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Forex brokerage FXCM has been fined $9 million by the Commodities and Futures Trading Commission in the US, the principal regulator of the futures trading market. The broker has also been banned from operating in the US. As a consequence, FXCM said it was selling its US operations to GAIN Capital, which already owns City Index.

The ban comes because the CFTC discovered that FXCM made false representations to its clients when it told them it would not have a conflict of interest by offering them its No Dealing Desk Platform. According to FXCM, the risk would be borne by banks and other independent market makers that were providing liquidity to the platform. In reality, the forex broker had an undisclosed interest in a market maker that consistently won the largest share of FXCM’s trading volume and was therefore taking positions opposite its customers.

According to the CFTC, the market maker in question was an FXCM-backed start up that was founded by a former FXCM executive when he was working at the broker. For the first year of its existence it operated out of FXCM’s offices. The CFTC also alleges that FXCM made false statements to National Futures Association personnel in order to conceal this state of affairs.

FXCM moved to its No Dealing Desk model in 2007, an agency model which it argued would address any conflicts of interest. The claim was made that this would address any worries forex traders might have that the broker was taking the opposite side of their trades. Price quotations would be provided by external liquidity providers rather than from FXCM’s own dealing desk.

The creation of the external market maker came about because FXCM developed an internal algorithm for market making that could compete against the external prices of the liquidity agents FXCM was using. This created a conflict of interest that was challenged by the company’s compliance department – the broker was now using an internal party to make markets on its No Dealing Desk platform. The decision was therefore taken to move this algorithmic business outside the company as an agency broker, a move which FXCM funded with a $2 million loan while also maintaining a profit share agreement.

The new company continued to use FXCM’s trading algorithm and also drew on personnel resources from FXCM. It generated over $80 million in revenue for FXCM. It was favoured over other market makers and was granted other privileges – e.g. a previous quote system whereby the execution requests FXCM submitted to the market maker were based on the trading limits in actual customer orders.

Throughout, FXCM was claiming to its clients that it had no conflicts of interest on its No Dealing Desk model. Even within the company, efforts were made to conceal or downplay the role of the spin off market maker.

GAIN Capital confirmed yesterday it had signed a non-binding agreement to acquire the client base of FXCM’s US operations. Under the terms of the letter of intent, the clients will be transferred to GAIN’s FOREX.com brand. GAIN said the transfer is subject to agreement and regulatory approval, and that it expected to transfer FXCM’s clients over by the end of February.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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