Gain Capital, its Forex.com division and group CEO Glenn Stevens have been served with a complaint by the National Futures Association (NFA) for five counts of violation including adjusting customer leverage without notification, dictating unfair slippage parameters on MetaTrader and for using a number of unregistered introducing brokers. Gain say they will contest the charges.
According to a 20 page NFA document, dated June 30 2010, seen by theWeeklyFiX, the 2009 audit of Gain found that the firm engaged in leverage and margin practices that were harmful to its customers.
“For example, Gain adopted a policy whereby, every Friday, it lowered the leverage for all of its accounts that were allowed to trade at 200:1 leverage - which included the micro accounts - to a 100:1 leverage. The effect of this weekly adjustment was to increase the margin requirement on these accounts from 0.5% to 1%.”
It adds: “Gain did not disclose to its customers - either in account opening documents, on the firm's website, or through any other means - that, if their accounts traded at 200:1 leverage (which included all the micro account customers), they would be subject to these routine weekly leverage/margin adjustments.”
By under margin the accounts, it could therefore double the chances of stopping customer positions and could not give the customer the chance to deposit additional funds to maintain their position or choose which position to liquidate.
“Gain's practice of routinely and repeatedly adjusting leverage and margin requirements on Fridays, without giving affected customers adequate prior notice of the adjustment, denied customers the opportunity to deposit additional funds to maintain their open positions or, at the very least, select which positions to liquidate, and caused them to experience significant losses in their accounts. As such, Gain breached its obligation to uphold high standards of commercial honour and just and equitable principles of trade,” says the document.
“Gain justified the Friday leverage/margin adjustment as a means of reducing weekend market risk for accounts trading at 200:1 leverage.”
What is not clear from the document is whether margin requirements were adjusted on just some currency pairs or on all currency pairs.
Secondly, according to the document, the retail version of the MetaTrader platform on Forex.com, had plug ins that allowed Gain to dictate the slippage parameters and at what price a customer's market order would be filled depending on the size of the market move that occurred after placement but before execution of the order.
“Gain's slippage parameters dictated whether, and at what price, a customer's ‘market order’ would be filled depending on the size of the market move that occurred after placement but before execution of the order. With Gain's slippage parameters, if a customer placed an order at X price and before the order was filled the market price moved within two pips of X, then the customer's market order would get filled at X, not the prevailing market price. On the other hand, if the market moved greater than two pips, then the customer's order would be rejected,” says the NFA. This could allow Gain to make two pips profit which should have been the customer’s profit.