Hello,
I'd like to talk about a problem that many of us have experienced, and I'd like to propose some solutions to this problem and hear your ideas on this subject as well. Since this has happened to me more than once, I'd really like to see us pull together and form a solution to this problem as group to the benefit of all.

I'm talking about brokerages being closed down by regulatory agencies, and it taking a minimum of months and in most cases years or simply unknown before any of the money is returned at all. Even then, when it finally does happen it is in pennies on the dollar. This can be and is devastating to traders, particularly those who are using trading to support their families or to supply a necessary supplement to their incomes. Even if trading is a hobby, it is still a loss. Most of us leave the majority of the money that we make from trading in our accounts so we can have the benefit of compounding our money.

As I said, I have experienced this more than once. Before the last time it happened at FXLQ, we (a friend and I) had gone to the effort to join a group of traders who had pooled their money so as to be able to take advantage of being able to use Goldman-Sachs to keep their money in a separate account from the brokerage as the brokerage we were with before had been shut down by a Swiss government agency.

In my understanding the horrifying thing was that in spite of our vehement protests when the NFA shut down FXLQ they FROZE the Goldman-Sachs account, and WORSE than all that, it has been declared an ASSET of FXLQ, and subject to CREDITORS which at least DOES include us, but does NOT exclude others who are not traders. In other words the electric company has the same rights on our money that we do because they are creditors as well.

Those of you who have experienced this sort of thing well know how outraged and angry this can make you feel, and it sure doesn't put toast on the table either. Nor does it pay the mortgage, hospital bill or anything else. Regulatory agencies simply do not care what happens to you. They think that you are rich because you invest in forex. They have no conception that to most of those involved it is like being fired suddenly with no warning and no unemployment. It is interesting to note that at the time FXLQ was closed down they had more than enough money to return all client funds and had volunteered to do so. The NFA would NOT allow them to do so. Not only that, but you were not allowed to make ANY adjustments to open trades. They gave you no time, no warning to make these adjustments to these trades or even to close them gracefully. Our group was in a carry trade- the stop could not be moved nor funds from one part of the trade to the other. Right there we lost about 50% of our in trade money, with no way to prevent it.

In summary having your brokerage shut down by a regulatory agency is the pits.

I've been doing a lot of thinking and talking with friends and have come up with some solutions. Here they are. I'm saving what I consider the best for the last and excluding obvious personal options like savings accounts.

1. Using money management in a different way. I will be using a 2% rule and small figures to explain this. That way I have to keep track of far fewer zeros!
Let's say you have $1000.00 to trade. You decide to use sound money management and you risk only 2% of your trading money on a single trade. That gives you $20 to risk on your trade which on a mini would give you an 18 pip SL on the EURUSD @ a 2 pip spread. Now using this same setup, let's say that you still have $1000.00 to trade, but you only put 25% of your total trading money at the brokerage. You stuff the rest either into your sock, or put it in the bank, but you don't spend it. You now have $250 in your trading account, but the rest is out of the hand of the broker. You continue to trade as though the $1000 were there risking your $20. You have to watch your margin more closely, but the majority of your money is safe. You also remove money regularly to keep from having too much build up at the brokerage. The major disadvantage of this is the lack of compounding.

2. We could form a group or could individually find an insurance company to underwrite an insurance policy for the event of a regulatory agency intervention in our trading lives. This could be really expensive initially, plus it would cost each person a monthly premium probably based on the size of their trading account. The disadvantages of this are probably cost, and the fact that insurance companies in spite of their advertising are not cheerful about paying out, and again they too are subject to regulatory agencies. Plus they can mismanage funds and not have them available.

3. We could form our own protective group to replace monies shut down, and do this in a way that could conceivably be mostly FREE to members. It would, however, make some people unhappy as we would be competing with their business. What I suggest we do is form an introducing brokerage and do this for an extensive list of brokers so that all our members have their choice of brokers and we get a commission on each trade. Most traders never see money that goes into spread. That money would then put into a bank in a country with a solid reputation for money management and that would not let a US or European regulatory agency claim that the money actually belonged to some broker they were shutting down! Furthermore as our funds grew, I suggest that part of it be put into trade among several of the best traders in the group with established records that were comfortable trading money for others. That way we could hopefully reach a point where if a brokerage shut down that had our members involved, that we could replace their entire trading account within a short period of time at the new broker of their choice. However, it would also be important in my opinion to hold in reserve at least 50% of the funds in case another brokerage was shut down.

To do this effectively not only is good input needed, but we would need to elect a committee to work on the particulars which are NUMEROUS- everything from finding a bank, to establishing broker relations, to how many signatures are required on a check, to membership requirements including establishing how much was actually in a members account, and, of course the original incorporation which would require some contributions from members.

If you are interested in this, and have positive ideas, please come forward and say what you have to say.

It is possible we could make the trading world a lot safer.

Absolutely excellent posting!
I agree with you 100%, also that it will be a lot of work to establish such a group...

Good post.

I have no real positive ideas but I want to explain some points.

About point 3 and some IB. The main problem is that most IB does not held the money, just earn some commission from the trades.

The money is wired to main Broker account. Just take a look into the forms of many IB. The form often says you're opening an account with another company than your IB.

Second problem could be what´s could happens if the IB helds the money. the main broker could ignore your trades because there is deposit under your name into your main account.

There are another problems to avoid.

One is the standard lot for Forex still is 100k, when you´re trading mini or micros you play the broker games. There is no real money involved. There is no money transfer. We accept that because we know we could win this game.

But this is a problem if we want to held our money within a bank. Every bank transaction has a fixed cost no matter of the amount. If we´re lucky and we could find a Broker and Bank that could accept mini or micro lots using money transfer the costs would kill the customer.

I suggest:

1-Banks acting as Brokers and a careful reading of the contract.
2-Canadian CIPF
3-Insurance Company.

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Without intending to, I may have created some confusion, and I'd like to clear it up.

The method I am talking about for raising money for this project is by being an Introducing Broker (IB) to many forex brokers, and getting commissions from the trades of our members. I am not talking about being a broker.

Being a forex broker is far too complex for the reasons that Linuxuser mentioned. There is essentially no way to trade less than one standard lot and have direct bank processing. Many banks do not even offer leverage.

As an IB, we would move the money from commissions via wire transfer to our bank after we were paid- probably weekly or monthly.

"The money is wired to main Broker account. Just take a look into the forms of many IB. The form often says you're opening an account with another company than your IB.

Second problem could be what´s could happens if the IB helds the money. the main broker could ignore your trades because there is deposit under your name into your main account." -Linuxser

I apologize that I don't really understand what you saying here. I have only been an IB once and that very briefly.

These are not trading accounts I'm talking about here, although I would guess that most brokers that we could be an IB for would want us to open a trading account to put the commissions into. We would then do that, and when the commissions are placed in the account by the broker, we would then request they be moved to our bank account.

"I suggest:

1-Banks acting as Brokers and a careful reading of the contract.
2-Canadian CIPF
3-Insurance Company." -Linuxser

I didn't truly understand this either, again my apologies.
What is a Canadian CIPF?

I think the fault here is mine. A friend of mine who read this post last night thought I was talking about a forex brokerage run by and for traders. This is definitely beyond the scope of what I am talking about. I would hope that after a reasonable length of time that there would be enough commissions accrued that we could have some of our members trade the money that has been made (with a commission for them for trading of course!) to increase this money at a faster rate so we are ready to help traders who are the victim of broker shutdowns faster.

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"If I have not love, I am nothing." So what is love? Is it our present day romantic notions? To me not. To me love is the willingness from the heart to serve others with respect, kindness and practicality in whatever way God gives us. As we serve others in this fashion we serve and reflect Him who made us all.

1-Banks providing brokerage services. Banks regulations are better than brokerage regulations. Examples: SaxoBank, dbFX, etc.

2- Canadian Investor Protection Fund: Choose our English or French website

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This process that is discussed is currently in progress with BCTS LLP, we hold 20% of funds in the broker, remaining stays in the bank, and earns interest. while this is a good situation once you have earned enough to say play with thier money. The usual issues are still there, IB or Broker fraud, missuse of your funds to promote thier business or pay bills.

the Final issue is straight forward, once you have Wired the funds to the broker, you still have a possibility of a Margin call on those funds , and the biggest issue is that.

So, HOW to solve the problem, what you need to determine from your past trades is your average DRAWDOWN, for any period, if your average drawdown is 15% of your funds, then you may wish to have 30% of your usable cash in the broker , but again, work with the drawdown instead.

In the development of the software for Hotspot I am doing, that is part of the process, the average drawdown is calculated to allow you to know how much funds in the broker you need.

There will be a broker soon, that will be "fully segregated" accounts and bonded , that's right bonded, dont' know exactly when it will show up, but it will happen.

as far as the NFA and CFTC, both are negligent when it comes to these OTC brokers, here is why, in the instance of FXLQ, they promoted a 40 million dollar bucket of cash for them for 7 months prior to shutting them down saying they didn't have that funds at all. IOW, they took "thier word for it" and told us that they where legit.

I am part of that mess, and will be looking at legal action after this is resolved on the 31st of March.

Andy Stapleton

Thanks Andy for better explaining to people how that method works.
Thanks Linuxser.
Again, it's probably me, but I just don't see what Canadian Government protection against broker shut downs will do for other citizens of the world, unless you invest strictly in Canadian brokers.
To seek insurance as a group, seems an expensive option.
To be an IB provides money that can be moved monthly out of an account into a safe bank account to help members when in need.
Smiles!

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"If I have not love, I am nothing." So what is love? Is it our present day romantic notions? To me not. To me love is the willingness from the heart to serve others with respect, kindness and practicality in whatever way God gives us. As we serve others in this fashion we serve and reflect Him who made us all.

You welcome .

Seriously. Of course can't help all traders, however we needs to think a little about.
Governments are like brokers. Some Governments take care of the citizens others just help swindlers.
A serious Government insure the citizens who want to invest, others claim for better regulations and then: FXLQ, Refco and so on . Others (because we have many classes) just offers their beaches to swindlers.

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------------------------
This angered me just reading it so I wrote them. Here is my letter and their response.
-------------------------
Dear Sirs,
Your website states:
*Strong enforcement authority*. NFA has the authority to take
disciplinary actions against any firm or individual who violates its
rules, ranging from Warning Letters for minor rule infractions to formal
Complaints in cases where rule violations warrant prosecution. Penalties
resulting from Complaints include expulsion, suspension for a fixed
period, prohibition from future association with any NFA Member,
censure, reprimand and a fine of up to $250,000 per violation. NFA often
collaborates with the CFTC, the FBI and other law enforcement agencies
to ensure successful prosecutions.

I read on a forex forum this-
/"In my understanding the horrifying thing ...<snip>... Right there we lost
about 50% of our in trade money, with no way to prevent it./

1) What was the reasoning behind the decision to declare customer
accounts an ASSET of FXLQ ?
2)If this is true, then why should we allow the industry to
self-regulate itself ?

I await your response and I will be contacting Gov. Crist to see if
there is anything we can do to put a stop to the tremendous amount of
scams and lack of regulation the forex market has in Florida and
nationwide.

Sincerely,
Robert M
-----------------------------
Dear Mr. Mc,

As you point out, NFA has the ability to take disciplinary action
against its Members for violations of NFA Rules. As part of an
examination of Forex Liquidity, we learned that the firm had grossly
misrepresented its financial position and had recorded assets that FXLQ
has yet to prove exist. Once this was uncovered by our auditors, we
took steps to immediately curb the business that the firm did, including
prohibiting it from accepting new customers as well as funds or trades
from existing customers.

While it is true that customers could not put on any new positions,
customers were able to liquidate existing positions, or continue to
roll-over trades if they wanted to keep the position on. Therefore, you
did have the ability to keep a trade and close it out when you deemed
that to be appropriate. The receiver appointed by the Federal Court to
take over FXLQ's operations did eventually close out customer positions,
but this was over one month after NFA's Member Responsibility Action was
issued.

With respect to the funds, it is incorrect to say that FXLQ had the
funds available to pay its customers; NFA staff were in FXLQ's offices
every day for over two weeks after the MRA was issued and received
updated financial records each day. During that time period, we
received no information which confirmed that there was, in fact, enough
funds to repay customers. I understand that firm personnel represented
to numerous people that these funds were available; however, firm
personnel also represented that they had $40 million in capital, which
also appears to be a false statement. Additionally, FXLQ had no funds
at Goldman Sachs at any point, although they did have funds at several
other financial institutions.

With respect to the classification of customer funds as assets of FXLQ,
this is a standard accounting issue. For all financial institutions who
hold customer funds (including broker-dealers and futures commission
merchants whose customers trade on-exchange futures), customer funds are
listed on the firm's books as an asset, which is off-set by liabilities
owed to customers. Additionally, U.S. Bankruptcy laws do not allow for
segregation of customer funds the way that they do for exchange-traded
futures, and there is no SIPC protection as there is in equities.
Therefore, customers of FXLQ are afforded no special protection in the
event of insolvency, and FXLQ was prohibited from making any claims to
the contrary. The receiver's most recent report indicates that there is
still a shortfall of approximately $1.8 million in assets.

While it is true that NFA is a self-regulatory organization, we are
subject to oversight by the Commodity Futures Trading Commission and we
are the ones who took immediate action to prevent additional customers
from being harmed and to prevent further losses by existing customers.
The MRA in this case was one of a dozen or so NFA has taken against
Forex Dealer Members, several of which were issued in the past year. We
have had numerous discussions with Congressional staff regarding the
forex industry and the CFTC's jurisdiction over it; we believe that any
steps that Congress can take to strengthen the Commission's ability to
regulate this area as important, and we have spent numerous resources to
ensure that Congress understands our position.

Sincerely,
Jennifer S

Excellent answer.

NFA just forget to apologize by a broker with 40 virtual millions during almost two years

Can you explain this a little better idontdowindoughs.

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