In the past, it was universally known that brokers would use slippage to their advantage. In essence, if there was a massive move in the markets that caused prices to move quickly, brokers would fill clients’ orders at a worse price. On the other hand, if the price moved in favor of the client (and in turn, against the broker), brokers would fill the order at the client’s requested price.
Pretty unfair eh?
Well, times are changing and finally, after years of allowing slippage to work in favor of brokers, the NFA is now forcing brokers to allow slippage to benefit clients as well!
The main purpose of this new ruling is to make sure that clients are treated fairly and for the creation of a fair market.
The truth is, this new ruling has already been in the making for a couple of years now. In 2010, Gain Capital received many complaints from its clients due to its Virtual Dealer Plug-in. Gain’s platform led to numerous losses for its clients due to unfavorable slippage, yet these same clients never benefitted when slippage worked in their favor.
Then, in 2011, FXCM was fined when it failed to ensure efficient execution of client orders and failing to treat customers equally when implementing price adjustments. In fact, FXCM even retained some profits when slippage worked in its favor!
During those instances, however, the NFA’s slippage rule was mostly just an informal requirement and not an actual regulation. This time around, the CFTC already formalized the rule, which was entitled NFA Compliance Rule 2-36: Requirements for Forex Transactions.
According to their official notice, the rule states that:
1. Forex dealer members should apply their slippage settings uniformly regardless of the direction in which the market has moved.
2. If the forex dealer requotes prices when the market moves against it, it must requote prices when the market moves in its favor as well.
3. Forex dealer members must ensure that their customers are aware of how they handle these price change circumstances prior to trading with them. To do this, they should provide full written disclosure of their policies.
Aside from that, forex dealer members must also ensure that its promotional materials that discuss the mechanics of its trading system do not include information that is misleading with respect to its price slippage and requoting practices.
This rule will come into effect by March 26, 2012 so forex brokers still have time to make sure that their services will be able to comply. Although the rule doesn’t state the repercussions for violators yet, it is certainly a step in the right direction for the forex market watchdogs as it promotes transparency in the industry.
Of course, these regulatory agencies could use your help, too! Do your part by making sure that your forex broker’s practices are compliant with these rules and report any unfair slippage and requoting practices to the CFTC or NFA. Constant vigilance is a must!