NFA Forex Dealer Dead Pool

[forex scholar]

The new capital numbers are out. Here is the most comprehensive list available of the industry's financial status. I have included every single registered Forex Dealer Member and listed their Adjusted Net Capital. Since I first started posting about the NFA proposal over a dozen firms have gone out of business. Two others have merged and several others are staring death in the face. Here is the direct link for the CFTC capital reports: Financial Data for FCMs

Firms Under $5 Million
All these smaller firms are reporting adjusted net capital below the $5 million mark as of the latest CFTC report. Some should be able to raise the necessary capital. Others clearly will not. Which ones can and cannot will be anybody's guess. Already one of these firms, One World Capital, is not allowing customers to withdraw money.

Hamilton Williams ($1,100,000)
IG Financial Markets ($1,014,000)
One World Capital ($1,170,000)
Wall Street Derivatives ($1,237,000)
SNC Investments ($1,247,000)
Advanced Markets ($1,269,000)
Direct Forex ($1,406,000)
Solid Gold Financial ($2,010,000)
CMC Markets ($2,806,000)
E FX Options ($3,055,000)
Forex Club ($3,308,000)
GFS Futures & Forex ($3,403,000)
MB Trading ($4,452,000)
Easy Forex ($4,628,000)

Firms Under $20 Million
These medium sized firms all meet the coming minimum adjusted net capital requirement. However, there are other capital requirements that as market makers these firms will need to meet in addition to the minimum $5 million. Most firms will likely need $10 million to be in compliance with the NFA's rules. Clearly firms like Money Garden are not in the clear just yet.

Money Garden ($5,505,000)
HotSpot FX ($6,023,000)
I Trade FX LLC ($6,645,000)
IKon ($6,736,000)
IFX Markets ($9,078,000)
CMS Forex ($11,255,000)
ODL Securities ($12,642,000)
PFG Forex ($14,742,000)

Firms Over $20 Million
These are the most well capitalized firms in the industry and two years from now may very well be the only firms left in the industry if Dan Roth and the NFA have their way and increase cap requirements to $20 million.

FX Solutions ($23,062,000)
Interbank FX ($27,110,000)
Gain Capital (36,679,000)
Forex Liquidity ($38,317,000)
GFT Forex ($48,302,000)
FXCM ($60,268,000)
Oanda ($156,467,000)

Firms No Longer in Business
These are the firms that have gone out of business since I began posting on the forum. That's a quarter of the industry in just a few months. And one of those firms, Nations LLC, has gone into bankruptcy and customers can't get their money back- and may never get their money back.

Bacera Corporation
Cal Financial Corporation
FiniFX
Forward Forex
FX Option1 Inc.
Nations Investments
Performance Capital International
Spencer Financial
Tradex Swiss AG
Trend Commodities
United Global Markets
Worldwide Clearing

Firms that Merged
These are the firms that could not make the new capital requirement on their own and decided to merge with larger players as a result.

American National Trading Corp (Merged with PFG)
Royal Forex Trading (Merging with IKON)

Summary
It is a very turbulent time in the forex industry. My advice is what it has always been, do not trade with a poorly capitalized firm. And if you must, at least wait until after the December 17, 2007, deadline before putting any money on deposit with any firm that is not meeting the current minimum capital requirement.

[forex scholar]

The Boston Business Journal ran another article on the shenanigans going on over at Tradex Swiss Ag:
Immigrants trapped in forex mess - Boston Business Journal:

Like most Swiss firms Tradex Swiss AG is not regulated and customers have been burned as a result. Please note the following Swiss firms ARE NOT REGULATED and should be avoided lest you end up like the poor sods at Tradex Swiss AG:

ACM
Dukascopy
WestCapFX
MIG
GFX Group (Forex.CH)
Crown Forex


Immigrants trapped in forex mess
by Jackie Noblett Journal staff
Z. Song was amazed by the size of her friend's new house.
The Westford resident asked her friend, who never had a full-time job, how she and her husband were able to buy their new home in Acton. The friend said her husband invested money with Tradex Swiss AG, a Boston money manager that specialized in foreign exchange trading. Song recalls being told she should trade, too.

"They would never lose money, always make big money," Song said in an interview.

Little did Song know that her friend's husband, David Qi, was getting paid, according to his lawyer, to refer friends to the unregistered forex trading company. Song also maintains she had no idea that, just three months after her initial investment, her money would be locked up in a legal battle involving Tradex and its regulators. Tradex is now being investigated by governments on both sides of the Atlantic for trading currency without being properly registered, and over $4 million in investment accounts hangs in the balance.

The rest of the article requires a subscription but essentially contains tales of misery and woe from traders whose funds are frozen in the shuttered swiss brokerage. Of interest in this sordid tale are the actions of Tradex salesmen who were STILL soliciting customers to trade even as Tradex was going under!

In the midst of the investigation, email communications provided to the Boston Business Journal by former Tradex investors show that company continued to solicit business from customers.
A July 25 e-mail from a Tradex broker said that the operation had opened an account at Sovereign Bank for future trading. "In the future, please wire your fund to this account," the e-mail states.

So basically Tradex was encouraging traders to purchase tickets on the Titanic right after it had struck an iceberg. Talk about a complete lack of ethics.

This is a very important point to remember. Small forex brokers that are in financial trouble rarely let customers know they are in trouble ahead of time. Indeed, as Tradex shows, they will go so far as to cover up that trouble to their own customers and encourage them to keep sending in money even when all is lost.

This is why traders should never invest money with a poorly capitalized/unregulated firm. These firms can unwind rapidly and by the time the average trader finds out it is way too late to do anything about it.

[forex scholar]

Well the folks over at IKon can't be too happy with the news that the NFA has filed suit against RFXT and accused them of fraud in a new complaint:
BASIC Case Summary

IKon recently merged with former Dead Pool Member Royal Forex Trading and on RFXT's website they are listed as being a "division of IKon Global Markets."

So how does IKon feel about a division of its company being charged with the following:
"CHEAT, DEFRAUD, DECEIVE FOREX CUSTOMERS"

The NFA summarizes their complaint as follows:

On September 14, 2007, NFA issued a Complaint charging Royal with using misleading and fraudulent promotional material; failing to uphold high standards of commercial honor and just and equitable principles of trade; and failure to collect and maintain the required security deposit. The Complaint also charged Royal and Marsch with failure to supervise.

Perhaps the most illuminating aspect of the NFA Complaint against RFXT is this doozy about how Royal Forex clears its trades. NFA cites an IB that RFXT uses and in the process reveals how RFXT clears its trades:

InterBank Group's website also contained statements that falsely implied that customers would be trading in the interbank market. For example, the website included such claims as, "InterBank Group clients routinely benefit from the size and strength of one of the world's largest online foreign exchange providers," and "with access to over $1 billion in liquidity from the world's top FX banks, InterBank Group is able to pass along bank level pricing to our clients through our clearing firms."

In reality, customers hardly enjoy "bank level pricing" as InterBank Group widens the spreads from the prices that it receives from Royal by as much as 39 pips. Further, Royal offsets its forex exposure with IFX Markets, Inc., an NFA Member FDM, which in turn offsets its exposure with IFX Markets, Ltd. Thus, it was misleading for InterBank Group to suggest that its customers receive the same prices that banks and other institutions do, as the spread InterBank Group charges its customers is widened from the spread on prices that IFX Ltd. receives from its counterparties.

Lol! This is another downside of trading with poorly capitalized firms. Firms like RFXT do not have the kind of trade volume needed to get access to the best prices in the interbank market (although that doesn't stop these same firms from exagerrating their access to "interbank pricing.")

As it stands Royal Forex trading is clearing its trades through IFX? How on earth are you going to get good pricing trading with RFXT when they have to go cup in hand to one of their competitors to get their quotes? Why can't RFXT get a line of credit with a bank like the larger players get? The fact that they can't should send up red flags that these firms are far riskier to trade with than the more well established players.

The more you learn about how smaller forex firms operate (the fraud, the insolvency, the lousy pricing) the more traders should thank their lucky stars the NFA has raised capital requirements to $5 million because this industry is badly in need on an enema.

[forex scholar]

The NFA made another announcement about the coming increase in Capital Requirements stated below:

NFA announces effective date for increased minimum net capital requirements for Forex Dealer Members

Beginning on December 21, 2007, NFA Forex Dealer Members (FDMs) will be required to maintain a minimum net capital requirement of $5 million. The increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). The amendments to NFA Financial Requirements Section 11 and the Interpretive Notice entitled "Forex Transactions" were approved by the Commodity Futures Trading Commission (CFTC) in late September.
"We have taken these steps because a Forex Dealer Member's activities create greater financial risks than the type of transactions involved in traditional exchange-traded futures and options," says NFA General Counsel Tom Sexton. "The increased capital requirement will result in greater customer protection."

FDM capital requirements have been a great cause of concern recently. During the past ten years, NFA has issued 11 emergency enforcement actions against FDMs for failing to demonstrate compliance with NFA financial requirements. In addition, since March 2007, nine different FDMs have fallen under the early warning requirement of $1.5 million.
"Customers trading off-exchange forex do not receive a priority under the Bankruptcy Code in the event of a firm's insolvency," says Sexton, "so it's crucial that FDMs have adequate capital."

NFA is closely monitoring its FDMs to ensure that those firms that wish to continue operating past December 21 will take the necessary steps to meet their new financial requirements.

The following firms, according to the latest CFTC Report, do not meet the coming $5 million requirement:

Hamilton Williams ($1,100,000)
IG Financial Markets ($1,014,000)
One World Capital ($1,170,000)
Wall Street Derivatives ($1,237,000)
SNC Investments ($1,247,000)
Advanced Markets ($1,269,000)
Direct Forex ($1,406,000)
Solid Gold Financial ($2,010,000)
CMC Markets ($2,806,000)
E FX Options ($3,055,000)
Forex Club ($3,308,000)
GFS Futures & Forex ($3,403,000)
MB Trading ($4,452,000)
Easy Forex ($4,628,000)

[forex scholar]

The last few weeks I have been enjoying the NFL season and thus my posts have not been as prolific as they were over the summer. However, it has come to my attention that the NFA has actually increased the minimum capital requirement to $10 million, NOT $5 million. Huh? Allow me to explain.

If you look at the text of this NFA Notice (National Futures Association | News Center) you'll see the nfa says:

A Forex Dealer Member must have $5 million in adjusted net capital as of December 21, 2007. This increase also raises to $10 million the amount of capital required for a security deposit exemption under NFA Financial Requirements Section 12(b). Since this is a significant change to the qualifications for the exemption, Members that are currently operating under Section 12(b) should notify NFA's Compliance Department whether they intend to continue using the exemption.

What is this exemption you say? The exemption allows firms to offer customers margin of lower than 2%. In fact, the standard margin rate for customers in the forex industry is 1% with some firms like Money Garden offering margin as low as .25%.

And so the question is will these firms be able to meet the new $10 million requirement, or, will they have to change their entire business model and dramatically raise margin requirements on all their customers?

It's safe to say if they do not have the mimumn $10 million (and let's not forget there are many other capital requirements forex brokers have to meet in addition to the minimum) they will have to raise margin requirements on all their customers which will in turn result in many, if not most, of their customers to close their accounts so that they can trade somewhere else at a better margin level.

Once again, this calls into question just how stable are these firms? The NFA is turning this industry upside down. There is no way of knowing who will survive in December. Traders need to beware. These are the firms most vulnerable to these coming cap increases:

Hamilton Williams ($1,100,000)
IG Financial Markets ($1,014,000)
One World Capital ($1,170,000)
Wall Street Derivatives ($1,237,000)
SNC Investments ($1,247,000)
Advanced Markets ($1,269,000)
Direct Forex ($1,406,000)
Solid Gold Financial ($2,010,000)
CMC Markets ($2,806,000)
E FX Options ($3,055,000)
Forex Club ($3,308,000)
GFS Futures & Forex ($3,403,000)
MB Trading ($4,452,000)
Easy Forex ($4,628,000)

If you are trading with one of these brokers be sure to ask them if they are going to meet the TEN MILLION DOLLAR REQUIREMENT and if not, when will they start raising their margin requirements on their customers?

[forex scholar]

According to the most up to date CFTC Report on file for Hamilton Williams (dba Velocity4x) this firm's future is in grave doubt. Hamilton Williams only has $1,100,000 in adjusted net capital. That leaves them a scant 100 grand over the required adjusted net capital requirement. How dire is the financial situation over at Velocity? Dire enough that the NFA last spring charged Hamilton Williams with a bucketful of financial violations:

http://www.nfa.futures.org/BasicNet/Case.aspx?entityid=0358241&case=07BCC00015&contrib =NFA
• C.R.2-10 - RECORDKEEPING FCMS/IBS
• F.R.SEC11(b)NEW - FDM TAKE CONCENTRATION CHARGE-UNAFFILIATED
• F.R.SEC11(a)NEW - FDM MAINTAIN ADJUSTED NET CAPITAL
• F.R.SEC12NEW - SECURITY DEPOSITS FOR FOREX TRANSACTIONS WITH FOREX DEALER MEMBERS

This is pretty serious stuff. This isn't like getting slapped with a fine for failing to put an asterisk on a marketing brochure. These allegations go right to the heart of whether or not Velocity4x is even viable as a company. Here are some statements from the NFA's Complaint:

"Hamilton failed to take the applicable concentration charge on transactions with unregulated counterparties. This failure resulted in the overstatement of Hamilton's net capital by over $275,000."

"Hamilton failed to maintain the required minimum adjusted net capital as of July 31, 2006."

"Hamilton was below its minimum adjusted net capital requirement from July 31, 2006, through September 4, 2006."

"Hamilton failed to collect and maintain the required security deposits as prescribed by NFA Financial Requirements Section 12(a)"

Wow. And these guys are going to be able to come up with $10 million two months from now? (Velocity offers 100:1 leverage which means they'll need $10 million MINIMUM to stay in business.) Where is this money going to come from? What venture capitalist is going to put his money into a company that has just been charged by the NFA with a whole host of bookkeeping violations that could get it shut down? I fear the future won't be bright enough for Hamilton Williams' execs to have to wear shades.

[forex scholar]

The New Cap Numbers are out! With the exception of MB Trading (now at $5,190,000) there has been no indication from the poorly capitalized firms on this list that they are shoring up their financials in preparation for the big cap increase to $5 million due in just 6 weeks. In fact one firm, Direct Forex, is reporting that they are in violation of the minimum capital requirement by $276,000!

Meanwhile, the $10 million minimum capital requirement for firms offering 100:1 leverage is proving to be a big barrier as well. How that plays out remains to be seen. But things might really get wild in the forex industry the next couple of weeks.

The following firms, according to the latest CFTC Report, do not meet the coming $5 million requirement:
http://www.cftc.gov/files/tm/fcm/fcmdata0907.pdf

Direct Forex ($762,000)
IG Financial Markets ($1,017,000)
Advanced Markets ($1,216,000)
Wall Street Derivatives ($1,231,000)
SNC Investments ($1,301,000)
One World Capital ($1,408,000)
Hamilton Williams ($1,453,000)
CMC Markets ($2,001,000)
Solid Gold Financial ($2,101,000)
GFS Futures & Forex ($3,078,000)
E FX Options ($3,752,000)
Forex Club ($3,989,000)
Easy Forex ($4,351,000)

The clock is ticking. Are your funds safe?

[forex scholar]

The Ten Million Dollar Capital Requirement affects ONLY those firms that trade at a margin level of greater than 100:1

So which firms in the Dead Pool are directly affected by this? Well, not many. IG index would be affected if they actually solicited customers in the U.S. but it appears their U.S. registration is just a shell. GFS Futures & Forex offers 200:1 mini accounts on their website. Thus this rule could have a major impact on their business. But the firm that stands to lose the most is Money Garden. MG Forex is notorious for offering 400:1 "Flex" accounts and this new rule could turn the firm upside down. Here is a quick rundown after looking at each firm's website.

IG Financial Markets ($1,017,000) [700 to 1 leverage]
Advanced Markets ($1,216,000) [100 to 1 leverage]
Wall Street Derivatives ($1,231,000) [Unknown]
SNC Investments ($1,301,000) [100 to 1 leverage]
One World Capital ($1,408,000) [100 to 1 leverage]
Hamilton Williams ($1,453,000) [100 to 1 leverage]
CMC Markets ($2,001,000) [100 to 1 leverage]
Solid Gold Financial ($2,101,000) [100 to 1 leverage]
GFS Futures & Forex ($3,078,000) [200 to 1 leverage]
E FX Options ($3,752,000) [100 to 1 leverage]
Forex Club ($3,989,000) [100 to 1 leverage]
Easy Forex ($4,351,000) [50 to 1 leverage]
Money Garden ($5,507,000) [400 to 1 leverage]
Ikon ($7,562,000) [Unknown]

[scorpion]

Well, thanks forex_scholar for doing research for us. I don't know what agenda you're holding on to, or whether you come from FXCM to spread your propaganda, but I will definitely make some use of information you have researched.

[forex scholar]

Looks like the Scholar missed this big development. Gain Capital bought out Direct Forex. So scratch them from the list. Here is the official Direct Forex Statement:

Dear Direct Forex Customer,

As you already know, Direct Forex LLC (“Direct Forex”) will be transferring the custody and clearing of all forex accounts to Gain Capital on Wednesday, August 29th 2007. Please keep in mind that it is important to liquidate any positions by the close of business, 4:00PM (CDT) on the aforementioned date. All open positions will be liquidated to facilitate the transfer of the accounts to Gain Capital.

For your convenience, we have attached a link that allows you access to Gain Capital’s two proprietary trading platforms. These platforms can be accessed through Direct Forex’ website (www.directforex.com) and by clicking on the link http://www.directforex.com/products/demo1.aspx. Please take time to familiarize yourself with these new trading platforms in order to minimize any disruption to your trading.

Please keep in mind that Gain Capital is in the process of integrating MetaTrader 4, and is confident that the system will be available on or around October 1st, 2007. Direct Forex appreciates your business and will keep you informed of any updates.

Sincerely,
Direct Forex