When you run a Forex brokerage, you get approached by every prime of prime time and again. They offer you multi-bank liquidity usually at a per million rate that can vary depending upon volume. Once you factor in bridge fees, this often is north of $10 per million up to $20 per million. Spreads usually are variable, but Prime of Prime will try and come in with spreads starting below 0.5 PIPs. Fortress Prime wanted in on the prime of prime market, and they were willing to offer anything and everything to get their market share fast.
Back in 2014, one prime of prime was going around with deals that sounded too good to be true. They were offering spreads between 0.2-0.4 with a per million charges of $8.50. What was the catch? They were not regulated in the US, UK or Australia but they claimed to be controlled in the UAE and had Central Bank approval. If I remember correctly, they also claimed that they were backed one of the princes or a sultan for over $100 million. Fortunately, we decided not to proceed with Fortress Prime which ended up in one of the worst blow-ups the industry has ever seen.
Not so fortunate were the numerous brokers that were sold on the liquidity and the incredibly low spreads. Fortress Prime was an example that retail clients aren’t the only victims of Forex fraud. Even FXCM fell victim to the enticing offerings of Fortress Prime and in the end, had to write off over $6 million.
FX Brokerage is incredibly competitive and outside of branding, marketing and sales it comes down to a competitive spread offering. The management of Fortress Prime understood this all too well. What they didn’t understand was how to handle risk management when it came to ordering flow from other brokers. A prime of prime is supposed to be a connection between retail brokers and liquidity providers which are usually banks. Retail brokers use prime of primes because it is challenging to qualify for a prime brokerage account and securing liquidity is slow, expensive and challenging.
What Fortress Prime failed to do was prepare for toxic order flow, and they were giving out these unbelievable deals without checking feasibility. Not every retail forex broker is going to send you all their order flow, and many have sophisticated systems to separate out the toxic flow and send that out to the prime of prime. For Fortress Prime this ended up being a recipe for disaster. The P&L was not going their way, and the deals their clients had were not sustainable. It wasn’t long before clients of Fortress Prime were submitting withdrawals and getting no response.
Fast forward to early 2016, and Fortress Prime was announcing they were raising $200 million from their royal family connections and that everything would be sorted out soon. The next thing we heard was that the FBI was seeking the largest shareholder Hamed Al-Barki for unrelated real estate fraud in the US. He would later be picked up by UAE authorities last July. No investment ever came, and clients weren’t getting any answers on their funds.
The Forex industry learned a hard lesson from the Fortress Prime debacle. Brokers can also be victims, and that systemic risk is a severe problem with a prime of the prime model. It is the responsibility of brokers to make sure due diligence is done on prime of primes. The industry needs to establish standards with counterparties to ensure that an unregulated broker can’t do this much damage again.