Best Thread CMC Markets owner answers your questions

[tar]

That calls into question the financial integrity and capital adequacy of FXCM. Lets say that all client funds are segregated. This does not mean that client funds are safe or guaranteed, just the client funds are not commingled with proprietary FXCM funds. Equally, client funds should not be used to satisfy creditors of FXCM.
However, consider the following scenario. Some large clients have a large position in the market leveraged 100:1. In a highly illiquid environment, or a gap scenario, the underlying market moves 3% before positions are fully liquidated.The client loses their margin deposit (1%), and FXCM is on the hook for an amount 2x what the client deposited. FXCM have undertaken not to enforce debit balances, so the company eats the loss.
If in aggregate, FXCM funds do not cover these losses, the other clients (including the profitable ones) get stuck with it, as total segregated funds are now < FXCM liabilities to clients. Remaining clients get paid off at something like 70 cents on the dollar or worse. The losing clients may well have had additional assets which could be used to satisfy the debit balance, however FXCM has waived any claim on these.
.

I understand if CMC cant provide such protection , but bottom line FXCM do . Your example is a theoretical one , fxcm is well capitalized and has more than 150K clients , anyway FXCM could protect itself from "gap risk" by purchasing spot forex otc options .

 

[PC at CMC Markets]

hi rufanuf
simple answer. yes we are adding more instruments. sorry cannot be specific because we are still doing some back ground work. we want to launch products based on great minimum spreads, great typical spreads and no requotes and automated execution. so bit of work to be done but more to come.
tks pc

Well Peter (if you are Peter, I find it hard to believe from 1 or 2 of the comments) you have certainly changed your tune in a few short months....follow this thread back to pages posted in April and all your promises of adding new instruments. Which have not materialised.

You can of course run any business model you want, honest, dishonest and HooDoo is absolutely correct on that point. So if your business model is to move away increasingly from bets you find harder to make money from, that is course exactly the same model as your punters I guess, so don't be surprised to lose a few (thousand)

I find Hoodoos apparent business acumen really insightful. Talk about state the bloody obvious!

So simple question then Peter are you adding more instruments or not ?, Or do I now have to close my CMC account (after a good number of years) and move onto someone who IS going to give me the instruments I want to trade?

 

[Ross Spur]

....or would you rather find a simple mechanism to take a small slice of the hard earnt cash of every man woman or child that ever dare dreamt of the possibility of making some easy money?

I thought that was what the government did?

 

[PC at CMC Markets]

Hi Hoodoo man

the point about our new click tickets whereby you can place stops and limits and they are oco from within charts further underpins the ability to protect the clients down side.
also we added automatic margin stop losses to our platform (you can turn it off) to further protect clients.


tks pc

That calls into question the financial integrity and capital adequacy of FXCM. Lets say that all client funds are segregated. This does not mean that client funds are safe or guaranteed, just the client funds are not commingled with proprietary FXCM funds. Equally, client funds should not be used to satisfy creditors of FXCM.

However, consider the following scenario. Some large clients have a large position in the market leveraged 100:1. In a highly illiquid environment, or a gap scenario, the underlying market moves 3% before positions are fully liquidated.The client loses their margin deposit (1%), and FXCM is on the hook for an amount 2x what the client deposited. FXCM have undertaken not to enforce debit balances, so the company eats the loss.

If in aggregate, FXCM funds do not cover these losses, the other clients (including the profitable ones) get stuck with it, as total segregated funds are now < FXCM liabilities to clients. Remaining clients get paid off at something like 70 cents on the dollar or worse. The losing clients may well have had additional assets which could be used to satisfy the debit balance, however FXCM has waived any claim on these.

So why should traders have their account equity put at risk by insurance offered to those who have blown out their accounts and incurred further liability to FXCM? I am glad CMC does not do this. As Peter has stated here, that offer doesn't exist in the real market and you couldn't get such a guarantee from a bank. Spread betters who want this are in fantasy land, and should not speculate on a leveraged basis if they are unable to satisfy margin calls and resulting debit balances. Just because the leverage is there doesn't mean you have to use it. You can deposit £7,000 and buy the FTSE at £1pp so your gains are tax free, rather than investing the same £7k in a FTSE tracker fund. This does not give you leverage or a risk of debit balance if you buy FTSE at under index level 7000.

If you want a guarantee of protection on leveraged positions (like a guaranteed stop), use options to give you the right to close your underlying at a known price. Example - Long 1 FTSE 100 future at index 5,800 + Long 1 FTSE 5,200 Put. At any time before put expiry, max loss on the position = 600 FTSE points at £10 per point + the premium paid for the option. This will be between £6 and £7k max loss, on a position with a notional value of £58,000.

Should there be a proper financial literacy test for spreadbetting accounts (in addition to the cursory tests which currently exist)? A leverage licence? In am not in favour of government regulations and other constrictions on freedom generally, and for the successful traders it will not be good to limit the number of "fish". However one does wonder at times...but in the end analysis it is down to the individual to project their financial security and understand the products dealt.

 

[rufanuf]

I thought that was what the government did?

LMAO, yes then they go their mates, and say "How much will you lend us against this money we have milked off the unsuspecting public" and they borrow billions. Dunno about you guys but I dont remember ever voting for my government to max out a credit card in my name, in fact I dont even remember ever voting for them to apply for one! Again forget conspiracy theories this is the world we live in! Id rather be fishing.

 

[hoodoo man]

I understand if CMC cant provide such protection , but bottom line FXCM do . Your example is a theoretical one , fxcm is well capitalized and has more than 150K clients , anyway FXCM could protect itself from "gap risk" by purchasing spot forex otc options .

Not it is not theoretical. Many brokers and dealers have gone bust. On occasion, even a clearing member of an exchange has needed to be bailed out, with creditors accepting haircuts.

So tar, what happens if 35k of these 150k clients are leveraged 100:1 and positioned the wrong way round for a 3% gap in a popular FX pair? The answer is that the remaining 115k clients take a haircut on their deposits, and potentially FXCM then goes under or is closed by regulators under capital adequacy rules.

FXCM are contracting not to enforce debts in order to lower the perceived risk of leveraged trading. What this does is transfer risk from those who incur debit balances to those who do not (ie the other account holders with credit balances).

I would not place capital with a firm which had such a policy, for reasons which ought to be obvious.

This thread is about CMC, and their MD has (quite correctly in my view) expressed that CMC are not offering guaranteed stops, guarantees of no debit balances, or other fantasies which don't exist in the actual markets. The business model for CMC is to make markets by providing good minimum spreads, consistent average spreads, and automated executions. The future of spread betting companies is to be a "mini exchange" with sophisticated products and risk management tools not a bookie where you are protected from losing more than your stake.

Clients wishing to take advantage of this must stand behind the obligations they incur in their betting / trading activities and not expect other solvent clients or the company shareholders to bail them out.

 

[Black Swan]

I understand if CMC cant provide such protection , but bottom line FXCM do . Your example is a theoretical one , fxcm is well capitalized and has more than 150K clients , anyway FXCM could protect itself from "gap risk" by purchasing spot forex otc options .

Good company but I'm underwhelmed by their share performance since they listed and the current price/market cap..However, read something a while back suggesting licensed brokers in the USA had collapsed from 30+ to circa 16 given the new rules in place so arguably a lot of business out there..or is there?

 

[tar]

Not it is not theoretical. Many brokers and dealers have gone bust. On occasion, even a clearing member of an exchange has needed to be bailed out, with creditors accepting haircuts.

So tar, what happens if 35k of these 150k clients are leveraged 100:1 and positioned the wrong way round for a 3% gap in a popular FX pair? The answer is that the remaining 115k clients take a haircut on their deposits, and potentially FXCM then goes under or is closed by regulators under capital adequacy rules.

FXCM are contracting not to enforce debts in order to lower the perceived risk of leveraged trading. What this does is transfer risk from those who incur debit balances to those who do not (ie the other account holders with credit balances).

I would not place capital with a firm which had such a policy, for reasons which ought to be obvious.

This thread is about CMC, and their MD has (quite correctly in my view) expressed that CMC are not offering guaranteed stops, guarantees of no debit balances, or other fantasies which don't exist in the actual markets. The business model for CMC is to make markets by providing good minimum spreads, consistent average spreads, and automated executions. The future of spread betting companies is to be a "mini exchange" with sophisticated products and risk management tools not a bookie where you are protected from losing more than your stake.

Clients wishing to take advantage of this must stand behind the obligations they incur in their betting / trading activities and not expect other solvent clients or the company shareholders to bail them out.

I understand your point , and i understand that this is how the market works and i have no problem with this , nonetheless there is some brokers offers protection for your account , and FXCM could protect itself from "gap risk"in the options market .. anyway should ask FXCM how they manage this risk , also not to forget that FXCM uk accounts are protected by the FSCS up to 80 K pounds .
And Fxcm is not a bookie check their Liquidity Providers in this link , however a broker or a SB firm who takes the other side of your trade that could be called a bookie :

http://www.trade2win.com/boards/forex-discussion/128096-fxcms-liquidity-providers.html

 

[hoodoo man]

I understand your point , and i understand that this is how the market works and i have no problem with this , nonetheless there is some brokers offers protection for your account , and FXCM could protect itself from "gap risk"in the options market .. anyway should ask FXCM how they manage this risk , also not to forget that FXCM uk accounts are protected by the FSCS up to 80 K pounds .
And Fxcm is not a bookie check their Liquidity Providers in this link , however a broker or a SB firm who takes the other side of your trade that could be called a bookie :

http://www.trade2win.com/boards/forex-discussion/128096-fxcms-liquidity-providers.html

Tar, this isn't "protection" for accounts. It is favouring one type of account over the other. By the broker / bookie contracting out of its right to enforce margin debts, this passes the liability to the company, and in the event this is not sufficient the other clients / account holders. It is not protection, it is favouring one set of accounts (those which go debit) at the expense of another set of accounts (those properly capitalised). To refer to this as protection is not correct. We might as well call it a policy for welchers, or a company which does not go after welchers.

No, FXCM cannot protect itself from gap risk. FXCM should have a flat book. In any case, FXCM (and the rest of us) cannot predict in which market or which direction the 3% gap will occur. It would be prohibitively expensive to insure against all such outcomes and I am confident that FXCM does not do so.

FXCM is taking a bet that its risk management systems are good enough and the markets will always be liquid enough to close out client positions when they no longer have funds to support them. If this is not true, FXCM exposes its own solvency and in the worst case other client funds.

When the S&P moved over 100 full points in less than two hours on May 6 2010, punters who are trading an ES future on $300 day trading margins could have incurred a loss of $5,000 per contract before the broker got them out of their positions. A punter with a $5k account long 10 ES futures who seized up at a big loss could have been exposed to the tune of $50k before being liquidated at the bottom with a debit balance of $45k. How many such traders does it take before the security of other client accounts with the same broker are threatened? This is a reason why no serious trader would keep significant capital at a broker who offers $300 margins on the emini.

I don't know how big CMC is, or how many clients they have, but if the world equity markets opened down 5% on a Monday morning, I am sure CMC would be in a far stronger position if they could legally enforce any debts arising from this. If the bulk of the book is long equities (must be the case more often than not), then CMC are getting killed on their long hedges. If they cannot recover this from the losing clients, then they are in trouble.

Your point about the FSCS is well taken, however this is state backed insurance. Firms pay into the FSCS compensation pool, however they should not be allowed to take the types of risk you are implying that FXCM takes with the benefit of a state guarantee when they lose. Peter was quite right to mention how such guarantees and offers could affect capital adequacy and other regulatory requirements.

(I also think the whole existence of FSCS is absurd and a distortion of the free market)

 

[tar]

No, FXCM cannot protect itself from gap risk. FXCM should have a flat book. In any case, FXCM (and the rest of us) cannot predict in which market or which direction the 3% gap will occur. It would be prohibitively expensive to insure against all such outcomes and I am confident that FXCM does not do so.

They have a flat book according to their NDD model , but it would be right to hedge with options against "an event of default" if theoretically FXCM clients where massively over leveraged at some point as you say . Anyway i agree with u regarding markets risk , but we cant say FXCM will go under or FXCM is under risk because of their business model i am sure they know how to manage their risk .

 

[tar]

I don't know how big CMC is, or how many clients they have,

75k active clients one year ago , notional volume 770 B pounds over the year ...

 

[Truth Seeker]

FXCM dwarfs CMC, and they offer something very important, you will NEVER go in the red on your account by bad trading or bad luck. With many other SB companies including CMC, you can end up owing them ££££££££ as well as blowing your account balance. These are the facts, call them up, read their website. To me this is invaluable. CMC are not going to offer this to its clients which imho is a mistake because this is real client protection and a good selling point.

 

[Black Swan]

Fascinating to watch how this thread wanders/meanders at times, the FXCM issues raised by Tar are interesting, fwiw I do think it's good practice that you can only lose what you have in your account, however, perhaps it's far easier for a pure play fx co to implement that strategy than an SB firm such as CMC, although I think Capital Spreads implement it too, not sure if that's on all their securities and trading options though..

Pretty basic simple stuff here off Google finance relating to FXCM; share price, market cap, they're down quite a lump from their $15 high, and this in a (arguably) secular bear market rally. Brokers now recommending them as a sell.

http://www.google.com/finance?q=NYSE:FXCM

 

[Truth Seeker]

It was me who started this FXCM debate, and now I see all you can try and do to railroad FXCM is by Following brokers recommendations now, LOL! Desperate. It doesn't change the fact that you can end up handing over your house to CMC for a spread bet that goes wrong!!!!!!

 

[PC at CMC Markets]

Hi Truth seeker,

Thanks for your post. I agree you did start the fxcm debate.
In next gen we have automatic margin stop losses. These are stop losses based on the margins for each product. We made this an automated service to protect clients as best we could. They are not guaranteed stop losses and we have debated this issue in previous posts but I think it demonstrates that we are trying to help clients protect themselves. You can also change these stop losses using chart tickets or from back office. You can also turn off the margin stop losses through preferences.
At the end of the day I still say that fxcm are not guaranteeing your account to not go overdrawn they are just stating their liquidation policy. They will liquidate your earlier to try to prevent your account going over drawn. If I am wrong about this I apologise, I havent read their terms and conditions I am just commenting on your post text. we can do that too, it is not difficult for any provider to do this but if you are trading on 1 percent margins then that doesnt leave a lot of leeway.
Hope that helps.
remember to understand the risks of trading before you open a trade. If you would like any information on our terms and conditions please call our support desk or I can direct you to the right department.

regards Peter

It was me who started this FXCM debate, and now I see all you can try and do to railroad FXCM is by Following brokers recommendations now, LOL! Desperate. It doesn't change the fact that you can end up handing over your house to CMC for a spread bet that goes wrong!!!!!!

 

[Black Swan]

Hi Truth seeker,

Thanks for your post. I agree you did start the fxcm debate.
In next gen we have automatic margin stop losses. These are stop losses based on the margins for each product. We made this an automated service to protect clients as best we could. They are not guaranteed stop losses and we have debated this issue in previous posts but I think it demonstrates that we are trying to help clients protect themselves. You can also change these stop losses using chart tickets or from back office. You can also turn off the margin stop losses through preferences.
At the end of the day I still say that fxcm are not guaranteeing your account to not go overdrawn they are just stating their liquidation policy. They will liquidate your earlier to try to prevent your account going over drawn. If I am wrong about this I apologise, I havent read their terms and conditions I am just commenting on your post text. we can do that too, it is not difficult for any provider to do this but if you are trading on 1 percent margins then that doesnt leave a lot of leeway.
Hope that helps.
remember to understand the risks of trading before you open a trade. If you would like any information on our terms and conditions please call our support desk or I can direct you to the right department.

regards Peter

Ah-ha..I thought it was Tar who previously mentioned FXCM, I have the Twusty Seeker of his own bent version of Twuth on ignore, so no idea what he posts..

 

[tar]

At the end of the day I still say that fxcm are not guaranteeing your account to not go overdrawn they are just stating their liquidation policy. They will liquidate your earlier to try to prevent your account going over drawn. If I am wrong about this I apologise ...

"Although the margin call feature is designed to close positions when account equity falls below the margin requirements, there may be instances when liquidity does not exist at the exact margin call rate. As a result, account equity can fall below margin requirements at the time orders are filled, even to the point where equity account becomes negative. This is especially true during market gaps or volatile periods. FXCM will not hold traders responsible for deficit balances in this scenario, but clients should be cognizant that all funds on deposit in an account are subject to loss. FXCM also recommends that traders use stop orders to limit downside risk in lieu of using a margin call as a final stop."

 

[PC at CMC Markets]

Hi Tar,
so what I think they are saying is that instead of making margin call they will liquidate the position and this should be sufficient from you going overdrawn. but is it guaranteed that your account will never go over drawn. still not convinced by this explanation. but not sure we should be discussing fxcm terms and conditions on this forum. I am not legal department so if any body wants to clear it up even maybe somebody from fxcm happy for them to post here.

tks pc

"Although the margin call feature is designed to close positions when account equity falls below the margin requirements, there may be instances when liquidity does not exist at the exact margin call rate. As a result, account equity can fall below margin requirements at the time orders are filled, even to the point where equity account becomes negative. This is especially true during market gaps or volatile periods. FXCM will not hold traders responsible for deficit balances in this scenario, but clients should be cognizant that all funds on deposit in an account are subject to loss. FXCM also recommends that traders use stop orders to limit downside risk in lieu of using a margin call as a final stop."

 

[tar]

Hi Tar,
so what I think they are saying is that instead of making margin call they will liquidate the position and this should be sufficient from you going overdrawn. but is it guaranteed that your account will never go over drawn. still not convinced by this explanation. but not sure we should be discussing fxcm terms and conditions on this forum. I am not legal department so if any body wants to clear it up even maybe somebody from fxcm happy for them to post here.

tks pc

Hi PC

Just contacted FXCM's rep , hope he can comment here .

 

[Black Swan]

Hi Tar,
so what I think they are saying is that instead of making margin call they will liquidate the position and this should be sufficient from you going overdrawn. but is it guaranteed that your account will never go over drawn. still not convinced by this explanation. but not sure we should be discussing fxcm terms and conditions on this forum. I am not legal department so if any body wants to clear it up even maybe somebody from fxcm happy for them to post here.

tks pc

Jason's a good lad Peter, he may take up the issue on his own thread in the FX section of T2W if enough folk are that interested. But the major issue (as I pointed out a couple of pages back) is apples are being compared to pears here, CMC have 5000+ opps/securities to bet on, FXCM have currency pairs and a couple of commods. No comparison in terms of margin calls/position maintenance.