The Forex Market has been under the regulators’ microscope since last Fall following reports of alleged scams perpetrated by some brokers.
Now word has leaked that a new investigation is about to be launched into whether some well-known Forex firms are still using unfair practices and taking advantage of retail traders.
Small Movements - Big Profits
The National Futures Association (NFA), a self-regulatory body that polices the futures industry, says it plans to begin analyzing trades executed by its 16 member Forex firms. It plans to search for signs that these firms are designing computer systems to take advantage of "slippage."
Slippage is a small price movement that may occur between the time a customer places an order and the trade is actually executed.
For individual investors, slippage is almost impossible to detect. For example, if a retail investor places an order for euros at $1.3350; he may find that by the time the brokerage firm executes the order, the rate has changed to $1.3348. Does the customer get that new, lower price, or does the firm reject the order? Is the firm only executing an order when the price moves up in its favor, to say $1.3353, and then pocket the spread?
While some slippage is normal, the NFA will be looking to see if trades are being executed only when the currency price moves in the firm's favor. This would indicate a firm may be violating NFA rules mandating fair business practices.
The individual price movements in question are tiny but they can quickly add up. A trader using 50-to-1 leverage could buy $100,000 worth of euros with just $2,000 in his account. If he placed an order to buy at $1.3350, but instead paid $1.3370, those euros cost him an extra $20. Within months, such spreads can mean millions of extra dollars for forex firms.
The new probe comes just as currency trading is becoming more popular for small investors looking for bigger returns. Average daily volume in retail forex trading grew 25 percent from 2008 to 2009, to $125 billion -- up more than ten-fold from eight years ago according to consultancy Aite Group. Both the NFA and the Commodity Futures Trading Commission (CFTC) are also keeping mum about any additional investigations that may be underway. But when FXCM went public in December, its SEC filings disclosed that the firm had been contacted by both regulatory agencies for information about trade execution practices involving Ikon Global Markets and Gain Capital. An FXCM spokeswoman declined to comment by press time.
Regardless of whether regulators find cases of unfair trading, retail investors are still at a disadvantage when trading currency because forex is far from transparent.
Charles Rotblut, the vice president of the American Association of Individual Investors says if a forex firm is acting as a market-maker -- taking the other side of a client's trades -- it's doubtful the investor is getting the best possible price.
NFA spokesman Larry Dykeman says the group can then assess fines, and in some cases may suspend or expel a firm from membership in the organization.
The new investigation follows last October’s probe into Ikon and GAIN. Both firms were accused of taking advantage of slippage at their clients' expense and both firms settled without admitting or denying the allegations. According to the NFA, Ikon paid a $320,000 fine and has ceased offering retail FX trading to U.S. clients. Meanwhile, GAIN, paid a $459,000 penalty and went public in December. A spokeswoman for GAIN said the trades in question accounted for only .05 percent of its transactions, and that the company will continue to review its operations to ensure that "the interests of our clients and partners are fully protected."