Despite what many traders, especially new traders, like to believe, the United States regulatory environment is extremely counter-productive and should not make any trader feel safe. This may be one of the best examples that regulation does guarantee traders that they are being protected against fraud as it appears that the brokers who mistreat their clients, in other words you the trader, often come from heavily regulated countries. The US is a prime example as the brokerage industry has been plagued by scandals and fines.
While one can argue that those who break the law are prosecuted and fined, it does not secure traders who may have lost millions as they traded there. This does not only happen in the retail space, but also in the professional segment. One has to look no further than the big scandals involving MF Global and PFG Best, two very well known brokers who handled and defrauded institutional clients with minimum accounts of $1 million and more. Today we will pay attention to a name which is familiar to every forex traders; FXCM.
FXCM, also know as Forex Capital Market after it changed its name from Shalish Capital Markets, was founded 1999 in New York and was one of the pioneers of forex trading in the US. As many young companies in an emerging field, FXCM did great work and attracted plenty of clients which came to trust the US regulated broker. The growth of the firm attracted a new investor in 2003, Refco which at that time was one of the largest US futures brokers. Two-and-a-half years later, Refco filed for bankruptcy as a $430 million fraud was discovered. FXCM had to battle for years to to finally clear itself from this mess.
The brokerage continued to grow as retail forex trading expanded and in 2010 filed for an IPO on the New York Stock Exchange. The broker had plenty of reps all over the internet claiming how great and superior they were. A few months after the IPO several class action lawsuits were filed against the company claiming fraud and racketeering in the IPO process. The use of misleading and unfair trade practices was cited. Rounding up 2011 was a $2 million fine by the NFA and a $6 million fine by the CFTC for slippage malpractice, FXCM did not pass positive slippage on to traders, and the broker paid $8 million back to clients as a result. 3 debtors also filed a lawsuit against the company.
In 2014, the UK regulator fined the broker for the same reason and FXCM had to pay £4 million in fines and £6 million to traders. It appears as if the broker decided to try its luck on the other side of the Atlantic in order to make-up for the losses in the US. During a twelve year period starting in 2005 and ending in 2017, a grand total of 8 regulatory actions were filed in the US, 13 reparation cases with the CFTC and 17 arbitration decisions with the NFA. After the Swiss Franc had its one day market move after the Swiss National Bank unpegged its currency from the Euro, FXCM lost $225 million and was unable to fulfil its regulatory capital requirements. Leucadia National Corporation offered the broker a $300 million loan in order to continue its operations with terms unfavourable to FXCM.
FXCM was renamed Global Brokerage Inc.and is currently listed on the NASDAQ stock market in the US. This did not stop the US regulated broker to continue defrauding its clients and the CFTC fined FXCM $7 million in February of 2017 with another $650,000 in due to undercapitalization. No-dealing desk execution was advertised, but FXCM used a related company to act as a market maker and book its traders losses. It has removed this claim now from its website, except in the UK, and also stopped accepting traders from many countries.
All those issues finally resulted in the loss of their US trading license, the company moved its operations to the UK and sold its US client accounts to Gain Capital. Other regulators were the company operates or used to operate continue to investigate their practices and the NASDAQ has issued a delisitng warning to the parent company which also stated going concern issues; this could result into a bankruptcy filing of the firm. 4 more class action lawsuits were filed in the US and Effex Capital, the company allegedly working closely with FXCM in the fraud, filed a libel case against the NFA.
FXCM reported a net loss of $28.2 million in their first-quarter financials, owed Leucadia National Corporation $121 million and the parent company Global Brokerage Inc owes $163 million to holders of its controvertible debt. FXCM only had $141.7 million in cash. This corrupt forex broker owns several smaller firms or has stakes in them which it currently needs to sell, two of the best known outlets are Lucid Markets LLP which is a trading group focused on currency markets using automation and FastMatch which is active in the ECN space of trading.
Forex Broker United States did not work out very well for one of the first companies capturing the growth in retail forex and serves as a prime example of why forex traders should not place regulation on top of their list, but rather find a great broker who serves them well. This relationship takes time to develop, time well invested. A good broker doesn’t need regulation and definitely doesn’t need to operate out of the US. Just as many individuals can tell if a person is good or bad, forex traders can tell if a broker is good and bad if they ask the right questions and take the right steps.