Last November the NFA's Business Conduct Committee issed a complaint following an investigation of Forex Capital Markets LLC (FXCM), a registered futues commission merchant (FCM), dealing desk broker, and NFA member located in New York, New York.Among other misdealings, FXCM was cited because the it was using promotional materials that included "numerous claims of "zero commissions" and "commission free trading", claims which imply "that FXCM did not maky any money on a trade when, in fact, it makes money on the mark-up or pip spread on trades which was not clearly disclosed in the promotional material."
NFA's complaint appears to be a result, at least in part, to FXCM's continued use of such appeals following an audit that was completed in April 2005 in which the firm was originally admonished. "Yet, FXCM and/or certain of its non-NFA member introducing sales agents ... continued to make some claims of this type in their promotional material."
The firm submitted an Offer in response to the complaint in which, without admitting or denying the allegations in the case, proposed to settle consenting to findings that it committted the violations alleged in the Complaint and also by agreeing to pay a fine of $110,000. The NFA's Business Conduct Committee accepted the offer.
How effective has NFA been in enforcing this disclosure requirement? In less than a hour I was able to find 20 deal desk broker and introducing broker sites characterizing trading in the headers of their sites and/or online advertising as commission free without the required clarification. While all disclose onsite that their profits are imputed in the the fix spreads they quote, they continue to make unqualified references to commission free trading in their META tag descriptions and/or online advertising which appears to be in clear defiance of NFA's recent finding.
Dealing desk brokers and traders have pointed out that the vast majority of brokers display the fact that profits are imputed in their fixed spreads on their sites, but there are two things that should still concern the spot trader.
First, anyone needing to attract clients with an offer of commission free service is just playing mind games. It's like the real estate broker who tells a buyer he doesn't have to worry about his real estate commission because it's a seller cost. You don't need a high school education to understand that the broker's commission is imputed in the sales price. The buyer always pays it.
Second, dealing desk broker profits don't end there. Creating and controlling an artificial, off-exchange market, they're free to take out traders at will.
To see for yourself how many dealing desk brokers rely on this appeal to attract clients, Google forex commission free trading.
June 14, 2006
I just received an informative email from Tom Henderson in Australia and after getting permission to reprint it, I thought I'd pass it along to everyone.
Hi Phil,
I don’t know if this might help you. A little bit of the history as I know it. It's not comprehensive because it's an area I leave alone. I work mainly with traders with some experience, whereas the area you are addressing (I think) attracts the novices because of the "commission free" advertising.
The concept was started by an outfit called DealForFree who came to town here in Australia in 2000. It caused a huge stir, and sucked in a lot of people for all the reasons you articulate in your blog's. The attraction of course was the "commission free" transactions, and it attracted the novices like flies. DealForFree styled themselves as a Euro or UK dealer. They traded under that name for two years and then renamed themselves CMC Markets.
They have been the global engine driver in CFD's which is so huge now it is generating 40% of the total traffic on the physical stock exchange here. The institutions have taken to them like ducks to water.
It is "spread betting". Have a look at their sites and you will probably find many of the smaller brokers you are describing are partnering them and using them as their clearinghouse/banker. The arena is so big it has the two large "recognised" bankers - SaxoBank and ING Global.
The feedback received here is, when trading with a phone-broker or broker-supplied trading platform it is essential to ask if the trade is "DM" or Direct-to-Market. Several of the larger brokers here have similar offerings which are straight-through Direct-To-Market whereas CMC operates its own spread "synthetic market" which mimics the true physical market. Close but not close enough for obvious reasons.
As I read your blog, I realised you were describing what we know here as spread-betting as described above. Check them out. They run it on Forex, Indexes, Shares, anything.
Regards,
Tom Henderson
Australia
Thanks Tom.
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