affected customers’ accounts, without contacting NFA in advance to determine whether this practice complied with NFA’s Forex Requirements.
Specifically, Alpari unilaterally made price adjustments that removed funds ranging from almost $153 to over $220,000 from the accounts of the five affected customers, though Alpari later provided a $55,000 credit to the customer who had filed for arbitration.
Alpari based its decision to take back profits from the five customers on the premise that the customers took advantage of Alpari and its trading malfunction and, therefore, were not trading in good faith. Alpari claimed the affected customers knew about the company policy prohibiting the execution of options trades 24 hours before expiration because the firm’s customer agreement disclosed the policy. However, the evidence does not support Alpari’s claim that these customers were not trading in good faith.
Specifically, in January 2012, NFA obtained what Alpari represented were the customer agreements for the five affected customers, but none of the agreements made any mention of the supposed 24-hour trading prohibition.
When NFA questioned Granholm about this, she admitted that the agreement used for the one customer who opened his account in May 2011 did not contain the 24-hour prohibition, but claimed that customers were bound by subsequent amendments Alpari made to the agreement in July 2011, which supposedly added the firm’s options expiration trading policy. When NFA asked how Alpari informed customers about the amendments to the agreement, Granholm told NFA that the firm had posted a July 13, 2011 notice in the “Company News” section of its website. However, that notice made no mention that the firm was imposing a 24-hour prohibition on the trading of forex options prior to expiration and failed to identify any of the specific changes Alpari had made to its customer agreement. Instead, the notice merely included a link to the section of Alpari’s website that listed forms. Furthermore, Alpari buried the trading prohibition in a one-line addition to an exhibit incorporated as part of Alpari’s nineteen-page customer agreement.
Other Alpari records, which included e-mails and tape-recorded telephone conversations with some of the affected customers, also demonstrate that these customers had no idea that the 24-hour trading prohibition prior to expiration existed prior to the October 2011 incident.
Alpari was unable to verify which version of its customer agreement applied to the four other customers (besides the customer who opened his account in May) who were affected by the October 2011 incident. Specifically, these four customers opened their accounts in August and September 2011, but the agreements Alpari initially produced to NFA for these customers did not contain the 24-hour trading prohibition that Alpari supposedly made part of its customer agreement in July 2011, After pointing out this discrepancy to Alpari, NFA learned that Alpari’s programmers had evidently made an error when they were uploading a revised version of the firm’s customer agreement in 2012 and overwrote data in Alpari’s historical data files, including the version of the agreement the four Alpari customers had “electronically executed” when they opened their accounts with the firm. Granholm admitted that the firm was unaware of this programming error until NFA raised the discrepancy with the firm in April 2012, almost three months after the programming error evidently happened.
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This is an interesting case however I don’t think we can entirely blame regulators for MF and PFG disaster. Firms who deal in high risk products should be aware of the guidelines and ensure they follow the rules, regulators cant assume that every broker has a saintly cell however advanced economies like UK and USA have certain standards in place that brokers should respect. “but both NFA and CFTC failed time and time again in preventing fraud by brokers they are in charge of regulating (MF Global and PFG) proving that they don’t have the skills to do their jobs”… Read more »
NFA , FSA or MAS all developed market regulators have systems in place to ensure the market is efficient and fluid. The NFA and CFTC has very qualified people in their advisory team, NFA’s board consists of professionals from; JP Morgan, Kansas City Board, dean of the School of Business at George Washington University and many other experienced individuals.
The LIBOR case was a big mess, this is capitalism at its peak, the banks want to get bigger – at someone’s expense.
Forex Magnates publishes a fines issued by the CFTC for unregulated or fraudulent US based FX providers on a monthly basis, if the NFA are doing nothing then what will happen when they actually start doing work!!!
I’m sorry, but this article makes little sense to me. I think NFA did the right thing in this case. A broker cannot just cancel trades like that – the regulations as to when and how to do this are very clear. And for good reason.
And the trader did not trade 25000 times, he traded 25000 contracts – you can do that with one single trade, you know..
in my opinion the NFA and CFTC want to make up the loses in revenue they have encountered after enforcing their additional restrictive regulations in the US (ban on hedging and FIFO). they are asking firms now to pay 1 million dollars membership fees (don’t know why such a huge amount). as if that wasn’t enough money for them they are going on fining most major forex brokers even more money. it reminds me of cops in some countries that have to fine motorists at the end of their shifts to satisfy their daily quota requirements, so if you are… Read more »
The headline is VERY deceptive. It is obvious that Alipari was trying to screw their customers out of their winning trades. Do you believe that Alipari would have busted these “illicit” trades if they had been losing trades for customers? Of course not! Alipari only claimed they were illicit because Alipari LOST. It is outrageous that Alipari thinks they can get away with something like this. The only reason they can is because they can’t be sued you can only file for “arbitration” which is a complete waste of time. Alipari’s arrogance is incredible!
GOOD JOB NFA!
Any pit committee on any exchnage floor anywhere in the world would have busted these trades. These prices were off the market, The NFA demands dealers keep priceson the to protect the client, but they do not acknolwdge the same standard of the clients. As far as I am concerned this amounts to outright fraud by the clients and they should be subject to punishment. Not to mention the extortion/blackmail of threatening NFA action. The NFA is a friggin joke… time to flush the toliet and get some real regulators with common sense as one mandate!
@ervin…are you maybe involved… hope things go well in civil court for you! There is no way anyone with an ounce of integrity would condier the behaviour of the clients to be anything but abhorrent. BTW, yes the trades would have been busted if the client lost because the dishonest client woudl have demanded it and Alpari woudl have honored the request, it would not be in their best interest to do so. They make a reasonable profit providing a good service and the actions of one scumbag will not chmnage that!
I have to agree that the NFA and CFTC are both useless organizations run by special interests who are completely bias to the Forex market. Every time you run into a case where some trader goes crying to NFA they always rule in there favor no matter how much evidence a broker provides indicating there actions were warranted. Then comes the ridiculous fines they love to impose on the firm who received the client complaint. The other part of the problem lies with individuals such as Ervin who most likely lost money in the Forex market and now blames the… Read more »
Firstly, I thought Forex Magnates being a source of information for everything “Forex” may perhaps be better off remaining unbiased (Michael!), your opinion, if your literature is written professionally, should express your views minimally, and this piece certainly does not. Regardless of your relationship with Al Pari, directly or indirectly, you do not have any right to bash a government mandated organization so unforgivingly because you feel they failed, they are not the first or the last to fail us. If Al Pari has a case, they can and should make it, as I am certain there are tools in… Read more »
Truth is Forex is a wild animal and NFA doesn’t even know how to tame it. On top of that, it’s receiving pressure by Chicago to get the Forex out of their way (just imagine how appealing the forex revenues would be if all that volume were to transit through Chicago). We all know the games that dealers play and there is no excuse for unfair practices, but NFA is not doing anything to actually resolve the issue. They think that by coming out with a new rule every day and fining brokers left and right they are regulating the… Read more »
I am not involved in ANY way. I don’t know any of the people involved. I DO KNOW know stealing when I see it. The comment about “the customers would have busted the trades is ridiculos. The customers did not know. This was obviously an attempt by Alpari to get their money back on a losing trade. Alpari’s own emails and recorded telephone calls show the customers did not know See pargraph 15 and 16. Michael you are a great shill for the brokerage industry. I really admire your ability to spin a broker screwing its clients into “poor, innocent… Read more »
I guess my last comment must have struck too close to home bc Michael deleted it.
Which part of ….”I’m not involved in ANY way. I don’t know any of the people involved.”…. did you not understand?
The NFA does not understand that pricing errors occur in the market and are not necessarily the fault of the broker. Often times , human error, traders entering wrong prices on Reuters causes system wide miss hits and spikes rates. According to the NFA rules , under such pricing errors, broker are only allowed to correct trades in customer favour ??? idiotic really ,
Ervin, it is naive to state ” the customer did not know” As an option trader, we’re very aware of any and all miss price that occurs in the markets. In the real world, pros l, would notify the bank or trader of the bad quote as opposed to dealing on it. “” five customers traded about 26,000 contracts overall during the so-called prohibited timeframe and generated almost $230,000 in total profits. The customer who filed the arbitration claim accounted for almost 25,000 of the contracts traded and over $220,000 of the profits generated.”” LOL” the customers didn’t know.. The… Read more »
Here is the upshot. Client finds a niche and decides to expose it and profit from it, (s)he probably done his homework beforehand to make sure, the hit amount points that one out. Alpari discovers the hiccup and ‘bust’s’ the trade’s but offers compensation as way of recompense to a disputed trade(s). Client goes running to the NFA who are all too happy come down like a ton of bricks. Alpari were lax on their compliance and perhaps a pop up new amendment and tick to agree upon opening the platform is now what is required, this client knew what… Read more »
From my point of view, those illicit trades were made possible because of software error or some kind of misconfiguration. Every error has its cost, so I guess, Alpari has found out that their platform cost couple hundred thousand dollars more than they were invoiced, huh.
So now the final payment is due, and NFA ensures that Alpari itself pays it, not its clients. Buy quality software and tech support. Cheapest is dearest.
indeed, however exchanges are allowed to correct trades, remember Facebook’s IPO?
yep, it cost Alpari so much that it ended the relationship with FX Bridge right after
Just for reference: Oanda has lost more than that amount because of an error in the pricing algorithm for their box options. A group of clients exploited this for a few weeks – and Oanda ate the losses. It was their fault after all.
Tony: i kind of agree, it has long been a rule of journalism to strictly separate news reporting and opinion pieces. If you mix it up, it becomes biased reporting. There should have been 2 articles, one reproting the facts, and a 2nd one with Michaels view on the matter, in a separate section.
NFA can not handle and understand advanced trading , they can make rules like low leverage and no hedging and with these non-scene rules ,NFA thought that all clients are safe. 🙂
Hi Michael, Thank you for the reply to the post, 1. You do not have to be a native English speaker to ask FM to provide you a proof reader (I am cheap and willing :)), you seem like quite a brain, no need to not communicate your thoughts clearly 2. FM tried, but failed at being unbiased, ( I blame you for that one) 3. Saying things like “ruthless” when describing a Government body isn’t factual reporting, one advantage in the United states is that there is always someone higher to complain to, but the reason no broker does… Read more »
Anyone that believes the CFTC and NFA did nothing wrong regarding the PFG fiasco is sadly mistaken. Not once in 20 years did the NFA confirm seg fund bank account account balances with the bank. These regulators should take out their checkbooks and make the customers whole. I have been a futures industry professional for 35 plus years and I am not a PFG client.
While the NFA chased after forex brokers because “leverage is dangerous,” ponzi schemes aplenty popped up all over the U.S. And PFG and others (there are more, and they are going to blow up in the next 12 months) falsified bank statements to stay in business. The question isn’t whether Alpari screwed clients. The question is this: Does the NFA spend its time doing the most good for the greatest number of traders? And the answer is, every time, EVERY time, NO. It does not. It does not protect a large number of traders. It retroactively penalizes firms that have… Read more »
Michael brings up a valid point. As a required NFA member, why in the hell do we pay 2 cents of every transaction to these numb-skulls. Were talking millions of transactions on a monthly basis. Their sole purpose was to protect our customers and industry, and in the last 8 months have failed miserably in both aspects. I propose we abolish the NFA in its entirety, and replace it with a more practical organization.
If anyone wants to understand the ineptitude of the NFA, look no further than the “ratio rule” rule 2-9
Great Job !