Say Adios To FIFO

We are traders too, and we are as fed up as everyone else is with the games most brokers play. That’s why we built Automata FX on a simple principle…what you see is what you get. That’s the type of Forex brokerage everyone deserves!

We’ve heard about some pretty amazing trading “anomalies” from traders using other brokerages and we’ve suffered through most of them ourselves in our own trading, that is, before we built our own non-nonsense brokerage. If you’re not familiar with the FIFO rule and how it is selectively applied by some brokerages, or if terms like requoting, slippage or repricing are foreign to you, then you are either one of the lucky few who haven’t encountered these shenanigans or, you are completely new to trading. Either way your trading experience will be vastly different here at Automata FX than it will be if you trade anywhere else. For everyone else, we’ve felt your pain. Grab a stiff drink and let’s commiserate for a bit, shall we?

What Is FIFO And Why Is It Such a Problem

The FIFO (First In First Out) rule is an NFA regulation that, as the name implies, forces a trader to close the oldest trades first when there are several open trades on the same pair and of the same size. Since the introduction of the FIFO Rule by the NFA in 2009, the web has been abuzz with complaints from traders who understand how important hedging strategies are for recovering from trades that have gone sour. We’ll offer some quick background first and then explain why we are so darned proud to not be a part of the FIFO mess.

Fair warning…the next paragraph offers some background that may not be suitable for people who are easily bored, but we’ll try to make it snappy – It’s important to understand that the FIFO rule was born (sort of) from the Dodd-Frank Act. The Dodd-Frank Act was enacted to regulate the derivatives market after the abuse of Credit Default Swaps (CDS) by the worlds largest banks. Let’s also not forget that the collusive relationships between the banks and the rating agencies resulted in overvalued Mortgage Backed Securities (MBS), which misled investors and eventually crushed the US economy and subsequently, the economies of many other countries. The CFTC then used the highly sensitive regulatory environment in 2009 to put an end to hedging by retail traders and mandated that the NFA enforce a no-hedging policy. Rather than simply mandating a no hedging policy, the NFA created the FIFO rule, which ostensibly ended hedging, but did so in a way that created mass confusion. Now, many brokers apply FIFO to your trade orders, but when you receive a margin call, some brokers will simply close all of your trades at once, rather than just closing enough of the first trades you opened to free up your margin. Seems unnecessarily harsh, doesn’t it? We certainly think so! This selective application of the rule is clearly meant to create an advantage for the brokers who undoubtedly are trading against their clients on B-Books. Click Here to Learn About The Hazards of Trading with a B-Book Brokerage.

As if the FIFO rule wasn’t already arbitrary and unfair enough, brokers themselves are not actually subject to it in their own trading. Yep, you read that right. The rules that apparently apply to the retail trader, don’t apply to the brokerages when they trade. Maybe this has something to do with the fact that the NFA is actually a self regulatory body of brokerages. So, if the FIFO rule was in fact equitable and truly intended to “help” the retail trader, as the supporters of the rule claim, then why would the NFA not subject the brokers that are members of the NFA to the same rule? Is it possible that they understand how advantageous it is to be able to using hedging strategies? We think the answer is pretty clear.

Long story short, the retail trader has been severely handicapped by the FIFO rule to the advantage of the brokerages that “adhere” to it. Go figure. Fortunately, the FIFO rule only applies to brokerages that submit to the NFA, and these are typically just the U.S. brokerages. The good news for both of us is that we at Automata FX absolutely refuse to submit our clients to unreasonable regulation. Hedge away friends!

What Are Slippage, Requoting And Repricing And How Are Some Other Brokerages Using These Tricks To The Detriment Of Their Clients?

The term “slippage” refers to a situation where an order is filled at a price that is different than the requested price. By contrast, the term “requote” means that the broker is either not able or not willing to give you a trade based on the price you submitted when you placed your trade order. Typically, this occurs with market orders. You see the market price, you like it, you submit your order at the market price, and the brokers either denies the order, denies it first and then offers a “requote” price, or fills the order at a different price, thus “slipping” the trade. Let’s be clear, these are sometimes natural market occurrences that can occur in fast moving markets, and while there are order types that can control how much slippage a trader can experience, there are no order types that can guarantee both the trader’s price and the execution at that price as well. This natural occurrence is not, however, the kind of slippage and requoting that foments the irritation that is so often voiced by traders. Traders often feel cheated when they know that despite the fact that their brokerage advertises real-time executable prices, their brokers may be sending trades to a dealing desk to be manually reviewed. This is where their orders are requoted at a worse price despite the fact that the market was moving in their favor, or unnaturally slipped by 10 pips or more, with no excuse. If your broker is employing a dealing desk and software that undermines your trading with re-quoting, slippage or outright rejections of your orders, do yourself a favor and part ways with them today!

The last trick we’ll address here is essentially theft on the part of some of the brokers and it absolutely enrages us. We’ll tell you about it if you promise to leave your brokerage if you ever catch them doing this to you. Promise? Great!

This last underhanded maneuver is referred to as “re-pricing”. Re-pricing occurs when you execute a trade, it appears to have been executed at the price you ordered and then, sometimes minutes later, the order is changed in your inventory to appear as though it was executed at a worse price. This becomes more apparent when trading with software that maintains your inventory at the price reported by the broker at the time of the trade, because when a trader later tries to reconcile the record of their trades on their software with the trades that the broker lists on their records, the execution prices will not align. That’s a big problem!

Ultimately, given our experiences as traders, we’ve learned that even the best strategies are only as good as the integrity of the broker executing the trade orders. Great strategies can be completely ruined by unethical practices on the part of the broker, while on the other hand, great strategies coupled with great execution can make a trader very wealthy. We try not to think about how many traders will inevitably lose their trading accounts to deceptive brokers. We know that the numbers will be staggering and just plain depressing, but we hope that we can educate as many traders as possible about the pitfalls they may face with unethical brokers and offer a true alternative. It is with this understanding that we have created Automata FX with the hopes of offering our traders the best trading tools, the most powerful strategies to master any market, and the most honest and transparent trade execution available, anywhere!

High Risk Investment Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss in excess of your deposited funds and therefore, you should not speculate with capital that you cannot afford to lose. Before deciding to trade the products offered by Automata FX Ltd. you should carefully consider your objectives, financial situation, needs and level of experience. You should be aware of all the risks associated with trading on margin. Automata FX Ltd. provides general advice that does not take into account your objectives, financial situation, or needs.The content of this Website must not be construed as personal advice. Automata FX Ltd. recommends you seek advice from a separate financial advisor if you have any doubts.