The Forex Hedging Ban – A Transatlantic Perspective

In the second of our series of interviews with senior figures from the Forex industry, I spoke earlier today with Marc Prosser, Chief Marketing Officer of Forex Capital Markets. I started off asking the question on everyone's lips these days about the new "hedging" ban. We then talked about the relative merits of "straight through processing" versus "dealing desk" business models, and then briefly touched on the regulatory aspects of transatlantic transfers of client cash.

Firstly I asked how the NFA's new compliance rule 2-43(b) had affected FXCM's business, and in particular whether their UK business had experienced an influx of deposits from the US.

Marc told me that a small percentage of FXCM's customers had taken the decision to open accounts with their FSA regulated UK subsidiary, Forex Capital Markets Ltd. Many of these "few thousand" clients were "passionate about hedging" because they liked to run multiple trading strategies simultaneously, using MetaTrader 4 expert advisors or FXCM's own application programming interface (API for short) to implement their trading systems. Some also liked to use "hedging" as a means of trading a range-bound market. Marc thought the main reason these traders wanted to move their accounts was because their trading systems relied on a "ticket based logic". This can become very difficult to manage if the broker is controlling which orders are offset against each other, rather than the trader.

Then I asked about the first-in first-out aspect of the new "no hedging" rules. Marc told me that whilst FXCM were "still coding it" he felt they were "in a good spot" to have everything in place on their Trading Station platform by the new NFA deadline of July 31st. As a large company FXCM had a team of programmers working on the necessary changes, and they were also working on educational materials to explain those changes to their customers.

We moved on to discuss FXCM's "no dealing desk" execution model. I pointed out to Marc that at that moment my demo EUR/USD feed from FXCM was showing a spread varying from 1.9 to 2.7 pips, whereas my live feed from Alpari UK seemed to be fixed at 1.8. As a trader myself, the lower spread looked the more attractive of the two. Marc said that FXCM made their money "off order flow", and that their quotes were driven automatically by a best bid offer (BBO) engine working with multiple price feeds from banks. This ensured that their customers could rely on getting a quick fill at the quoted price, which was not always the case with other brokers. Such brokers suffered "an enormous conflict of interest".

I then pointed out that on one of their websites FXCM explicitly pointed out that with their "micro lot" accounts "FXCM may or may not offset individual transactions". Marc told me that micro orders made up less than 10% of FXCM's total volume, and while they were indeed not routed direct to the banks, the quotes were driven automatically in the same way as their standard accounts. FXCM did have dealers to manage their overall risk, but those dealers never got involved in quoting or "requoting" prices to their clients.

Finally I asked Marc if he would care to comment on the suggestion that regulators were in some way unhappy at the thought of US residents moving their accounts offshore to the UK. Marc told me that he could see that US brokers simply moving their clients' money to the UK would be totally unacceptable. However, he was sure there was no problem if an individual made an informed decision to move their own money. That was certainly the case for the few FXCM clients that had done so.

At this point I glanced at my watch, to discover that we had already been talking for over twice the agreed period. I thanked Marc for being so generous with his valuable time and put down the phone. Then I pondered whether guaranteed fills were more important to me in my own trading than getting the lowest possible spread.