NFA’s new regulation demands: Anti-Pricing or Return of Slippage and Re-Quotes, this time with a regulatory blessing? Part 2 (Pricing Adjustments)

Another draconian move by the NFA was to forbid price adjustments by brokers unless they are in the traders’ favor.

Hot off the NFA’s Press Release: The requirements regarding price adjustments will become effective for all customer orders executed after June 12, 2009.

Another draconian move by the NFA was to forbid price adjustments by brokers unless they are in the traders’ favor. On its surface it sounds like the right move, but those who understand the STP mechanism a bit (I guess NFA is not one of them) will immediately say – this is BS!

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STP brokers are fully dependent on their liquidity providers, and when the latter fail to deliver the right price brokers are left stranded. While some brokers will use it in their favor, others won’t.

Another case is when a Broker’s liquidity provider changed or adjusted the prices. Then the proposed ‘solution’ is to notify the trader within 15 minutes about the adjustment. The liquidity provider must then provide documentation AND either cancel or adjust all executed customer orders placed during the same time period and in the same currency pair or option regardless of whether they were buy or sell order. Easy, right?

The NFA gave FDM’s a bit more time to prepare: that is month and a half. How will they adjust their trading platforms to comply with this regulation only G-d the NFA knows.

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Basically, both the Anti-Hedging and Anti-Pricing requirements will take the Forex trading industry a few steps back in terms of order execution. Just when the technology reached the stage where it minimized the number of Re-Quotes and Slippage errors – the NFA, with their good intentions, to benefit the novice trader, demands that either the traders get exactly the quote they wanted or the cancellation of the order.
This will result in reduced trading volume, heavy software development and will add to the already hefty regulatory compliance – brokers’ staffing might be 90% compliance and 10% other (sales, support and marketing) from now on…

Not only that, the NFA with this latest move also pushes brokers back to the Market Making mode of trading instead of the more ‘fair’ STP model. As Market Maker you never display Slippage or Re-Quotes simply because you display the quotes yourself.

My proposal to the NFA is this: Instead of employing tens of people whose sole business is to interview brokers on what’s good and what’s bad and then making decisions that are completely detached from the markets, why not propose a single Execution Protocol that will make sure Brokers AND Liquidity Providers are aligned and not only that traders and Brokers are punished? This way everybody will have a single Mechanism to comply with, and will program their software and connectivity feeds minimizing exactly what you are interested in minimizing (Re-Quotes and Slippage)?

Michael

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