Pay Up, Says Uncle Sam! FXDD Ordered To Pay Penalties As Case Draws To A Close

The long and drawn-out legal wranglings surrounding FXDirectDealer (FXDD) in the United States, have undergone a further development today as the National Futures Association (NFA)  issued a $1.1 million fine, and a $1.8 million restitution order against the New York-based FX company, which is registered with the regulator as a Futures Commission Merchant.

In addition, the Commodity Futures Trading Commission  added to the firm’s woes by issuing a similar charge against FXDD today, on the basis that from December 10, 2009 until June 2011, the firm has violated its supervision obligations by employing a trading system that gave FXDD pricing advantages, and harmed thousands of its retail customers.  The CFTC Order requires FXDD to make full restitution of $1,828,261 to FXDD’s current and former customers who were harmed by its violation, and imposed a $914,131 civil monetary penalty against FXDD, echoing the NFA’s actions.

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The decision, issued by NFA’s Hearing Committee is based on Complaints filed on June 29 and October 23, 2012, and a settlement offer submitted by FXDD.

The June 29 Complaint charged FXDD with using asymmetrical price slippage settings that favored FXDD over its customers, failing to supervise the trade integrity of the firm’s electronic trading systems, failing to maintain complete and accurate records and failing to review the use of promotional material. The June Complaint also charged FXDD with making improper price adjustments in customers’ accounts, converting customer funds, willfully submitting misleading information to NFA and others, and failing to treat all customers equally when giving price adjustments.

In addition, the same complaint leveled charges at FXDD for failing to implement an adequate anti-money laundering (AML) program, failing to develop and implement adequate screening procedures to determine whether persons and entities with whom FXDD intended to carry out FX business, were required to be registered with the Commodity Futures Trading Commission (CFTC) and Members or Associates of NFA.

The October 23 Complaint charged FXDD with failing to implement an adequate Anti- Money Laundering program and failing to adequately supervise the firm’s AML program.

As part of the settlement offer, FXDD agreed to pay restitution in the amount of $1,828,261 to FXDD customers, who experienced unfavorable price slippage on “limit-fill-or-kill” trades placed in their accounts from December 10, 2009 until June 29, 2011.

Furthermore, FXDD will pay a fine of $1.1 million, of which $914,131 is attributable to FXDD’s unfavorable price slippage practices. In a related action taken by the Commodity Futures Trading Commission, FXDD will pay an additional penalty of $914,131 to the CFTC.

The NFA most certainly has its regulatory eye on FXDD, and in scrutinizing its corporate procedure, imposed a $75,000 fine on the company’s chief compliance officer, James E. Green, earlier this year, holding him personally responsible for the aforementioned irregularities in the company’s Anti-Money Laundering procedure, further demonstrating that the regulator is intent on prosecuting not just the firm, as per the case against FXDD itself, but also the individuals charged with the responsibility of overseeing such compliance procedures, and issuing further penalties against compliance personnel.

Subsequent to the case, according to the NFA, FXDD neither admitted nor denied the allegations against it.

With regard to the CFTC Order, similar to the charges imposed by the NFA, FXDD used asymmetrical slippage parameters on its principal trading platform, meaning that the system favored FXDD over its customers in slippage situations.

Based on these parameters, FXDD rejected a customer’s order when the price slipped more than 2 pips in the customer’s favor (and instead re-quoted the customer the new, less favorable price), but filled a customer’s order at the original price if the price slipped in FXDD’s favor by more than 2 pips.

As a result, FXDD benefited from slippage of more than 2 pips in its favor between order placement and order execution, but did not allow its customers to benefit from similar price changes in their favor.  The CFTC Order further finds that had FXDD employed an adequate supervisory system, and diligently supervised its personnel, FXDD would have discovered these problems with the integrity of trades on the platform, and would have had the opportunity to correct them before more than 24,900 customer accounts were deprived of $1,828,261.

David Meister, the CFTC’s Director Enforcement, made a public statement today on behalf of the US regulator saying, “Those who offer forex trades to the retail public must do so fairly. Trading platforms that are secretly designed to favor the house more than the customer are not only unfair, they also violate a firm’s supervisory obligations.”

FXDD subsequently made a statement regarding the outcome of the case, explaining that the company has reached a settlement with the NFA and the CFTC regarding asymmetrical price slippage parameters experienced as a result of “limit-fill-or-kill” trades, executed between December 10, 2009 and June 29, 2011.

The company further explained that the settlements are intended to provide restitution for FXDD customers of $1.8 million, representing an average of $72 per impacted account. In reaching the settlement, FXDD maintains that it does not admit nor deny any of the allegations set forth by the NFA.

The company concluded by explaining that it had enhanced its slippage parameters to provide its clients with an improved trading environment during the summer of 2011, and believes that it  acted in the best interests of its customers with regard to the settlement.