FXCM (Forex Capital Markets) on July 3, 2007 issued a press release to announce that 99% of all their clients are now trading with “No Dealing Desk” execution (not to be confused with non-dealing desk trading). I'm guessing the shift didn’t happen because traders necessarily wanted it, but because FXCM decided that it was in FXCM’s best interests to put everyone on it. Up until a few weeks ago the company had a disclosure that intimated as much saying that FXCM reserved the right to put anyone and everyone on it. Well, now it appears they've gone and done it.According to FXCM’s spokesman, “The No Dealing Desk model eliminates the potential conflict of interest between broker and client” and goes on to say that that’s because “prices are provided by six of the world’s largest banks.”
Guess what. Most market makers (brokers) have multiple banks feeding them prices so how does this magically eliminate the potential conflict of interest? Well, it doesn’t. And the suggestion that "prices are provided by six of the world's largest banks" is total rubbish. Yes, FXCM may get quotes from six banks but the trader never sees them.
FXCM still has its thumb on the pricing scale, otherwise, they would offer an Electronic Communications Network (ECN) platform where traders could see for themselves the depth of the market and all that wonderful pricing they brag about. Instead, what the trader sees is what FXCM wants them to see - a single bid and ask price for each currency pair - which I seriously doubt is going to be at the best available price as the company's spokesman intimates.
If FXCM’s claim to offer best available pricing were legitimate, FXCM would undoubtedly post a verifiable guarantee on their site that traders will get the best quote from participating banks. They haven't done that and I'm guessing for good reason. If they did, not only would their business model collapse, they'd have to allow the NFA to verify the claim and that's a visit I'm sure they wouldn't want to invite.
FXCM’s spokesman goes on to say that the move to automated trading will lead to consistently lower spreads, claiming that “spreads have already decreased in 13 currency pairs since the introduction of No Dealing Desk execution.”
Give me a break. If FXCM were to lift its thumb from the pricing scale, traders would see spreads occasionally dropping to zero and that’s simply not going to happen because FXCM’s profits are in large measure imputed in the spreads they quote. The competition may, indeed, lead to lower spreads but I find it hard to believe the trader will ever see the best of them because it will deprive FXCM the opportunity to trade against the lower spreads themselves.
In the final analysis, FXCM’s move to “No Dealing Desk execution” is nothing more than a marketing ploy, a play off the non-dealing desk trading paradigm I’ve been writing about for almost a year now and I’m guessing that savvy traders aren’t going to buy into it any more than I do. Anyone who thinks their move to fully automated trading somehow changes anything, needs to think again. A frog by any name remains a frog.
FXCM’s spokesman closes with the following statement. “In effect, we have now ended our dealing desk trading system, thereby removing any possible conflict of interest. With many other forex brokers, a client’s losses might be linked to a broker’s gains. FXCM hopes others follow our example to put the client’s interest first.”
Makes ya kinda wonder what FXCM was doing before they changed into this cheap blue suit and tie, doesn’t it?
If you think I'm being unfair, feel free to read the text of the original press release. If you don't come away with the same feeling I did that the company is suggesting that traders will see the best price participating banks have to offer, feel free to drop me an email.
Update: It "appears" that someone at FXCM has taken exception to this post and in an apparent response has attempted to discredit their smaller competitors, suggesting that traders should abandon any FCM that doesn't show at least $5M in the bank. The discussion that ensued on The NDD Forum is most instructive. It's also interesting to note that the day after the source of fear campaign was traced to an IP address just 5.4 miles from FXCM's main office in Manhattan, someone flagged this blog hoping that Google would shut it down.
Desperate times, desperate measures?
Check their latest Alexa traffic stats. If you select the five year chart, you'll see that FXCM has been losing market share big time. Alexa ratings have to be taken with a grain of salt because they're derived only from those who use their tool bar, but in microcosm it sure looks like they're in trouble. Alexa has been discounted by many because at one time the stats could be easily manipulated but that's only on the positive side.
I am not suggesting here that FXCM is about to go out of business. What I am suggesting is that there are a lot of traders who are fed up with the games they play. The company's loss of market share started at the beginning of the year just after the NFA filed its second complaint about the company's promotional materials and practices. The first complaint resulted in a $110,000 fine. The second complaint, as serious as the first, has yet to be closed.
Automated trade execution doesn't mean the trader will get more competitive pricing. Just compare the spreads you see from FXCM to those offered by MBTrading and/or Oanda. FXCM could have 20 banks feeding them rates but as long as they have their thumb on the scale, the only market the trader will see is the one FXCM wants him to see and their spreads aren't the least bit competitive.
Hypothesis: The bulk of this post appeared before I stumbled on the Alexa charts which makes me think that they moved to automated execution because they can no longer afford to pay account reps to "manage" trader accounts. A step in the right direction but for all the wrong reasons.
Recommended Additional Reading Advantages and Disadvantages of Non-Dealing Desk Trading
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