$77 million in "kickbacks" behind a facade of honest order execution: the FXCM case

For years, FXCM marketed itself to clients as a broker with a "No Dealing Desk" model — that is, one that executes orders directly on the market, with no internal conflict of interest. In practice, however, according to the findings of US regulators, the company received $77 million in hidden "kickbacks" from the market-maker firm Effex Capital, which it itself secretly controlled and supported.

FXCM was one of the largest retail forex brokers in the US, and it was precisely the term "No Dealing Desk" that served as the company's main marketing argument — a promise that the interests of broker and client were not in conflict, since FXCM supposedly simply routed clients' orders to external liquidity providers, without profiting from their losses.

An investigation by the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) established that one of the company's key liquidity providers, Effex Capital, was in fact supported by and effectively controlled by FXCM itself. Over the course of this arrangement, the company received $77 million from Effex Capital, which regulators characterised as hidden kickbacks — FXCM disclosed information about this connection neither to clients nor to supervisory bodies.

In February 2017, FXCM simultaneously reached settlements with the CFTC and the NFA. Under the terms of the settlement with the CFTC, the company paid a $7 million fine; the settlement with the NFA involved no monetary penalty, but both regulators required the company and its associated persons to withdraw their registration and leave the US market permanently. FXCM sold the client accounts of American traders to GAIN Capital. Later, affected clients secured a class action against the company for $6.5 million.

Published 17 May 2021