Jason Rogers
ET Sponsor
You make a great point. Billions of dollars in client funds is at risk without seg funds and insurance. It's important that traders be able to know with confidence that the money they deposit with their broker will be there for them when it's time to make a withdrawal. The brokerage industry has come under financial struggles over the years as a result of 3 major points:
- FCMs (primarily futures brokers) are struggling due to falling trade commissions as a result of price competition
- Low volatility has lowered trading volumes, thereby further lowering revenue earned by commissions or spreads
- Low interest rates have greatly reduced interest earned on client deposits as a source of revenue
According to a study by US consultancy Tabb Group published last month, US FCMs collectively made more than 40% of their income in this way in 2008 â more than they made from either clearing or execution. But with interest rates in the US and Europe at record lows, this source of revenue has all but dried up. Tabb Group said that, this year, investment income was expected to account for just 10% of US FCMsâ revenues and the pool of revenues available to US FCMs is set to almost halve from $7bn to $4bn. As the available revenue has shrunk, so too has the number of brokers. A study by PA Consulting in September found that the number of US FCMs registered with the Commodity Futures Trading Commission had dropped by 33% since 2008.
On top of all that, thereâs the rising costs of regulation, compliance, and other rising business costs such as health insurance, cost of living increases, etc. All of this has presented a challenging business climate for the brokerage industry. The resulting constant pressure can result in a firm making aggressive, losing bets with client funds (MF Global) or in an outright fraud (PFG Best).
It's hard to know the true health of brokerages that are privately held companies. In order to make the industry more transparent and allow traders to get a better view of their brokerage's financial health which could impact the safety of their funds, FXCM has made the following proposals to the NFA and CFTC:
- Require all FCMs and RFEDs to employ a top ten accounting firm
- Require all FCMs and RFEDs to publish a consolidated balance sheet and income statement once a quarter
Jason