FXCM Downfall NFA Witch-hunt or Self Inflicted


FXCM Downfall

Many will continue to debate what caused FXCM downfall in the US. Was it a hostile regulator out for blood? Or, was it management that was too careless in how they ran things.


FXCM Downfall Started Prior to SNB

Many feel that FXCM troubles happened at the now infamous SNB event two years ago. Some would argue that is prior that FXCM had a reputation problem. In the days when FXCM was openly a market maker, they were often accused of lousy trade execution practices. The accuracy of these claims is irrelevant but the perception that as a market maker FXCM was not playing fair.

STP Model is Introduced

In 2009, the whole STP/ECN model was being introduced to the industry, and this was an opportunity for FXCM to change its perception with the public. FXCM in a very public way announced that it will no longer be a market maker but will STP all transactions to its counterparties. This ended up being a big marketing success and re-established trust between FXCM and the trading public. With the STP model comes added cost and a possible reduction in revenue. When connected MT4 a “bridge” is required to transact with Liquidity Providers. At some point management at FXCM saw the reduced income and said let’s own our Liquidity Provider. One wonders why no said this is probably not a good idea.

FXCM Ignored Risks

Forex Brokerage has many different risks. The obvious being a transactional and counterparty risk. Another threat is the regulatory risk. A firm the size of FXCM and with its resources should have been focused on avoiding these risks. It is unthinkable that FXCM would get caught up in the Fortress Prime debacle, but it did. FXCM ended up writing off nearly $7 million. Someone at FXCM received a deal from Fortress Prime and said too good to pass up. How is that no one at FXCM questioned an unregulated counterparty offering near choice spreads.

When it came to regulatory risks, here again, FXCM dropped the ball. Did FXCM have a target on their back from the NFA? Probably, but even more, the reason to be incredibly vigilant when it comes to compliance.  All the regulatory issues FXCM faced could have been dealt with.

Mistakes Responding to SNB

Right after the SNB event, FXCM was on an all-out campaign to save the brokerage in the US. In doing so, they started to sell off all their most valued assets including DailyFX and FXCM Asia. For some reason, the focus was keeping the US Brokerage active. This would have been one of many opportunities to exit the US and build the global brand. The growth and revenue prospects were limited in the US market. The regulatory environment was hostile at best.

In the end, FXCM downfall came as the result of a management team that was too set on staying in the US, and regulators that were intent on getting rid of another broker from the US market.