NFA Rule 2-43 (b): “first-in, first-out” (FIFO) II

BarroMetrics Views: NFA Rule 2-43 (b): “first-in, first-out” (FIFO) II

Yesterday I concluded that the intention of the new NFA legislation was in accordance with its charter to protect traders. The question I want to raise today is: how effectively have the implemented this intention?

Unfortunately the implementation was clumsy and inept. It was probably drafted by some lawayer who has little knowledge of how the FX broking industry works.

I know of at least two models that brokers use to track trades:

  • One model  is a net based position. What this means is when a trader takes multiple positions, the prices of the positions are averaged. As a result, traders are unable to hold multiple positions in the instrument or pair and Rule 2-43 (b) is not violated. A broker with this type of system is GFT.
  • Another model is a position based system. This means that a trader could close out each position as he determines and as a result contravenes the new regulation.  An example of a broker affected by the ruling is FXCM (see http://www.fxcm.com/lp3-nfa-fifo.jsp)

The result of the regulation on net based position brokers is that their clients are unable:

  1. To place OCO orders (one cancels the other, used when bracketing the market for breakouts).
  2. Stop Loss Orders (to limit your losses or risk in a given trade).
  3.  Limit Orders (to exit you out of your position when your target is hit).

As a result these brokers are suggesting that the clients open accounts outside the USA.  To this, some commentators have reacted with a certain degree of vehemence. For example:

” There are quite a few rumors and even some scare tactics going on about the recent changes to the NFA rules and some are even trying to make it sound so bad that if you don’t move your account overseas, you’re pretty much buggered as an individual trader. 

Don’t listen to the B.S.!

The NFA and CFTC are there for a purpose and that is to look out for you – by keeping the brokers in line!

By moving your account overseas to a broker that is un-regulated, you put yourself at a risk that is potentially greater than any.  Forex especially has already been a bit of a “Wild-Wild West” compared to futures and stocks, with plenty of charlatans running around and hosing good people with no one to answer to.

If you run into a problem with an un-regulated broker, who will you call?

Besides, the hype about Regulation 2-43(b) is primarily that – a load of scare tactics in my opinion.  Several brokers are using it to get people to move their accounts overseas – to unregulated firms – out of fear.  The NFA took action because they saw problems for individuals and took steps to address them.”

The emphasis above is mine and tomorrow I’ll explain why I disagree with the comments.

2 thoughts on “NFA Rule 2-43 (b): “first-in, first-out” (FIFO) II”

  1. Ray,

    I’m somewhat surprised there haven’t been a slew of comments on your two posts here. The one I did on my blog when the no hedging rules were announced generated 200+ comments, many of them very irrational and the rest trying to figure out why the others were so irrational. 🙂

    The whole “the NFA won’t let you use stops or limit orders” is such a joke. All they have done with these rule changes is to get retail forex trading in line with futures. For years folks have claimed retail forex is a scam because it’s not regulated. Now that it is they scream because of that.

    John Forman
    Author – The Essentials of Trading

  2. Hi John

    Thanks for your comment.

    The difference in the response is you have many more readers than I do(G).

    While what you say is true, there is real problem for FX brokers that use a ‘net positions’ algorithm.

    I asked a few legal beagle friends of mine in NY. I am told that the FX brokers who use a ‘net positions’ alogorithm will be breach of the regulations if they allow stop and limit orders.

    I’ll address this aspect when I conclude the series on Monday.

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