The CFTC recently adopted the NFA’s interpretative notice to NFA Compliance Rule 2-36 regarding price slippage and price re-quoting. Rule 2-36(b)(1) prohibits a Forex Dealer Member (“FDM”) from engaging in a forex transaction that cheats, defrauds or deceives any other person. Similarly, Rule 2-36(b)(4) prohibits an FDM from engaging in any manipulative acts or practices regarding the price of any foreign transaction.
When a customer’s order reaches an FDM’s trading system, the price being offered on the system may be different than the price offered at the time the customer first submitted the order. The difference between these two prices is commonly referred to as slippage. Because the FDM takes the other side of an order, if the market movement is unfavorable to the customer, it will be favorable to the FDM and vice versa.
In order to prevent re-quoting the current price to the customer to confirm whether the customer wants to still place the order, FDMs have built in and clearly disclosed slippage parameters to customers that permit the execution of the order if slippage is within the established parameters. As a result, some FDMs have set asymmetrical parameters that makes it more likely that the customer’s order would be filled when the market move is unfavorable, which benefits the FDM.
The NFA’s interpretative guidance does not prevent FDMs from setting symmetrical parameters. However, in order to avoid violating NFA Compliance Rule 2-36 when addressing these price changes, FDMs must adhere to the following:
- FDMs must apply the slippage setting uniformly regardless of the direction the market has moved;
- If the FDM re-quotes prices when the market moves against it, it must re-quote prices when the market moves in its favor;
- FDMs must ensure that the customer is aware of how the FDM handles these price change circumstances prior to trading with the FDM by providing full written disclosure of its policy, including the information outlined in the interpretive notice. For existing customers, FDMs must provide written disclosure prior to the effective date of this interpretive notice.
- FDMs must have written procedures that outline the manner it handles price changes; and
- FDMs must ensure that its promotional material does not include information that is misleading with respect to its price slippage and re-quoting practices.
The NFA’s position is that, although the interpretive notice becomes effective on March 12, 2012, any practices outlined in the notice are currently violations of Rule 2-36.