The Complaint
A recent thread on The NDD Forum has brought an issue to the forefront where an FCM has, in fact, admitted that offers of commission free trading accompanied by a simple statement implying that the broker’s profits are limited to displayed spreads is not only misleading but an outright misrepresentation.
The facts as I know them.
1. On August 19, 2004, NFA's Directors made the following ruling: “Any Member or Associate is prohibited from representing that its services are commission free without prominently disclosing how it is compensated in near proximity to that representation.”
2. Peregrine Financial Group Inc. (PGF) (NFA 0232217) is a registered Futures Commission Merchant.
3. Peregrine Financial Group offers commission free trading.
4. While Peregrine Financial Group not only does meet the NFA’s minimum disclosure requirement regarding compensation “in near proximity to that representation”, it does explain on an unrelated page and in considerable detail why typical broker disclosures related to "commission free trading" are misleading.
Update:This complaint was submitted to the NFA the last week of October. As of November 6, 2006, Peregrine has deleted all offers of commission free trading on its website.
5. There are a number of FCMs who use the terminology “commission free trading” on their websites to attract traders who provide a footnote that would lead traders to think that their compensation is limited to quoted spreads which, if Peregrine’s acknowledgement is to be taken seriously, it is clearly not the case.
It is my hope that in bringing Peregrine's "confession" to your attention that you will not only require Peregrine but all other brokers offering "commission free trading" to provide a thorough and accurate disclosure explaining exactly how they are compensated and in immediate proximity to the offer.
The ball's in the NFA's court. If they ever respond or take action, I'll be sure to post the results. Until then, make sure you take offers of commission free trading as they were intended to be. A hook to encourage the unwary to enter the snake pit without boots.
Update:As of November 6, 2006, the NFA has yet to take action to require broker offering commission free trading to clarify misleading claims that their profits are restricted to quoted spreads.
Recommended Additional Reading
Think You've Been Trading the Forex? Think Again
Advantages and Disadvantages of Non-Dealing Desk Trading
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