Category Archives: Tips for All

Global FX Code

The collective global foreign exchange markets are undergoing a gradual shift at the highest levels that should bring greater integrity for participants including major dealers and individual retail traders in the months and years ahead.

Meanwhile, regulators are collaborating across borders on efforts such as the global fx code to help standardize best practices for major dealers and banks when it comes to fair and ethical dealing at the interbank level.  

What triggered these changes?

The developments to reform the foreign exchange markets come on the heels of major investigations (recent and ongoing) of FX market price manipulation at some of the largest banks and dealers in recent years.

The Global FX Code was created to bring a standardized approach to best-practices in the FX Markets to help ensure best-execution while preventing market price manipulation, among other expected benefits of the code.

The effort was organized through the Bank for International Settlements (BIS) under the Foreign Exchange Working Group (FXWG) and in collaboration with the others across numerous regulatory bodies and the Federal Reserve of New York.

The first phase of the code launched softly during the middle of 2016, allowing firms to voluntarily adopt its code of conduct rules, while the second edition of the code is set to update during the first half of 2017. The code is like a giant pilot program, helping regulators and participants gather collective feedback to improve future iterations.  

Progress at the interbank level

Already banks and some dealers are beginning to state that they will only trade with other dealers that adhere to the code. This is an indication of its positive effects already, and something that regulators will be surely gauging as this pilot program gathers feedback from the industry during its first year in voluntary operation.

One size fits most

However, if financial market regulators try to create a unified set of rules to govern the origination and dissemination of FX prices as well as the execution of orders against prevailing market prices, then the Global FX Code will be a good place to start reviewing such data.

Already regulators such as the FCA have numerous programs underway including after recent studies that the FCA conducted on its members, and with regard to last-look, time-stamping and the process of marking-up rates (adding spreads), among other areas of concern by the FCA.

Need for a solution

A recent report by BIS cited by Reuters said that there has been an increase in outbursts of volatility and flash events and that shrinking fx volumes could cause stability risks. This means that significant market reforms could help bolster the integrity of the markets while aiding its operational efficiency. Improving the market framework should help regulators have better oversight over firms’ execution practices while encouraging firms to adhere to such rules.

Retail traders in focus

For retail traders, the FX market could see an influx of new market entrants as the integrity of the market is bolstered thanks to the initiatives underway including a reduction in leverage which essential makes trading less risky when compared one a dollar for dollar basis in terms of the buying power in a margin account.

Although the Global FX Code is underway at the interbank level, over time this could reach down to online brokerages and other market participants and eventually affect retail traders where best-execution from a broker can be verified more easily.

Mid-level challenges

Other areas of concern pointed out by the FCA’s findings has to do with the practice of ‘last-look.’

Similar to asymmetrical slippage, last-look is a form of asymmetrical execution. When an order is received by a dealer for execution from a client, rather than executing it immediately at the rate that had been advertised or that is currently available, the dealer gets to decide whether the rate has since changed unfavourably – and instead cancel or re-quote the order.

Another alarming practice that has plagued traders in the FX industry for years that is only now coming to the spotlight by regulators is known as “stop-hunting”, or when a firm arbitrarily widens its bid or ask price to trigger client’s stop-loss orders.

 

Financial Commission welcomes the work underway via the Global FX Code and supports this voluntary effort, and calls upon brokers to join as members where they can demonstrate their commitment to self-regulatory compliance while meeting the guidelines that our members uphold to best serve clients.

Belarus Forex Market Regulation

Recently, the Financial Commission increasingly receives members’ inquiries asking to explain the key provisions and regulation specific in Belarus. High interest in this jurisdiction is justified and can be explained at least by  the following:

  • Incomplete, incomprehensible and “expensive” regulation in Russia as well as absence of feedback from regulator regarding its prospects

  • On the contrary, favorable and comprehensible, based on European standards,  Belarus regulation  has a great chance to make this jurisdiction forex haven for the entire CIS.

In this article we want to make a detailed analysis of Belarus forex regulation to make it clearer and answer all industry questions regarding this matter.

In accordance with Edict № 231, Belarus forex regulation came into force in March 2016, since then, six companies and one of the national banks have already been included in the register of forex companies  by the National Bank of the Republic of Belarus.

In order to provide services on retail Forex market in Belarus, first of all, it is necessary to obtain license issued by the National Bank of the Republic of Belarus to be included in the register of forex companies  (simpler and “softer” analog of licensing), secondly, to undergo an assessment of software used in the National forex center and deposit a quarantee payment to the compensation Fund in amount of 55 000 US dollars (note: the payment will be returned in case of voluntary exit from the market without any uncovered obligations towards clients) and, thirdly, to become a member of the local Association of Financial Market Development – “ARFIN”.

Obtaining of license from the National Bank of the Republic of Belarus requires incorporation of local legal entity as well as preparation of all necessary documentation and going through certain legal procedures.

Basic requirements

Financial requirements

Min. capital

~$103,000

Funds must be allocated on the company’s account in one of the local banks

Compensation fund payment

$55,000 – guarantee fee +calendar fees in amount of 5% of the amount of total liabilities towards clients. Important! When the total amount of the company’s clients funds is reducing the calendar fees are paid back to the company.

Funds are transferred to the National forex center and allocated on deposit in a local bank.

Risk management and risk capital

Yes

Regulation has fairly strict risk management requirements which implies that the maximum size of own, not overlapped total position for each instrument may not exceed the amount of equity capital of the dealer. In fact, if the dealer does not have large equity capital, then, almost all clients positions should be hedged on an external counterparty. At the same time, regulation is quite flexible in choosing of counterparties and permits transactions with foreign companies.

Trading conditions

Max. leverage

  • Client 1:100

  • Qualified client 1:200

  • Professional client 1:500

Professional client

  • Local forex company and (or) with license to carry out insurance activity, banking and exchange activity regarding securities;

  • Non-resident legal entities licensed to operate on OTC forex market and carry out banking or other financial activity;

  • The income of legal entity reduced by taxes and fees for the last fiscal year amounts to at least 4 million base units*;

  • The total amount of company’s accounting balance by the end of the last fiscal year amounts to at least 2 million base units*;

  • Equity capital of the legal entity by the end of the last fiscal year amounts to at least 200 thousand base units*;

Qualified client – legal entity or individual that:

  • Conducted at least 10 transactions totalling more than 10 thousand base units*  within each of the last four quarters.;

  • The amount of client long-term and short-term investments, including cash, by the first date of the current month is more than 10 thousand base units*;

Client – usual client who has minor trading experience or does not have any experience at all.

*Base unit amounts to 21 Belarussian ruble or 10.83 USD

Instruments

FX and CFD

Trading accounts in different currencies

Yes

PAMM accounts

No

The regulation does not have any specific requirements for asset managers, however, forex dealers can not represent independent managers on their websites and must not participate in negotiations between investors and managers.

Copy trading

Yes

No additional requirements for dealers

Market making

Yes

Accepted risks must correspond with company’s equity capital, if the established normative is exceeded, a mandatory withdrawal of positions on the counterparty must be carried out (see requirements for risk management)

STP

Yes

Withdrawal on foreign brokers is possible

Clients’ and own funds. Choise of counterparties

Segregation of client’s  funds

No

Allocation of client’s funds on foreign banks and financial companies

accounts

Yes

50% of clients’ funds must be allocated on local bank account

Using of client’s funds for hedging transactions abroad

Yes

Not more than 50% of clients’ funds may be allocated on counterparties’ foreign accounts for hedging and direct withdrawal of orders

Allocation of own funds abroad

Yes

All company’s funds for hedging transactions abroad

Requirements for foreign counterparties

Yes

Foreign counterparty should be an American, Japanese or Russian company with profile license (permission), as well as company with a license (permission) obtained in the European country applying provisions of MIFID.

In addition, the counterparty may be a company from another jurisdiction, which is not offshore, if the performance of its obligations towards the forex company is guaranteed by the bank or other entity which financial viability is confirmed by the auditor’s report.

Forex company may hedge transactions, in amount not exceeding 5 percent of the amount of client funds, in any foreign company which equity capital amounts to at least 5 million euros, as well as in parent company in any amount, but at its own expense.

Sales and Marketing

Forex services advertising requirements

Yes

Prohibition of guaranteed income promises, mandatory risks warning, prohibition on useage of information that is not evidenced documentary, etc.

Sales ethics control

No

Indirectly (see advertising requirements)

Opening of own offices

Yes

No specific requirements for office operating activity

Introducing brokers

Yes

No specific requirements for introducing brokers

Personnel professional requirements

Director

Yes

Higher legal or economic education, no criminal record (unserved), absence of facts of initiation of criminal proceedings, as well as dismissal due to loss of confidence

Internal Control Officer

Yes

Higher legal or economic education, no criminal record (unserved), absence of facts of initiation of criminal proceedings, as well as dismissal due to loss of confidence

Dealer

No

Sales

No

Taxes and other fees

Annual fee

No

Reporting to the depositary (the National forex center)

Yes

~$ 1,230 monthly.

Company income tax

Yes

Reduced rate in amount of 9% until 2019, afterwards 18%.

Function of a tax agent

No

The Company does not levy taxes from customers.

Clients income tax

No

No income tax on forex trading until 2019. Afterwards 13%.

Summing up all the analysis of forex regulation in Belarus, it can be said that:

  • Firstly, it is logical and clear to any international forex dealer

  • Secondly, it takes into account the interests of all parties (business, clients and state)

  • And, thirdly, has foundation that allows to carry out further improvements and changes.

For instance, at first glance it may seem that the requirement of allocation of 50% of client funds in Belarus looks tough enough as it deprives the dealer’s ability to use all client funds for hedging client positions on external counterparty. This point may seem especially painful for dealers working exclusively on STP model. However, in case of obligatory segregation of client funds such as, for example, in Russia, the client funds can not be used at all. Consequently, the dealer will have to do it either at his own expense or by obtaining a credit line  from counterparties what is almost impossible if the forex license is not recognized by the state where the dealer’s counterparty registered.

In this case, Belarus regulation offers a compromise, which, on the one hand, gives the dealers the opportunity to use part of client funds for hedging transactions and, at the same time, prescribes to allocate half of client funds “at home”, thereby, significantly reducing risks of foreign counterparties which are supervised by authorities of other states.

Informational Newsletter July 2016

July 28th, 2016, Hong Kong & New York: Financial Commission is pleased to announce the launch of Informational Newsletters that will assist traders in understanding trends and challenges related to foreign exchange disputes.

As a result of the growing number of companies within our organization, and as the underlying number of traders protected directly by the Financial Commission continues to rise, the newsletters will provide traders unique insight about brokerage complaints – to help traders be better-informed when considering where to trade.

The Informational Newsletters will be posted on a new section on FinancialCommission.org and will highlight forex industry issues and trends identified by the Commission during the examination of claims – including any fraudulent activity of unscrupulous market participants, in addition to other industry trends that will be shared in the updates.

External dispute resolution trends

By informing traders of challenges that exist within the industry, and helping inform the public on how complaints are handled via an External Dispute Resolution (EDR) process, Financial Commission continues to strive towards its goal to educate clients.

In addition, Financial Commission will be sharing complaint data received about non-member firms, highlighting the interest that traders have in attempting to resolve complaints via a 3rd party EDR – even when their broker is not currently a member.

The timing of this launch follows shortly after the recent Global Code of Conduct issued by the Bank for International Settlements (BIS) which aims to provide a basis for best practices in global FX markets.

Binary Options Complaints

Among the Members of the Financial Commission there are more and more companies offering binary options trading and an increasing amount of claims are connected with these products. It is obvious that Binary Options trading is becoming increasingly popular and attracts many inexperienced traders, yet the escalating number of complaints is intelligible.

Violation of payment processing regulations

Financial Commission has also observed a slight increase in the amount of complaints related to customers payment processing requests that exceeded the regulations time-limits. Almost every complaint was connected with a refund directly to a client’s bankcard. This withdrawal method has become increasingly popular in recent years, however, sometimes such payments are processed longer than bank transfer since they depend on a chain of intermediaries. All such complaints were upheld by member firms within 1-3 days, reflecting benefits from the Commission’s members.

Nonpayment of funds.

An increase in complaints from traders regarding nonpayment of funds by brokerage companies that are nonmembers of the Financial Commission was also observed. Unfortunately, these traders are not under the direct protection of Financial Commission, and its resources are limited in this connection, yet it is important for the public to be aware of such claims.

We once again urge clients to work with companies that are members of our organization, as well as take advantage of our advice on selecting companies that we cited earlier, in order to have the related potential benefits of Financial Commission membership.

Fraudulent activity of unscrupulous brokers and asset managers in the field of asset management.

We also observed an alarming trend worsen, as numerous complaints were received of unfair brokerage firms operating in the field of investment and asset management over the last six months.

In the modern world of investment consulting, services such as wealth and portfolio management as well as trading and investment advisory services are very common. However,  distinguishing between legitimate professional management firms and from among the many non-professional deceitful entities – especially in markets where such services are not regulated, remains a challenge for both investors and traders.

First of all, firms that guarantee clients extraordinary profits without any risks should be the first red flag to look for when evaluating an opportunity.

For example, a client may be offered to invest and use instructions (trading signals) of “professional” analyst who in most cases has nothing to do with the broker itself. As a result, under the mentor guidance the client opens several large transactions which can instantly zero out the trading account. In this case mentor offers to replenish your account in order to recover the loss and the same story happens again after a subsequent deposit is made.

Avoid non-market losses that result from scams by avoiding their initial bait:

Financial Commission has prepared some recommendations in this regard:

1. Before you open a trading account, check whether the broker is a member of the Financial Commission.

2. Examine clients comments through the internet about brokers (forums, ratings, media) yet keep in mind not all comments reflect fully factual statements as some feedback reflects clients perceptions or wishes yet reviews can provide clients with a wider view.

3. Examine the contract and client agreement when opening the account, and read all the fine print to understand the legal aspects of your relationship with each broker.

4. In case of dealing with an asset manager, do not forget to conclude an additional agreement (that provides trading authorization) that contains the trading strategy, specifies the maximum risks and responsibilities of the parties, and provide it to the broker and/or make sure they permit such activity. Beforehand, be sure to become familiar with the fund manager and its trading operations and history (track-record).

5. Always remember that active trading is a high risk activity and each individual’s personal suitability should be taken into account in terms of whether such risk is suitable, before deciding to invest. We strongly recommend that traders constantly improve their knowledge in this area in order to make the right decisions both in trading and choice of partners.

List of nonmember companies against which complaints have been received.

Company

  Complaint description

Fort Financial Services

  Profit annulment

GAINSY

  Trading advising and forex investment proposals,

  falsification of known analysts names

MXTrade

  Nonpayment of funds

MyBoption

  Nonpayment of funds

Pegase Capital Ltd

  Nonpayment of funds

SunbirdFX

  Nonpayment of funds

PLUS500

  Nonpayment of funds

 

US Forex Market Regulation

 RFED – Retail Foreign Exchange Dealer

CFTC

In 1974, the US Congress established the Commodity Futures Trading Commission (CFTC) – the federal regulatory agency with jurisdiction over futures trading.

The same law authorized the creation of a “registered futures association,” thus opening the possibility for the creation of self-regulatory organizations on the national level. That is how NFA was established in 1982, after it won the position while competing with another trade association called the Futures Industry Association (FIA) which was not selected.

In 2000 and 2008, Congress passed a law for certain types of companies requiring them to register with the CFTC and to become members of the NFA.

  • companies performing second party functions in transactions on Forex market (dealers)
  • fund managers on Forex markets
  • trading advisors on Forex markets
  • representative brokers on Forex markets
  • forex pool operators

In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which gave the CFTC rulemaking authority and oversight over swaps, swap dealers and major swap participants. Subsequently, the CFTC passed regulations requiring swap dealers and major swap participants to register with the CFTC and become Members of NFA.

NFA

The National Futures Association is a self-regulatory organization for the US derivatives industry including exchange-traded futures, OTC foreign exchange market (forex) and swaps.

NFA develops and implements policies and services to ensure the security and integrity of the market and investors protection.

Membership with NFA is mandatory for all companies operating on this market. Currently, NFA has about 4,100 member companies and 57,000 registered specialists.

NFA is a non-commercial, independent, self-regulatory organization which is entirely financed by membership fees.

1.Basic requirements for RFED

Type

Requirement

Details

Minimum equity capital

$20,000,000

Level of early warning – 150%. I.e the dealer must maintain a minimum level of equity capital in the amount of $ 30m. Important: Being below $ 30m does not lead to revocation of the license, but the broker must notify the NFA each time the level of private capitalization falls below this rate.
Risk capital

6% Major Currencies, 20% Exotics

Risk capital is calculated separately on the basis of open currency positions of the dealer, which is kept on the firm’s own book (not overlapped on the counterparty positions). The sum of risk capital is an integral part of the formula for calculating a dealer’s own net capital. (Example: the sum of all assets – liabilities towards clients – risk capital – expenditures = net capital)
Membership fees

$125,000

Paid annually
FX trading offering

Individuals and legal entities

 ________

STP of FX Trades

Yes

Approved counterparties only:

  • US companies and banks, as well as companies, regulated under recognized jurisdictions.
  • Foreign banks with a market capitalization of at least $ 1 billion.
  • It is also possible to approve an unregulated counterparty, however, the  NFA requires to provide accounting certified  by licensed auditors.
Futures

Yes

On-exchange traded contracts only. Additional capital requirements and segregation of funds will apply.
Options

Yes

Only stock options. Additional requirements to capitalization and obligatory segregation of funds.
FX leverage

50:1

Calculated in a form of margin in US dollars. Therefore, the minimum margin required is 2%.
Futures margins Please see marketplace specs.
CPA Audit

Every 12 months

Audit of the financial statements prepared by a certified auditor (Certified Public Accountant audit).
NFA Audit

Every 12 months

Held in the company’s office by the NFA staff.
AML Training

Every 12 months

Held by accredited compliance professionals/certified auditor.
Ethics Training

Every 36 months

Held by accredited compliance professionals/certified auditor.
FinCen    Twice a month Examination of the client base for any presence of individuals, firms requested by FinCen
4G CFTC

  Upon request

Examination of the client base for any presence of individuals, firms requested by CFTC

 

2. Key responsibilities of the member:

  • Complete an Annual Questionnaire online with NFA;
  • Complete the electronic Annual Registration Update;
  • Pay the NFA dues on the anniversary date of the firm’s registration;
  • Maintaining of up to date contact information of employee responsible for communication with regulator on USA PATRIOT Act 314(a) requests;
  • Supervise the operations of any GIBs and/or Branch Offices, including conducting an annual onsite inspection of every GIB and Branch Office;
  • Examine sales department work and conduct inner audit report;
  • Send the firm’s Privacy Policy to every current customer;
  • Contact active customers who are individuals, at least annually, to verify that the information obtained from that customer under NFA Compliance Rule 2-30(c) remains materially accurate, and provide the customer with an opportunity to correct and complete the information. To ensure that the clients have received and familiarized with the risks warnings and other essential documents;
  • To conduct the annual review of the disaster recovery plan and make adjustments. Mandatory record-keeping.
  • Review the security, capacity, credit and risk-management controls, and records provided by the electronic trading systems and certify that the requirements outlined in NFA Interpretive Notice 2-36(e) have been met. Prepare a certification, signed by a principal who is also a registered AP, and provide a hardcopy to NFA with the submission of the annual audited financial statement.
  • For Forex Dealer Members (FDMs) designate one or more principal(s) to serve as Chief Compliance Officer(s) (CCO). Each CCO, as outlined in Compliance Rule 2-36, must certify annually to NFA that the FDM has a process in place to establish, maintain, review, modify and test policies and procedures that are reasonably designed to achieve compliance with the CEA, CFTC Regulations and orders thereunder, and NFA Requirements. Each CCO must also certify that the FDM has compliance processes in place and that the CCO has apprised the FDM’s CEO (or equivalent management personnel) of the FDM’s compliance efforts to date, as well as identified any significant compliance problems and the CCO’s plan to address those problems. Each FDM must file this annual certification with NFA at the time it files it annual certified financial report.
  • Provide clients with NFA website link, which contains the information regarding the company, its directors, history of violations, etc. This information should be also sent to all new clients when opening an account.

3.Retail Foreign Exchange Dealer report requirements

Report description

Submission date

Details

Submission channel

 Forex Daily Report Daily, due by noon on the next business day Customer funds on deposit and where they are held, Customer open positions, amount due to customers, names of counterparties. Qualifying institutions holding assets used to cover the firm’s liabilities owed to its retail forex customers must report the balances in the firm’s account(s) held at the qualifying institution to NFA on a daily basis. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Forex Monthly Report Monthly, due within 17 business days of month end Operational information, specifically number of retail and ECP forex customers, as well as how many customers are active, US domiciled or foreign domiciled. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Forex Quarterly Report Quarterly, due within 17 business days of quarter end. This is based on the calendar year, not the firm’s FYE. Performance disclosures required by CFTC Regulation 5.5(e)(1)(i)-(iii). Including the total number of non-discretionary retail forex customer accounts maintained by the RFED for the prior quarter, indicating the percentage that were profitable vs. non-profitable. See NFA Financial Requirement Section 13 for specific reports required. NFA electronic system
Daily Trade Data Reports (“FORTRESS”) Daily, due by 11:59 p.m. the same day Each member must file a daily electronic report of trade data containing the data and be in the format prescribed by NFA. The information must be prepared as of 5:00 p.m. and filed with NFA by 11:59 p.m. the same day. See NFA Compliance Rule 2-48 for specific reports required. Forex Transaction Reporting Execution Surveillance System (FORTRESS)
Financial Reports (unaudited) Monthly, due within 17 business days of month end In accordance with the requirements described in CFTC Regulation 1.10(d)(1) WinJammer system
Certified Financial Reports(audited) Annually 1-FR-FCM due 90 days after fiscal year end;FOCUS due 60 days after fiscal year end In accordance with the requirements described in CFTC Regulation 1.10(d)(2) Mail
Subordinated loan agreementsstandard forms are available from NFA If applicable The loan, and all changes and amendments, must be approved by NFA before the effective date. If approved by DEA, please file approval letter with NFA. Mail
NFA questionnaire Annually, to coincide with annual dues NFA will send a new questionnaire for brokers every year NFA electronic system
Notice of undercapitalization If applicable Immediate notification when capital falls below the level set in NFA Financial Requirements Section 12. A 1-FR- FCM/FOCUS must follow within 24 hours as required by CFTC Regulation 5.6(a). Notification by telephone, confirmed by fax or WinJammer, fax statement or file via WinJammer
Non-current books and records If applicable Same day notification. Written report stating corrective action due within 48 hours as required by CFTC Regulation 5.6(c). Fax or WinJammer
Substantial reduction in capital If applicable Within 2 business days of the reduction in accordance with CFTC Regulation 5.6(f)(1) or (f)(2).(30% decrease in capitalization exceeding the minimum level) Mail or WinJammer
Material inadequacies noted by CPA in audited financials If applicable Notification within 24 hours. Written report stating corrective action due within 48 hours in accordance with CFTC Regulation 5.6(d). Fax or WinJammer
Request to change fiscal year end, orRequest extension of time to file financial reports If applicable File a copy of the request and NFA’s response with regional CFTC. If the firm is also registered as a B/D, must file request and DEA response with NFA and regional CFTC in accordance with CFTC Regulation 5.12(f) and (g). Mail or WinJammer
Adjusted net capital falls below the early warning requirement/eligibility to guarantee IBs requirement If applicable Notification of the NFA within 24 hours in accordance with СFTC Regulation 5.6(b). Mail or WinJammer
Forex liabilities owed to customers exceeds forex assets If applicable Immediate notification required in accordance with CFTC Regulation 5.6(g). Notification by telephone, confirmed by fax or WinJammer, fax statement or file via WinJammer
Change in security deposit amounts established by the FDM If applicable The FDM is required to immediately notify NFA if the FDM changes the security deposit amount established for a particular currency pair being offered to retail forex customers. See NFA Financial Requirement Section 12(f) for further information. WinJammer
Chief Compliance Officer Report Annually Report must be filed within 60 days after the FDM’s fiscal year end. See NFA Compliance Rule 2-36 for further information. WinJammer
Risk Exposure Reports Quarterly and whenever a material change occurs Report must be filed within five business days of providing to the FDM’s senior management. See NFA Compliance Rule 2-36 for further information. WinJammer
Risk Management Program As applicable (submitted on January 4, 2016 and thereafter upon request) Policies and procedures designed to monitor and manage the risks associated with the activities of the FDM. See NFA Compliance Rule 2-36 for further information. WinJammer
Bulk Transfers If applicable At least five business days in advance of a transfer, the RFED must provide notice under certain conditions. See CFTC Regulation 5.23 for further information.

Regulation of Binary Options

Binary Options

One of the newest trading instruments to gain popularity in recent years are binary options. Although various regulators have moved at different speeds towards either regulating these tradable products or not, binary options are typically classified as either  gaming or gambling product, or into the category of derivatives.

Binary options are typically available alongside forex, CFD offerings, and/or traditional vanilla options contracts that are traded either alongside listed-products on many of the world’s stock exchanges or in over-the-counter (OTC) markets and off-exchange.

The classification or lack thereof, for binary options, largely depends on the relevant regulatory jurisdictions and any efforts made within various countries towards a required framework for the products to be legally implemented by companies and offered out to clients.

What are Binary Options?

The reason binary options are called ‘binary’ is because of the nature of risk when buying options which is limited to the entire premium (i.e. the cost of the trade). It gives the appearance that it’s an all-or-nothing trade or a trade that results either in a 100% gain or 100% loss, hence a dual or binary nature.

However, this is not always the case as some binary options trading instruments can be exited early, or feature other risk-management  features depending on the contract specifications, and underlying market movements, as well as the brokerage or exchange offering the products.

Options Risk Profiles Across Products

For some people, this type of investment appears highly aggressive or akin to gambling. In reality trading listed options in the US stock markets can be the same or even-more risky, and typically requires advanced approval for level 1, 2 and level 3 options trading (reserved only highly experienced and sophisticated investors) as certain options trading can carry unlimited risk (i.e. risk greater than the initial deposit or margin collateral).

Therefore, despite binary options labeled by some as a gimmick or sounding like a gambling product, the many billions of US Dollars worth of options that trade on the US stock markets operate in a similar manner where the premium paid is the maximum risk when buying either long calls or short puts in the options market. Conversely, selling options short or writing naked puts to collect premium from buyers can carry unlimited risk in some cases, whereas trading binary options in this case would be safer. At the end, it really depends on the specific product features and the trading venue where the contracts can be traded.

Trading Community Observations

Despite the risks, investors and speculators love trading options of all sorts as they can serve as a tool to hedge either the underlying instrument or correlated asset and/or enter the market for fix amount of time and price target. This contrasts spot trading which can be subject traders to getting a stop-out or margin call from underlying price movement that can result in a prematurely liquidated trade whether in equities or forex and other markets.

With the right approach, various options contracts including binary options can serve a purpose within an investor’s portfolio or traders’ strategy, and based on suitability and risk-appetite and other common attributes that vary per customer.

The reason for any negative association with this industry is the unfortunate number of unscrupulous brokers that have emerged in recent years – many of which operate either illegally or lack any regulation or oversight, and who employ questionable ethics in their business and towards their clients. The same occurred within the foreign exchange market as it evolved along with related regulations across the world in the last twenty years, and despite ongoing challenges that still exist.

Therefore, a strong self-regulatory effort is needed and Financial Commission can help companies offering these products achieve that through the membership criteria and advantages provided to clients when firms become members.

Legal Status and Reforms

Overall each regulatory jurisdiction has their own opinion or lack thereof regarding binary options and either attempts to classify these products within any local framework and based on existing laws or has not yet done so. As a result, the consensus towards these products varies across different countries.

This means that some regulators allow binary options trading with proper licensing, whereas others have banned it completely, meanwhile some countries not having done anything on whether binary options are permitted or not locally.

Regulations normally lag behind new technologies or approaches and the same can be said for these products, while the length delay appears to be shortening as reforms have been put in motion in some countries.

Contrary Approaches

In some countries, Binary Options (BO) have been criticized by regulators and other authorities (e.g. Italy, France), together with proposals to classify these instruments as gambling. Elsewhere, they all fall under a ban, such as in Canada and Israel. Yet this could be a stepping stone for any future reform and to clean up firms operating in these locations, and after numerous warnings have been issued against related companies.

On the other hand, in the most developed countries in terms of the regulation of financial markets, these instruments are classified as financial derivatives and are regulated accordingly – for example countries such as the USA, UK, Japan, Cyprus and other European countries under MiFID Directive (although the French AMF regulator considers MiFID insufficient to offer a license for firms to offer BO in France).

In order to understand the reasons for the negative relation to these instruments from a number of countries, Financial Commission analyzed official statements and publications from regulators and other authorities, excerpts of which have been paraphrased and collated in the table below.

The main problem Causes Solutions
  • Denial of service providers (non-regulated), to meet their obligations to customers. For example, in its release, the Commodity Futures Commission noted that the big  number of claims related precisely to the failure to satisfy the requests for withdrawal of funds belonging to clients.
  • Cancellation of a positive result that the client had received from transactions with binary options (i.e. cancelled profit)
  • Because there is high demand for new instruments such as binary options, it becomes a weapon of choice for fraud. New, so-called screen, under the guise of which the funds are raised.
  • Binary options are attracted not only retail investors with no experience, but also the businesses without it. As a result, this leads to bankruptcy for companies scammed.
  • Undeveloped market. Not a standardized market, causing it no effective hedging instruments.
  • State regulation and oversight will help to deter fraud, to solve the problem of unqualified personnel in the industry, as well as to monitor the adequacy of firms own capitalization to ensure fair dealing and the safety of customer funds.
  • Aggressive practices of sales and insufficient disclosure of risks.
  • Often, the use of a very similar position to gambling. (Get rich quick & easy)
  • Provision of “poor quality” analytical support – in this paragraph notes the work of personal trading advisors
  • No requirements / standards concerning the process of attracting customers
  • Lack of requirements for managing and trading advisor.
  • Governance of marketing and sales processes, as well as requirements to people, engaged in sales.
  • Internal audit and information storage requirements.
  • Manipulations in the platforms.
  • Changing the terms of the options, after the trade is conducted.
  • Input unexpected, non-prescribed limits, and creating other difficulties to the client.
  •  Lack of control over pricing.
  • Lack of standards and rules for carrying out transactions.
  • The absence of dispute settlement mechanisms, and a lack of expertise.
  • The low level of product awareness
  • Regulation and monitoring of the pricing process.
  • Standardization of contracts.
  • Ensuring consideration of ways and the settlement of disputes.
  • Reporting and storage of information requirements.
  • Control of honest disclosure to the client

 

It is important to note that some regulators explain binary options as gambling because they see it as a market of purchasing predictions rather than actual securities and where the probability of correct market predictions at short time intervals is highly random. Thus making these trading instruments based on guessing rather than the overall forecast over either a short, medium or longer term period. In addition, these views may be taken in order to fit binary options within the existing gaming regulations applicable, if no such rules apply within the financial investment authorities for a given jurisdiction.

Some broad opinions from the other side are that these definitions are just as suitable as any other speculative transactions on the market. Also, if the underlying asset of a binary option is a security, and the payment of the cost of the contract is determined by the volatility of the underlying asset in a financial instrument, then trading in such instruments should be monitored by the appropriate supervisory authority.

Jurisdictional Differences

Looking at the experience of the US and Japan, it is clear that a compromise was found and implemented by introducing specific conditions for providing BO trading. Regulators are trying to help increase awareness for clients regarding binary options so that investors trade binary options more consciously, as some believed that trading in very short intervals is devoid of any analytical component. Also, trading longer intervals eliminates the possibility of price manipulation.

For example, in the United States, the minimum option duration is 5 minutes, and in Japan it is 2 hours, and issues like these vary across parts of the world. Initially, binary options were very standardized products yet have become more varied and diverse in recent years, as different providers continually customized their related products and platform offerings over time. In addition, across various jurisdictions, binary options are required to meet certain standardized criteria related to their contract specifications and/or functions.

The Financial Commission is able to help the binary options industry by supporting firm’s own self-regulatory efforts through a voluntary membership structure using an external dispute regulation (EDR) platform that the organization provides and through its Dispute Resolution Committee (DRC) that brings extensive experience across the online brokerage industry. In addition, companies must meet minimum standards to join the Financial Commission as well as demonstrate ongoing compliance as needed in order to maintain membership – such as in cases of customer claims or disputes that are brought to the Financial Commission to be heard.

Fair Dealing in Forex: From Myth to Reality

In recent years, such aspects as financial market manipulation and fair-dealing have come under scrutiny of state regulators, as well as high-frequency trading (HFT) was blamed for providing an unfair playing field despite existing best-execution regulations in place in the U.S. and Europe

As technology and financial markets evolve, along with regulatory guidelines, the need for high standards of best execution of orders on decentralized markets such as Foreign Exchange (Forex) has become even more significant thus, the Financial Commission highlights some approaches to this challenge across Forex market.

Exchange versus off-exchange

Unlike an exchange, where a centralized order book or bid/ask process is standardized for price discovery, in the over-the-counter (OTC) foreign exchange (forex) market, dealers make markets independently and pull prices from various sources.

Policy of Best Execution

There are several best execution policies exists in our days, for example, in the U.S. Stock Markets there is a National Best-bid Best-offer (NBBO) policy, while Europe has its own best execution within Markets in Financial Instruments Directive (MiFID). These policies are the main components in the financial services regulation and are designed to ensure the protection of investors, pricing transparency and healthy competition among trading floors in a growing number of fragmented markets.

General idea of the Best Execution policy

Best execution purports that each company is required to take all reasonable measures to achieve the best possible result for the client, taking into account the entire range of factors affecting the execution of orders while carrying them out for transactions with financial instruments on client’s behalf. The Company is obliged to act as much as possible in the interests of the client when receiving and transmitting client’s orders for execution to other companies.

Nature of FX Markets

In the US, the best execution policy does not extend its effect on the Forex market, though Europe’s MiFID directive requires uniform application of best execution policy to all markets. In reality, the decentralized nature of forex market makes this task difficult to implement and leads to a systematic misunderstanding between dealers and regulators.

However, in the cases when market maker is a bank, investment company or the dealer himself, companies tend to quote a client as close as possible to the current interbank market rates while executing orders. Thus, they remain competitive, including any spreads, which are added as a commission.

This situation occurs because there is no centralized single price that represents the true market, at any given moment. Consequently, a blend of some of the leading prices is typically used as an indicator to see where the majority of the interbank dealers are trading. Thanks to evolving technology the degree of difference across major providers is extremely small, what indicates the high efficiency of the existing market.

Price Origination

Prices may be originating on platforms like EBS, Reuters, and other interdealer matching systems, where banks and counterparties can trade with each other. Prices from sources like these are nearly instantly disseminated across the entire collective forex market through other intermediaries and price data providers, and reaches brokerages and other companies that use real-time fx data for their business.

What is a fair dealing in Forex?

Fair dealing in forex means that when a price is offered and available to a broker it is shown to the broker’s client without any additional changes / interventions (except spread and commissions), regardless of counterparty and the client’s current position.

The idea of best execution applies the concept of «legitimate reliance». This concept is applicable to non-professional (retail) customers. Ie there is a rule which obliges the company to act as much as possible on behalf of the client, but the client does not control the process of execution and forced to rely on the company.

In most cases, companies are taking orders from their clients and executing them with third parties (exchanges, dealers and other counterparties), in such case, the company always acts on behalf of the client and, in turn, the client has a «legitimate reliance» that the company acts in his best interests.

However, even in a situation where the company acts as a counterparty in transactions, it still can act in the client’s interests and comply with the rule of the best execution, despite the fact that in such cases the client does not have «legitimate reliance».

For instance, a client has the best price in the platform which was displayed by some market-maker, the client received a price and made the transaction, however, the execution was not carried out by that particular market-maker.

What is unfair dealing in Forex?

US and European regulators have given particular attention to how the work should be carried out with the price slippage (the difference between the price specified in the order and the execution price), as companies were carryin out unbalanced / unfair trade at a time of heightened market volatility when the price was changing intensively. In particular, regulators were categorically unsatisfied that the companies wanted to “cash in” on the client at the time of price slippage. It is a situation when the price moves against the client in the period of time between placing the order and its execution.

In order to prevent such practices, regulators have introduced a rule requiring dealers to use identical parameters for possible slippage of prices regardless of market direction. The requotes, if applicable, must be carried out both, when the price moves against the client and in favor of the client.

It is also important that the company should have evidence that the slippage was caused by external factors (market data latency, client’s  Internet connection speed, excessive volatility of the market, etc.), but not artificially produced by the company.

Unfortunatelly, despite the constant work of regulators to protect private investors and ensure fair trading, the nature of the forex market makes its own reality. This is a very tech and fast-paced market. Regulation always catches up with innovations. Earlier, talking about forex trading we meant seconds and pips, but today it is a milliseconds and fractional pricing pips.

There is still no unified approach from regulators that helps resolve matters regarding fair dealing, that isn’t either overly cumbersome for clients and/or brokers, and still fails to ensure that all brokers are always executing client orders fairly.

More than just best execution

The Financial Commission has considerable expertise, having dealt with a large number of related complaints, and by understanding the nature of the FX markets, and how brokers operate, we are able to process related complaints very efficiently for brokers and their clients.

There are many issues which resolution requires not only compliance with the best execution policy, but compliance with the highest standards and best practices of the industry. However, all of this is possible when the broker voluntarily seeks to adhere to the highest ethical standards so clients can rely on fair pricing and orders execution.

Effective complaints resolving

In the case of a client complaint over trade execution, Financial Commission takes a systematic approach starting with analysis of the market situation and the asset price behavior at the time of the incident. This is the very first step which helps to carefully evaluate all of the factors that could affect the deterioration of trading conditions (widening of spreads, delay in the orders execution, price slippage etc.) at the time of the transaction. The second stage involves the study of the Client Agreement terms and conditions, which forms the basis of the relationships between the client and the broker.

Discovery and Ruling

The next step is investigation of the evidences provided by the parties and the analysis of the price at which the transaction was executed. The Commission necessarily requesting the data from price providers, which were used by  the dealer, as well as runs a comparative analysis of the leading market makers on the forex market in order to have a common vision of fair market price of the asset at the time of the incident.

The fourth stage includes the analysis of historical data of the system, namely, at what time and what price has been put into the platform, what price was given to the client, when the order was sent, when it was executed and at what price.

Finally, the case is then reviewed by the Financial Commission’s Dispute Resolution Committee (DRC) where further consideration is made and final decision is taken in order to indicate the guilty party and the measure of its responsibility.

 To learn more about membership benefits of joining the Financial Commission, contact a representative today or visit financialcommission.org.

Dispute Resolution Channels Comparison

Challenges for existing resolution channels

Financial Commission has compared approaches that are available for brokers registered in both highly regulated jurisdictions such as in the U.S., as well as progressive evolving places such as New Zealand, and has observed that each jurisdiction has its own advantages and limitations, whether in Australia, Singapore, or Cyprus, as an example.

There doesn’t appear to be a single universal solution or panacea available that equally helps both clients and brokers in a manner that is both cost-efficient and effective when it comes to resolving customer complaints. Yet, this is where the Financial Commission is able to provide its greatest value, because retail forex, CFD and binary options products make up the industry that it was designed to support.

Dispute resolution comparisons

Many Jurisdictions require brokerages to become regulated in order to carry out financial services activities from within their country and to domestic clients, and in some cases allows one but not the other (i.e. soliciting foreign clients but not domestic).

Whereas, other developing countries have yet to implement robust financial market oversight and ensure that providers adhere to best practices with customers and give customers proper channels to seek 3rd party assistance, and may only offer the ability for companies to become incorporated and carry out permitted activities – yet with no real oversight.

Available Dispute Resolution options in different jurisdictions

 Country Complaints Resolution Body Annual Membership for FX Dealers Resolution Cost to Client Resolution Cost to Broker Max. Complaint Amount Average  Resolution Time
USA NFA Arbitration Program NFA Membership $125,000 plus other fees Filing fee $50-$1,550 + Hearing fee $125 to $5,100 Filing fee $50-$1,550 + Hearing fee $125 to $5,100  5m
Mediation by Approved Party  $300-$500 per hour  $300-$500 per hour  N/A
 New Zealand  FSCL  ~$700-$1,400  $0  ~$240 complaint opening fee + $700 to $4,000 resolution fee  $135,000  2m
 FDR  ~$1,200  $0  From $370 to ~$1,400  $135,000  N/A
 Australia  FOS  ~$300 and up based on the size of business. +ASIC Membership fees  $0  Up to ~$2,300 for external advice + up to ~$2,500 to cover applicant expenses  $114,000  2m
UK FOS FCA $0 $0 ~$210,000 2m
Cyprus FOS CySEC Membership fees from ~$4200 and up based on the business size but not more than ~$85,000  ~$23  $0  ~$56,000  6m

*All fees are presented in US Dollars, so please mind the local currencies rates.

**Please refer to official websites for most recent and accurate information as conditions may change over time. If you found an error, please let us know.

Organizational structure

Financial Commission can help to bridge the gap as an industry focused EDR, and as standard alternative and traditional channels can be costly and/or time-consuming.

For example, in one jurisdiction where the initial cost of annual membership could be very low, the hidden mandatory costs that brokers bear for every customer complaint can be significant, regardless of whether the case is favorable to the client or the broker.

Such scenarios, over time, can compound the problem while discouraging the broker from advertising to clients about the option available to file a complaint.

Supporting self-regulatory initiatives

There are highly regulated jurisdictions where brokerages strive to adhere to strict rules, yet clients can find it very difficult to go through the entire complaint process within traditional channels unless the complaint is for a significant monetary amount – motivating a client’s persistence (or their attorney’s) through the entire process. Even then, there is no assurance that the case will be fully investigated properly and result in the right outcome.Thus, many smaller complaints can fall to the wayside.

Financial Commission provides value to traders and brokers in such cases and helps potentially amend broken relationships and avoid subsequent negative reviews from clients whom would otherwise feel wronged.

Financial Commission has found through its research that even in highly regulated environments the available channels to resolve customer complaints can be costly and inefficient or fast yet ineffective. Ideally, channels should be effective, fast, and affordable, and are all aspects that Financial Commission organically achieves due to its organizational structure.

Legal options such as the domestic courts mentioned within broker-client account agreements should be a very last option, and not the goto place for clients when they are unable to resolve their complaints directly with their broker, meanwhile, these agreement are referenced by Financial Commission in cases where compliance with the agreement is in question by either or both sides.

Financial Commission supports the self-regulatory efforts of financial markets participants through its voluntary membership structure.This allows brands that are either unregulated or highly regulated to become members of the Financial Commission and show clients their level of commitment to integrity and in treating them fairly.

Dedicated to Education

Financial Commission has observed that customer complaints often stem from a misunderstanding about how a product works, and subsequent experience while trading, and then revert back to the broker with a sense of the broker being responsible for the experience. However, also observed is that when brokers are at fault the reasons aren’t always easily evident to their staff, unless detailed investigations are done, or advanced reporting and tracking is readily available.

Financial Commission is dedicated to broker education as much as it is to client education, as complaints often stem from misunderstandings, as is such in nearly all human dealings and consumer/company relationships education helps improve understandings. To learn more about Financial Commission and membership benefits, please visit us at FinancialCommission.org.

What are Binary Options?

Binary Options Introduction

Binary Options are a type of investment instrument that can be traded electronically both over-the-counter (off-exchange) and on regulated exchanges (on-exchange), through online brokers.

These contracts are an increasingly popular form of trading and provide investors and speculators (traders) the ability to have potential risk/reward exposure to an underlying asset. This type of investment exposure includes certain unique characteristics with regards to time and other conditions, as will be explained below.

While the regulatory status with regards to binary options varies per jurisdiction, the space is growing and evolving at a steady pace. The Financial Commission as part of its mission statement aims to provide traders with educational content to help better their understanding of this type of trading instrument. The next section will compare some differences within options.

Not all Options are Created Equal

Buying options typically conveys the right – but not the obligation – to buy or sell an underlying asset at a specified price, and which can be exercised within a certain duration of time (with key differences between how American and European style options can be exercised) until the expiration date is reached.

Binary options share many similarities with traditional options, yet have many components that have been removed from the equation by incorporating pre-determined criteria into the process to simplify it.

Therefore while trading stock options is often for more advanced traders and is more complex in nature, Binary Options offer an easy way for the  beginner trader to learn about speculating in the financial markets. At the same time there are still some key parallels with regards to options that every trader should know, such as the time component as will be detailed next.

All Options Have an Expiration Date

One common theme all options share is that they are a wasting asset. This means that they expire worthless if not exercised (and if they are not in-the-money or passed their break-even point), and are either cash-settled or deliver a multiplier of the underlying asset (i.e. 100 shares, etc…).

In essence this time component means that the time value ticks away and degrades over time regardless of market conditions, and therefore choosing the right amount of time (duration until expiry) is an important element of timing an option trade correctly.

For this reasons it’s crucial to understand the particular options contract specification, and how your broker processes any profits or break-even scenarios which may be either automatically paid out upon or before expiration and/or whether the contracts can be manually exercised before or at expiration.

With binary options this entire process is typically very simple (when compared to trading stock options) and can be clarified by your broker, but it’s a good ideas to see it in writing – normally in the account agreement or product listing under the contract/instrument specifications so there is no uncertainty .

How are Binary Options Different?

Binary Options simplify the often complex dimensions of risk characteristics that traditional options trading carries, by creating only two possible outcomes – either a profit or a loss – hence the dualistic name “Binary” which has been appropriately designated to these option contracts (keep in mind that a third outcome is possible in some cases if a trade reaches a break-even outcome and there is neither a profit or loss.)

This simplification enables traders of nearly all experience levels to understand the basics of binary options trading without having to learn the complexities of traditional options investing which can include premiums that change in value over time, time-value, and intrinsic and extrinsic value, as well as the historical and implied volatility of the underlying asset, all factors that can directly affect the options value over time.

With Binary Options nearly all of those components are removed and the focus is entirely on the payoff and break-even price since this will enable a trader to gauge how much to risk based on the trade size and depending on their outlook of the underlying asset over time. Time is of course a key part as well, and typically is chosen based on the outlook of the investors, with regards to their view on the underlying assets.

What is the Payoff?

With binary options the return component is typically called the “pay-off” where the value can be either zero or positive, and both of which are known in advance. In essence the payoff is the result of the trade and depends on whether the binary option trade becomes in-the-money by surpassing its break-even price, and if not the cost of the investment is the loss generated on the trade.

Therefore, a trader who establishes a bullish trade or “call” with a $50 payoff, can expect to make a $50 return if the price of the underlying asset increases over a specific rate – say for example $6.50 (for the price of an underlying stock), within a fixed period of time (i.e. 60 seconds, 60 minutes, 1 week, etc..) .

In such a scenario there are two main outcomes: either both the $6.50 price is surpassed and the trade realizes a $50 profit on the $50 capital investment (100% return), or if the price is not reached – thus there is a $50 loss (100% loss).

However, in some cases (varies per broker) if the call price of $6.50 is reached exactly and doesn’t increase any tick higher from that break-even point, then the cost of the trade is returned (i.e. the trader will receive his initial cost back and has a 0% gain or loss) where the trade is flat with a break-even return.

Customer should fully understand the characteristics of binary options and the often unique features or policies that their brokerage may have with regards to how orders are handled, and how positions and options contracts function, including the various possible outcomes that can result from trading binary options.

The Financial Commission aims to provide educational content to traders, such as the information above, to support a key part of our mission statement. For more information please contact us.

How To Choose A Broker

10 Steps Traders Should Take When Choosing a Broker

The steps for choosing a broker may vary from person to person depending on their unique needs, styles, and level of acceptable risk, including the geographical locations involved. However, there are several aspects of the due diligence process that we will highlight here in order to provide traders with some universal advice on selecting brokers, most of which apply regardless of objectives and personal preferences.

  1. Education and free demo account. Broker provides some kind of education for their clients in the form of books, articles, webinars, youtube video or one-on-one help. They offer demo accounts for software especially if you are not familiar with their trading platform. Some companies do more and offer a multistep education to make sure their clients understand the trading before they put real money on the market
  2. They never offer high returns along with low risks. Neither they guarantee your money.
  3. They don’t offer employment opportunity in Forex Trading while asking you to pay for the courses to become their employee.
  4. It’s a good sign if the company is regulated or is a member of self-regulated and well known organization in the industry like Financial Commission.
  5. Make sure that company has an office where you can come and see real people working.
  6. Transparent organizational structure and management. This information should be obtainable if not already listed on the broker’s website,
  7. Partnerships with reputable service and liquidity providers
  8. Easily accessible legal documents, such as agreements and policies
  9. Same legal entities should be  used for trading and financial transactions
  10. Make sure that major terms of business are properly describe, so you understand the following:
  • Margin policy for weekdays, weekends, news releases and locked positions.
  • Order Execution and pricing during news releases (volatile market conditions,etc).
  • Slippage and Re-Quotes
  • Stop Out and Forced Liquidation policies
  • Customer Account deposit & withdrawal policies
  • Incentive and bonus policies
  • Rollover policy
  • What steps to take in case of technical problems
  • Where and how can you dispute financial or trading transactions

Putting It All Together:

As described earlier in the list of items to look for when choosing a broker, since the process is not an exact science and will vary for each trader and depending on the broker they are considering, the important thing to remember is to put all the information together and see the whole picture.

If there are more bad signs than good, that could be a cause for either more due diligence or looking elsewhere. Whereas, if the positive attributes outweigh any perceived risks, then the trader will need to discern based on their personal judgment and seek counsel or guidance if needed.

The Financial Commission aims to educate traders in order to help improve their trading experience by arming them with information that they can use when making informed decisions such as choosing a broker, and believe that using the steps described in the above list is an example of one such approach.

Understanding Slippage and Re-quotes

This article will help provide a simple explanation as to what the terms slippage and re-quotes refer to when dealing with online brokers, whether trading electronically or using a voice broker.

As financial markets brokerage firms aim to provide quality execution when handling customer orders across various asset classes and trading instruments, the varying types of orders and exchange rules or brokerage policies may drastically differ from one venue to the next, and thus can greatly affect the function of orders and rules governing how such orders are handled.

One common challenge is executing an order at the rate that was requested by the client –such as in the case of a limit order, or the next available market rate as in the case of a market order.

The Essence of Slippage: Change in Rate Between Requested Price and Executed Price

Regardless of the order type and rules of the exchange or broker, if the venue is not able to execute the order at the price requested and a worse price is provided, this is referred to as negative slippage.

In the case of a price improvement or better-than-expected rate than was requested, the slippage is described as positive.

Essentially, slippage is the difference between the rate requested and the rate executed, and is typically due to the fact that prices across various financial instruments often change rapidly in milliseconds or less, sparked by trading volumes, market volatility and the large size of markets (and the accompanying large number of participants). Thus slippage can occur even at the most technically sophisticated brokerages, and not a limitation in a providers system.

Latency and Fast Markets

The specific reason for slippage occurring is  a time-delay between when an order is submitted and when an order is received, and to when an order is processed, even when this is done electronically – at the speed or light.

The internet speed/quality and geographic distances between servers, as well as the time needed by the servers to process such operations, all add to the potential latency that can cause rates to change, and thus cause a trade to be slipped either positively or negatively.

In even a shorter period of time, a rate can have already changed a moment after it was displayed, making it no-longer executable or no-longer valid (and thus a stale price –that would cause either slippage or a re-quote to occur).

In the case of a broker only providing negative slippage and never providing positive, such practice is often frowned upon by regulators and described as Asymmetrical slippage.  If slippage is to occur, it must be symmetrical, so the positive slippage should be passed on to customers- if the negative slippage is also passed on.

Re-quotes Are Similar to Slippage, Except Trader Decides Whether to Accept or Not

Similar to Slippage, a re-quote occurs when instead of slipping a trade, the broker presents the customer with the option to execute the trade at a different rate than the one they requested-  when in such cases the rates originally requested are no longer available.  For example, if the EUR/USD rate is Bid 1.3422 and Ask 1.3423, and a client submits a market order to buy at the ask price, the trading platform may re-quote the trade automatically at 1.3424 – if the rate has changed around the time the trader clicks submit/enter to confirm the original order (submit it for execution).

While the details of this process may vary across brokers and depend on their specific policies, the essence is the same in how the re-quoted rate may be more favorable or less-favorable (negative or positive) than the original rate requested.

When dealing with complaints related to slippage or re-quotes, the Financial Commission will examine the rate logs, trade logs, tick-price history or other such data provided by the member broker in order to ascertain the degree of slippage if any and whether it was positive/negative, as well as if the slippage was justified (comparing rate providers). Finally, slippage if and when it should occur, must be symmetrical for the sake of providing clients with fair dealing.