It may seem like something out of a movie where thieves or opportunists try to make money by taking advantage of fractions of a penny differences in trading, but unfortunately the National Futures Association, a self-regulatory organization policing the futures market, is beginning to analyze trades executed by its 16 member forex (foreign exchange) firms to see whether firms are taking unfair advantage of such differences which the industry refers to as “slippage.”
With regards to futures contracts, slippage is the small price movements that occur between the time that a customer orders a trade and the time that trade is actually executed. While some slippage is normal since currency prices naturally fluctuate constantly, the NFA is investigating to see if the firms are executing trades only when the currency price moves in the firms’ favor. This would be a violation of the fair business practice standards mandated by the NFA.
For example, an investor might place an order for euros at $1.335. It is possible that by the time the brokerage firm executed the order, the price could have changed to $1.332. So does the customer get the benefit of the lower price, or does the firm reject that order? Does the firm only execute the trade when the price moves up, to say $1.338 and therefore it can pocket the spread? The price movements are tiny, but overtime and with leverage applied, taking advantage of these spreads could mean millions of extra dollars for forex firms. Although the market moves quickly and these fluctuations are normal, the NFA is investigating fairness in the execution of these orders.
Two firms already received internal complaints (not filed in a court) for taking advantage of slippage at their clients’ expense. Without admitting or denying allegations, Ikon Global Markets paid a $320,000 fine to the NFA and stopped offering retail FX trading to U.S. clients, and GAIN Capital paid a $459,000 penalty to the NFA. Another forex firm, FXCM, went public in December 2010 and mentioned in its SEC filings that it had been contacted by both the NFA and Commodity Futures Trading Commission with requests for information about trade execution practices.
According to the American Association of Individual Investors, despite these regulator investigations, retail investors are still at a disadvantage because of the lack of transparency in the forex market. Firms may act as brokers and market-makers, as well as take advantage of slippage. Clients should take heed and keep their eyes and ears open when exploring this alternative.
Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in investment-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.
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