• Home ::
• Fundamental ::
• Analysis Reports ::
• The Brokers (re) Evolution: The CEO's reply

• Send
• Print
• Add To

The Brokers (re) Evolution: The CEO's reply

3f2e0405-a92d-447d-a5bc-94cf5736d062

0

0

James E. Green, Managing Director at FX Direct Dealer, LLC: "FXDD will not be affected by the increase in capital requirements"

Thu, Sep 27 2007, 14:59 GMT
by Marina Schiaffino

FXstreet.com

Mr. James E. Green, Managing Director at FX Direct Dealer, LLC (“FXDD”) answered the second questionnaire that Francesc Riverola, CEO & Founder of FXstreet.com, sent regarding new NFA requirements and their potential impact on the FX industry.
[ View the full interview ]

I am providing this memorandum in response to your email enquiry and further to our discussion of the issues you raised in your email. I believe our telephone conversation clarified some of the questions you raised, particularly as they relate to the form of some the questions and terms that are, at least in the United States, what I terms of art. I appreciated your candor during our discussion and I trust you appreciated mine.

The internet, like any anonymous means of publicly available communication, is a two edged sword and anonymous self censorship is not one of the internet’s strengths. There is nothing to prevent one person’s comments from being taken out of context while providing anonymity to the person who republishes the comments in chat rooms and on bulletin boards. I know that many firms have been on the receiving end of comments they believe were unfair, half truths or simply wrong. You have the unenviable task of trying to strike the right balance in publishing comments made on FXStreet. Like most forums, FXStreet has allowed people to openly express their views anonymously. There are always instances, as you and I discussed, where unhappy, unlucky and/or unskilled “traders” use the internet to vent their anger at one or multiple firms for both real and imagined slights. As we noted, perhaps time could be better spent learning their craft, developing an understanding of how the OTC spot foreign exchange market actually works (rather than wishing it worked differently) and taking advantage of the services offered by the many excellent firms that appear on your site.

"We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA."

There has been much made of the NFA’s decision to increase capital requirements and we, like many firms, have fielded telephone calls from traders wanting to know how this increase in capital will impact the firm. It seems as though these traders have all been reading each other’s mail or reading the same chats because they all refer to the companies that “the NFA put out of business.” We tell our clients that FXDD will not be affected by the increase in capital requirements because FXDD is not registered with the CFTC and is not a member of the NFA. We also note, however, that we do not believe that increasing capital requirements to $5,000,000 is sufficient. If $5,000,000 is the miinimum threshold entry to the foreign exchange business, it is only a slightly higher barrier to entry than the previous $1,000,000 minimum capital requirement. While it is true that the companies against whom the NFA took action were undercapitalized, their management’s lack of experience and expertise surely contributed to the failures. Perhaps a “minimum net experience” threshold should also be a requirement. We advise our clients that FXDD is well capitalized and holds substantially more capital than that belonging exclusively to its clients. FXDD does not publish its capital or the amount of customer equity it holds. Those prospects who demand to see our confidential financial information are advised that we do not release that information.

As I suggested to you during our conversation, customer funds held for off exchange OTC transactions may not be deemed to be “segregated” as that term is understood in the context of the Commodity Exchange Act and the NFA’s regulations. Thus it is unclear whether funds held for such transaction are protected in the event of a bankruptcy. To the best of my knowledge, only funds held for regulated activity in the futures markets will receive segregated protection. Most firms, FXDD included, manage their own firm capital separate and apart from the margin capital posted with their liquidity providers. Thus, firms who imply to clients that client funds are “segregated” are by reference seeking to assure the client that somehow their funds are secured and are protected. This issue struck home with the Refco fiasco. Perhaps the U.S. Congress will, at some point, extend the benefits of true segregation to client funds held by all foreign exchange dealers. Currently, however, that option does not appear to be available to any dealer regardless of its registration status. Thus it appears that once a firm files for bankruptcy protection, clients would not be able to withdraw their funds. Those clients would become unsecured creditors of the firm. FXDD carries a blanket bond that covers theft, fraud and criminal activity by its officers and employees, but even that does not cover bankruptcy.. I do not know whether other firms carry such a bond.

The company listed on the CFTC’s website, Tradition Securities and Futures, Inc. (TSF) is not FX Direct Dealer. Tradition Securities and Futures, Inc. is a registered futures commission merchant that does not deal in spot foreign exchange. TSF is owned by Tradition North America, Inc. which is also a minority shareholder of FXDD. Tradition North America, Inc. is one of the largest interdealer brokers and provided financial and professional assistance to FXDD when it was a startup company. Tradition North America, Inc. is part of the Tradition Group which has a forty plus year history in the financial markets (www.traditiongroup.com). FXDD has maintained the policies, procedures and protocols established when it was a subsidiary of Tradition.

"As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question."

Regarding the business model that foreign exchange dealers follow. Some firms accumulate customer positions; others pass those positions through to the dealer’s liquidity provider (STP); while others use a combination of accumulation and STP. As we noted, some firms are now promoting “no dealing desk interference” as an added benefit. Whether no dealing desk “interference” is an added benefit is certainly an interesting question. From the client’s perspective (at least our clients’ perspective), the issue is not whether there is a perceived or actual inherent conflict of interest on the part of firms who may accumulate positions. Our clients want to know that our desk manages client positions with integrity based on honest pricing and fair dealing practices. Some firms have, rightly or wrongly, developed a reputation as “stop hunters,” and “boosters.” Since the dealing firm knows all customer positions, it might be tempted to widen the market or boost the bid or offer just so that it can hit client stops. Later they justify the price change based on a set of objective or subjective parameters. Those firms, to our way of thinking, are not credible dealers and abuse their clients’ trust. And firms who are strictly providing liquidity on an STP basis (no dealing desk interference) have the same ability to manipulate the price should they choose to. Professional dealing desks like FXDD’s manage risk, execute customer trades when needed and provide constant liquidity to the firm’s clients. The bottom line is that clients must always demand credible pricing and honest dealing from their firm whether it is FXDD or one of the other excellent firms on your site.

I hope I have answered your questions Francesc. FXDD prides itself on providing honest pricing, credible dealing practices, good client support and competent assistance with all matters relating to our clients’ accounts. There are many good firms on your site and we, like them, would like to see the foreign exchange market grow. The really good firms do not tolerate abusive activities or remarks aimed at their competitors and are content to let their services speak for themselves.

Disclaimer: The above information is provided as an opinion of the author. The author shall not be held liable for any acts or omissions on the part of the reader based on the information provided in this opinion. No severed part of this opinion shall be copied, transmitted electronically or otherwise, modified, linked or used without prior written approval by the author. All rights to the entire contents are reserved by the author. The recipient of this correspondence or any other reader is allowed to read, download, print this opinion as a whole, but is NOT granted any rights to the use of this opinion. The opinion(s) expressed above must be used with this accompanying disclaimer at all times.

• Back to The Brokers (re) Evolution

Published on  Tue, Oct 2 2007, 15:01 GMT