Greetings Linuxser!

Your post raises an excellent point. Mainly, do NDD firms that aren’t making markets have the kind of risks that would mandate a high capital requirement? Yes. Let me explain why:

First, all firms, whether they have dealing desks or not, are required to set aside 10% of all customer assets if they offer 100 to 1 leverage. So a firm with $50 million in customer assets is required by law to already set aside $5 million just to meet that simple requirement.

But getting back to your point. There is this notion that somehow NDD firms don’t have to deal with risk. That just isn’t the case. Here are just some of the risks NDD firms have to cope with.

1)Business Risk. All businesses have the simple risk of not having enough revenue to cover their expenses. Forex firms are no different. But since forex firms are holding customer funds the temptation of creditors to lay claim to those funds should a forex firm go out of business is too tempting. That is one reason the NFA wants forex firms to have more capital on hand than the average business in America. If a restaurant goes under the customers of the restaurant don’t feel the pinch since they just go to another restaurant. But customers of forex firms could lose their money on deposit if the firm they do business with goes under. Thus the risk is far greater to the general public.

2)Credit Risk. The reason behind the NFA’s customer asset requirement rule (firms must set aside 10% of all customer assets) is because of the risk of customers defaulting on their credit obligation. This happens in futures all the time when accounts go negative. While forex firms like to brag about their platforms preventing customers from going negative the fact is it does happen. If the market drops 100 points in one tick it can easily happen. And if the firm can’t collect on that customer they have to eat that loss. That is a big risk. And with customers trading at 400 to 1 leverage in some cases the NFA is well justified in demanding firms have more capital on hand to offset that risk.

3)Market Making Risk. As much as NDD firms like to say they have no market risk because they pass along their trades to banks the fact is they still do have market risk. While that risk is not as large as non-NDD firms the fact is if the banks who execute each trade suddenly decide NOT TO execute a trade it is the NDD firm that has to take over pricing. Banks are not obligated by law to make prices the way exchanges are. If the market gets wild and the NDD firm’s bank decides not to make any prices who do you think is stuck with that responsibility? The NDD firm is. Either that or they don’t offer prices at all and basically cease operations. I would say that is quite a risk and certainly justifies a higher capital requirement as a result.

4)Market Discrepancy Risk. Trade discrepancies happen. There will always be cases where a bank says it executed a trade at one price while the counterparty says that trade was executed at another price. Since banks are loathe to admit guilt the onus of responsibility almost always falls on the counter party. And with high leverage those discrepancies can be very costly. Again, this justifies a higher capital requirement to help offset that risk.

So as you can see Linuxser NDD firms have plenty of risk as well. They are not immune to the laws of economics. And as such are just as much in need of higher capital requirements as every other forex firm.

Why does the NFA want to raise capital requirements? Precisely because of firms like CFG. Of course, many of the fraudsters will be driven out of the business which is certainly a good thing and one of the reasons for the NFA to take action. But there will always be con-men in the financial markets. I believe the real reason the NFA is pushing so hard to raise capital requirements is its concern that there are many more potential CFG’s out there.

The fact is you need more than $1,000,000 to run this kind of business today. Ten years ago when there was no regulation you could a run a forex broker dealer on the cheap. Not now. After all a good compliance officer alone can run you upwards of $200,000 a year never mind all the accountants and book keepers and legal staff needed to run a fully functional compliance/accounting department. But guys like Don Snellgrove couldn’t afford that kind of staff. And neither can many of these poorly capitalized firms. When you are a small forex broker dealer start up you have one goal: GET CUSTOMERS. To do that you need a fully functional platform and an aggressive sales force. That costs money. Compliance can come second after that, if at all…

With this in mind I have outlined a checklist for the average trader looking to find a broker:

1) Make sure they are registered with the NFA (or appropriate regulatory body such as the FSA in the United Kingdom). Avoid unlicensed firms at all costs.

2) Check the firm’s regulatory background on the NFA’s website. (BASIC Search) Be sure to also examine the background of the principals of the firm. This is extremely important because if you see that a principal has a record of working for a bunch of firms with dodgy backgrounds then you need to seriously reconsider that firm.

3) Check the firm’s financials. (http://www.cftc.gov/tm/tmfcm.htm) Make sure the firm you are dealing with is well capitalized. This should be one of the most important criteria used in deciding on a forex broker. As I have demonstrated meeting the minimum capital requirement should not be an ending point when considering a firm since at one time or another even the most crooked outfits are reporting they are in compliance with the cap laws. Furthermore, beware investing with firms below $5 million net capital right now until the situation with the NFA proposal is sorted out. No, the rule has not passed yet but it most likely will and should that time come it is very likely that some of the firms on the dead pool list wil go under. Why put yourself through the stress of wondering whether or not your firm will be able to make the cut?

4) Test a firm’s customer service in advance. Are they open on the weekends? Do they respond quickly to emails? Do they have actual customer service 24 hours a day or just a surly dealer outside business hours who doesn’t like talking to people? Customer service with a forex firm is a lot more important than customer service with your bank as it can often times have a direct impact on your p/l.

5) Avoid “get rich quick” scams. Easily said but even though everyone knows it people still fall for them, especially in forex. Whether those scams involve some broker promising software guaranteed to make you a millionaire or some money manager saying his fund always has a positive return don’t fall for the hype. Remember, if what they said were true they would be millionaires sitting on a beach in Bermuda not sweating it out trying to get you to buy in on their scheme.

6) Experience means nothing in forex. Keep in mind this industry is only 10 years old. This isn’t the equity market where you have brokerage firms that have been around for decades. Everyone is new to forex including the brokers selling themselves to you. Don Snellgrove had more experience in this industry than almost anyone but his firm was not the better for it. Stability is what matters. And larger firms tend to be more stable because they have the capital to ride out the storms in this industry. Furthermore, many of them are backed by well established corporate partners or investors while smaller firms are mainly on their own with limited resources at their disposal.

So there you have it. Those are the lessons from the Collapse of CFG. Take them to heart and trade wisely.

The New CFTC numbers came out last week:
http://www.cftc.gov/files/tm/fcm/tmfcmdata0706.pdf

As a result it is time for another Dead Pool Update:

Poorly Capitalized Firms
Advanced Markets ($1,039,000)
American National Trading Corp ($2,159,000)
Bacera Corporation (Shutdown!)
Cal Finanical Corporation (Shutdown!)
Direct Forex ($1,458,000)
E FX Options ($3,158,000)
Forex Club ($2,873,000)
FiniFX (Not Accepting New Customers)
Forward Forex (Shutdown!)
FX Option1 Inc (Shutdown!)
GFS Futures & Forex ($2,995,000)
Hamilton Williams ($1,130,000)
MB Trading ($1,170,000)
Money Garden ($3,584,000)
Nations Investments (Shutdown!)
One World Capital ($2,308,000)
Performance Capital International (Vanished)
Royal Forex Trading ($1,171,000)
SNC Investments ($1,524,000)
Solid Gold Financial ($2,239,000)
Spencer Financial (Shutdown!)
Trend Commodities (Shutdown!)
United Global Markets (Shutdown!)
Worldwide Clearing (Shutdown!)
Wall Street Derivatives ($936,000)

Unregulated Firms (Buyer Beware)
GCI (?)
Cletus' Fishing & Forex (?)
Krusty's Currency Trading (?)

So far not a single firm in the dead pool has shown any signs they have the capital to potentially meet the proposed requirements. Of course, they are not required to put forth any additional capital yet since the rule has not passed but you would think that at least one or two of them would take the initiative and pony up the dough now to show the world they are in it for the long haul.

Although I must doff my cap to I Trade FX for their near $4 million in reported capital. Contrary to my earlier ribbing they are getting closer to making the $5 million barrier to entry and just may stick it to the savior in the end. They have replaced the firm that was, prior to the most recent report, the most likely firm to make it off the Dead Pool List- MB Trading. The month before MB Trading was showing $3,952,000 in adjusted net capital but now they are only showing $1,170,000 in adjusted net capital. That is quite a drop for MB Trading. It leaves them with only $171,000 in excess net capital. Of course, it could be a one month anomaly so I won't jump to any conclusions. But in light of the new NFA proposal and the increasing drumbeat from the media about the likelihood of this rule becoming law it seems to me MB Trading should be INCREASING their net capital, not decreasing it. It leaves one to wonder just what's going on over in El Sugundo...

Thank you for taking your time to update and educate us about brokers. Can you tell us if any clients from these 10 shutdown firms get hurt by not receiving their money? Do you have any undate on Advanced markets (AMIFX) case? Thanks again!

AMIFX has yet to reply to the NFA's formal case. We'll need to wait a bit longer to see what happens. In regards to customers losing funds, the firms that were shut down for fraud were shut down precisely because so many customers lost funds. The other firms like UGMFX and CFG did not see any customer losses.

The word "Bucket Shop" gets thrown around a lot in the retail forex business. But what exactly is a bucket shop?

Online Trading Resource for Stocks Futures and Forex describes a Bucket Shop as follows:

Describes a brokerage facility that books (takes the opposite side of) retail customer orders without actually having them executed on an exchange. The term comes from the practice of placing an order in a bucket rather than transmitting it to an exchange as a broker would normally do. Bucket Shops were popular during the 1920's at a time when many stocks traded at over $100 a share and the average salary was $1,000 a year, making investment in the stock market too expensive for most people. The most sophisticated bucket shops, known as bucketeers, were hard to distinguish from legitimate brokerage offices, having their own ticker tapes and chalkboards. The bucketeers would often take opposite positions in the market to ensure that their customers could not win.

Forex bucket shops essentially do the same thing and simply pocket the money right up front without even bothering to go into the market to offset customer trades. Instead, the firm simply creates dummy statements showing customers they are making money and that as a result they should send in more money. Then after they have milked the customer enough they'll send out another dummy statement showing them they have lost it all. Or they just fold up shop and run like the wind.

Such were the sales practices of such prominent dead forex firms walking as Forward Forex, Trend Commodities Limited, Worldwide Clearing and FX Option1 Inc. Add to this list another con-man, and newly baptized convict, Udo Rotmistrenko. Udo was a licensed Commodity Trading Advisor registered with the CFTC. The NFA granted him his license in March of 2000:
BASIC Details

Udo was the sole proprietor of Rittmeister Capital Management and his specialty was managed forex funds. But by June 2, 2004, the only thing he would be managing was how to find enough spare change to make his lone phone call from prison. For on that day he would be arrested by the feds for forex fraud. The details of Udo's case can be found here: http://www.usdoj.gov/usao/nys/pressr...ntencingpr.pdf

For the condensed version here is essentially what Udo did; courtesy of the Fraud Digest: Fraud Digest - Online Fraud Magazine

On March 31, 2005, Rotmistrenko pled guilty to twelve counts of wire fraud and twelve counts of mail fraud. During his guilty plea, Rotmistrenko admitted that, from 1999 to 2003, as then-CEO and president of Rittmeister Capital Management in New York City, he fraudulently induced investors to wire and mail him funds by giving the investors inaccurate information regarding his company’s profit history. Rotmistrenko did so by giving the investors account statements that falsely inflated the profits the investors were earning and by using investor funds to pay his personal expenses without disclosing those expenditures to the investors. According to the Indictment, Rittmeister held itself out to the investing public as a brokerage firm that managed investments for retail customers in the foreign currency exchange (“forex”) market.

In order to induce potential customers to invest funds through Rittmeister, Rotmistrenko and Rittmeister sales representatives made false and fraudulent representations regarding Rittmeister’s trading history in the forex market. Specifically, they falsely represented to retail customers that Rittmeister historically generated large profits, as high as in excess of 43 percent per year, for its customers through forex trading. In fact, Rittmeister generated little or no profits for Rittmeister’s customers through trading in the forex market. Furthermore, sales representatives told retail customers that Rittmeister’s customer investment funds were used to invest in the forex market, when, in fact, the company failed to transfer a large majority of investor funds to any forex trading firm for the purpose of executing forex trades. Rather, a substantial amount of investor funds were diverted to pay Rotmistrenko's personal expenses, and to pay Rittmeister’s operating expenses. To hide the fact that a large portion of the customer funds Rittmeister received was being diverted to pay Rittmeister’s operating expenses and for Rotmistrenko's personal benefit, Rotmistrenko created and sent clients false and fraudulent account statements that represented trading activity and profits and/or losses incurred on trades in client accounts. In truth, Rittmeister failed to generate any trading profits for the customer accounts. Rotmistrenko diverted customer funds from Rittmeister’s bank accounts in various ways, including the following: (i) approximately $319,000 was withdrawn in cash; (ii) approximately $146,900 was paid to an associate; (iii) approximately $24,900 in checks was made payable to Rotmistrenko; (iv) in excess of $30,000 was used for car payments and other car expenses; (v) approximately $38,000 was used to pay college tuition for Rotmistrenko's wife; and (vi) funds were used to pay for numerous hotel, motel and restaurant bills, wedding expenses, and gym memberships.

In fact, Udo is quite the sportsman. Not only did he use customer funds to bankroll his trips to the gym but he used them to pay for scuba diving lessons too! A simple googling of old Udo shows him to be a member of the "2001 Rec Scuba Rogues" Rec Scuba Rogues 2001. You can see his mugshot under the name "chaoswolf." Wonder how many pips all that scuba gear cost his investors? And boy could I spend hours and hours coming up with appropriate metaphors for Udo's membership in a club titled "Scuba Rogues..."

But alas Udo won't be breaking out his wetsuit anytime soon because on June 17, 2007, Udo was sentenced to 51 months in prison by Judge Deborah Batts. Ouch. Rarely do forex fraud criminals get such harsh prison sentences. What gives? Well, this was not your typical clumsy regulatory action. This case was initiated and prosecuted by the United States Attorney of the Southern District of New York. This was the office that gave America Rudy Giuliani. In short, these guys don't mess around. And that is an important thing to remember because prior to Udo's being arrested he had been given a clean bill of health by the NFA. What does that mean? It means that doing a background check is no guarantee that you're dealing with a legit firm.

In short, there is only one way to avoid the bucket shops and that is to avoid any and all unregistered firms and to avoid anyone that isn't showing a healthy balance sheet. Am I saying that firms with just a couple million dollar are bucket shops? Of course not. But since we know forex fraud is primarily taking place with smaller firms why take the chance? In short, until the industry gets flushed by regulators investors should be wary of any firm that isn't showing a healthy balance sheet else you stand a chance of being eaten alive by the Chaoswolves of the world.

If you´re with one of the well capitalized brokers posted here produce excellent benefits for... you?

Let´s say you´re with one of the top boys, fxcm, forex.com, whatever.

Why you want to be with one of them?

1.You would have the best technical analysis software. Because you have to pay for a decent one.

2.They take care you don't´s waste money in ridiculous commissions. The money you save is for pay the decent software.

3.You would have the best spread, as low as 1/2 pips, under normals conditions*

4.You have access to the more secure news. Because after the news is released a team of professionals would write a report and the news with the report will arrive to your desktop as soon 2 or 3 hours later.

5.Or you can buy a news service with the money saved in commisions.

6.They would wide or move the quotes to help you to understand you're in a non regulated market.

7.You can call to help desk and ask by some indicator that they exhibit in their website and the help desk it is going to say to you it´s proprietary indicator. Helping you to don't infringe copyrights.

8.Help traders is a primary mission, specially under high volatility moments. During this moments you are not going to be able buy or sell. They take care of you.

9.The mission of brokers it´s help you make money. That´s why scalping is not allowed. Scalpers make little money. You don´t want to do that.

10.If your order is not filled at the desired price, it would be done at some point. It´s a broker´s mission nobody misses a trade.
Also and even, if you have checked the option of max slippage or deviation broker mission prevails. Soon or later you would be jumped in.

I think I´m forgiving something but who cares, with all this advantages who can refuse to open an account in well capitalized broker.
I´m with you.


*Saturday and Sunday, but Sunday before the trading opens.

__________________

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Meanwhile, back at the Dead Pool. The NFA appears to be wrapping up the closures of CFG and UGMFX. They released the following two press releases today regarding the regulatory actions they took against said firms. Once again both firms were very poorly capitalized and were not able to keep their books straight. Once again this is one of the reasons regulators want to raise capital requirements. Once again if regulators share these concerns the trading public should as well.

NFA permanently bars Virginia forex firm, Forefront Investments Corporation
August 13, Chicago - National Futures Association (NFA) has permanently barred Forefront Investments Corporation (Forefront), a Futures Commission Merchant and Forex Dealer Member located in Richmond, Virginia, from NFA membership. The Decision, issued by NFA's Business Conduct Committee, is based on a Complaint filed in April 2007 and a settlement offer submitted by Forefront.

The Complaint charged that Forefront used misleading promotional material. In addition, the Complaint charged that Forefront failed to comply with NFA financial requirements, file financial statements within a timely manner, and implement an adequate anti-money laundering program. Further, the Complaint charged that Forefront failed to have a principal also registered as an associated person (AP).

NFA permanently bars United Global Markets LLC and orders firm to pay $40,000 fine
August 13, Chicago - National Futures Association (NFA) has permanently barred United Global Markets LLC (UGM), a Futures Commission Merchant and Forex Dealer Member located in Boston, Massachusetts, from NFA membership. Additionally, NFA ordered UGM to pay a $40,000 fine. The Decision, issued by NFA's Business Conduct Committee, is based on a Complaint filed in August 2007 and a settlement offer submitted by UGM.
The Committee found that UGM failed to maintain the required minimum adjusted net capital.

The Decision follows a recent enforcement action taken against UGM. In June 2007, NFA issued an emergency Member Responsibility Action against UGM. See previous press release.

First, the link for the Udo Scuba Rogues is incorrect. This is the correct link:
Rec Scuba Rogues 2001

Second, I made some incorrect statements regarding Trend Commodities Limited:
National Futures Association - NFA is a regulatory service provider for the derivatives markets

In regards to the bulk transfer of accounts from Forward Forex to Trend this was an incorrect assumption on my part. Let me correct the record. I assumed since they were sharing the same office and Forward Forex was going under and the principal of forward forex is drawing cheques on Trend’s bank account this is where the transferred accounts came from. But neither Trend nor the NFA can confirm where these accounts came from at this time. (Page 6)

Second, I made a mistake regarding the NFA ordering funds be sent back. It appears Trend did this voluntarily after being pressured by the NFA as to the status of the funds in one of their bank accounts.

Apologies – The Savior

I have received some complaints from other forum users that my "Dead Forex Firms Walking Dead Pool" amounts to nothing more than scare tactics since the rule hasn't passed and since no one is yet required to meet the proposed $5 million capital requirement. In short, these little firms are being given a bum rap.

But those critics are missing the big picture. The Dead Pool is not meant to be fair. It is meant to single out those firms that have a low probability of meeting the proposed capital requirement (keep in mind Currency Trader Magazine said the proposal could possibly “wipe out 90% of the industry.”) The counter argument to that is some of those firms have additional capital they aren’t showing in the CFTC Capital Reports. That may be so but how is the average trader to know that absent firms showing us their company financials? My critics insist the onus of responsibility to find this out is on me because I am putting these firms on the Dead Pool list but I say the onus of responsibility is on the firms because it is they who are soliciting customers to trade at their firms.

Why the Dead Pool? Because traders should be aware of the very precarious state these firms may find themselves in should the rule pass. The time to know this information is BEFORE a firm goes under, not after it has gone under. That is why I have included so many stories in this thread detailing the demise of so many poorly capitalized firms. The CFG case in particular is an instructive one I encourage everyone to read.

True, CFG was undercapitalized while the firms in the Dead Pool are currently meeting their capital requirement. But the NFA was taken by surprise when they checked CFG’s books, who as late as January of this year showed they were meeting their capital requirement too. My point is “low capitalization” can quickly lead to “undercapitalization.” And while the firms on the dead pool are not undercapitalized (I take back any comments to the contrary regarding undercapitalized firms on the dead pool), they are poorly capitalized and thus a lot more likely to go out of business should this rule pass.

Finally, I want to make clear I'm not saying all these firms will be going out of business should the new capital requirement be adopted. Surely some will survive. And it should also be noted that a firm’s month to month Adjusted Net Capital on the CFTC’s website can change radically from one month to the next. While I joked about I Trade FX with the line “Run Forrest Run” after they posted negative capital for one month I never stated I Trade FX was bankrupt and their current Adjusted Net Capital figure shows them to have close to $4 million which means they are one of the most likely firms to survive the proposed capital increase. So the CFTC capital requirement figures are not the end all be all in this debate. That I will grant my critics.

But at the moment, that report is the only independent source for checking a firm’s financial health. As such it carries tremendous weight and needs to be closely followed by the trading public in addition to the many other things a trader should do when checking on a firm before they open an account.