Terminology to know


Adjusted Net Capital (ANC): The CFTC developed this term to represent the available capital of a futures commodities merchant (FCM) firm to meet its capital requirements. The calculation is complicated. Roughly speaking, the ANC represents all the current assets of the FCM minus all of the liabilities of the firm. Current assets are, of course, assets that can realistically be turned to cash within a year. Liabilities are what a firm owes and this includes client deposits which the FCM holds. FCMs have a requirement to report this figure every month. There is at least a two month delay between the close of the month and when the CFTC publishes this data.

Net Capital Requirement (NCR): This figure, as the name states, is the capital amount that an FCM has to maintain to meet its regulatory obligations. New CFTC regulations have started to require a certain percentage of client funds to be set as the net capital requirement. This figure can be used as a proxy of how big is the book of business of an FCM: the bigger the NCR, the bigger is the FCM in terms of traded volume and/or Forex client funds under custody.

Key ANC Ratio: This ratio is calculated as ANC divided by NCR. It is used by Forex Datasource to determine how many times the ANC is bigger than the NCR. The bigger the Key ANC Ratio, the better capitalized the FCM. The Key ANC Ratio for the top 20 FCM’s averages between 4 – 6.

Average Trader Recommendation (historical): Forex traders are asked to evaluate how likely they would be to recommend to others a Forex dealer they have used or are using, using a 1 to 10 scale (1 = low, 10 = high). In the Historical recommendation category are included votes from current clients and former clients.

Average Trader Recommendation (last 3 months): This category is similar to the historical recommendation. The only difference in this category is that Forex Datasource does not count recommendations that are more than 90 days old or any recommendation made by former clients. This category is useful to determine how popular a firm is currently. The historical recommendation statistic allows someone to appreciate how popular a firm has been over time.

Service Rating: This rating is an average of the evaluation that current and past clients have given to the Forex Broker Dealer in the 3 service categories: Client service department, accounts department, and funding department.

Trading Platform Evaluation: This evaluation is clear: current and past clients evaluate their satisfaction on the Forex Broker Dealer's platform(s).

Beneficiary Name: This category indicates the name of the person or entity who legally owns funds when a client opens a Forex brokerage account. In the US, Forex Broker Dealers are required by the NFA to have pooled client funds separated from operational funds of the firm. In the 2005 bankruptcy case of Refco FX, client funds were frozen for more than one year by a bankruptcy judge because client deposits were considered a property of Refco FX, not of the clients. Of course, Refco FX was not registered by the NFA, so the NFA tries to prevent situations where client deposits will run into trouble, such as the bankruptcy of an FCM. In the futures market, the NFA allows segregated accounts because the clearing of trades is done by one entity, the exchange, thus adding a measure of security for the market as a whole. Still, people who do not trust that the NFA will catch a FCM bankruptcy fast enough may prefer to open “segregated Forex accounts”, which are offered outside of the US. We would only recommend considering a segregated Forex account if the broker dealer is regulated by a reputable regulatory body, such as the UK’s Financial Services Authority (FSA).

Algorithmic trading: This term is popular among the more sophisticated Forex traders. Algorithm trading refers to automated trading. Someone with programming skills has set conditions in code format that a trading platform or a black box (program they developed) executes automatically or semi-automatically directly with the trade server of a Forex dealer. The better known advantages of algo trading are the speed of execution that can be achieved and the fact that a machine takes out the emotion of buying and selling. The more sophisticated algo traders use algorithms to do much more than just order execution. Algorithms can also identify trading opportunities, monitor trading conditions, evaluate trade execution, reconcile trades, etc. Algo trading is something that has become very popular, regardless of the size of the account.

API trading: API stands for application protocol interface. This is a nerdy way to say that you have the code to communicate with a particular application. The API typically is provided by a Forex dealer, enabling the trader to write strategies that are communicated directly from the trader’s computer to the dealer's trade servers – often bypassing the dealer’s trading platform. Again, speed of execution is one of the main reasons why API trading exists. Also, sophisticated traders with a black box strategy and multiple accounts in different Forex dealers tie the black box to execute with multiple dealers through API’s. CTA’s and hedge funds are typically the main users of API technology.

Deposit currencies: When opening a Forex account, some broker dealers allow the client to make the initial deposit in a non-USD currency, such as the euro, the yen or the sterling. Doing this often saves a client a lot of money because the constant conversion between their foreign currency and the US dollar costs them money.

Client funds in custody: This category indicates approximately how much money a Forex dealer holds in deposits from Forex clients. Typically, the higher the amount of client deposits, the bigger the size of the Forex dealer.

Regulators: Forex dealers are regulated by multiple entities, depending on where they are doing business. Certain regions, such as the US, the UK, or the province of British Columbia in Canada, prohibit the solicitation of Forex business from residents in their jurisdictions unless the Forex dealer is duly registered therein. Another important fact to consider is that the regulation of retail Forex transactions is a relatively new activity. Many regulatory bodies do not have all the regulations in place to properly offer a measure of safety for client Forex funds. Forex Datasource considers the NFA and the UK FSA as the leading firms in terms of having a sound regulatory environment to protect client funds. Other regions, such as Switzerland, are taking steps to consolidate and increase investor protections – but are not there yet. Other regulatory bodies, such as those from Russia, Cyprus or the Caribbean are simply inadequate in their efforts to protect client funds.

Islamic accounts: This is a type of account that aims to respect the religious beliefs of people of Islamic faith in their avoidance of receiving or paying interest. Normally, a Forex dealer will either pay or receive interest (called swap) whenever a trader has an open position past the end of the US trading session (5PM Eastern Standard Time). So, an Islamic account is an accommodation that Forex dealers make to allow devout Muslim traders to open trading accounts. Forex dealers typically will have conditions and charges that they assess to Islamic account holders to prevent situations where abuse of this privilege is being committed.

Agency Broker (No trading desk): An Agency Broker is a Forex dealer that does not have a dealing desk. They do not have a human or algorithmic program speculating that a client will lose on their trade or trying to keep a trader from having a winning position. Agent brokers make money by widening the spread they receive from the banks a little bit and keeping the difference. So, if multiple banks show Forex dealer a spread of 0.5 pip on EURUSD and the agent broker shows to his clients a 2 pip spread, the agent broker makes 1.5 pips on that trade. Examples of this business model are FXCM, Oanda FX, and Interbank FX. Another way in which an agent broker can make money is by charging the same spread they receive from the banks and charging a commission fee – an example of this business model is MB Trading.

Principal Broker (trading desk): A principal broker makes money by widening the spreads they receive from the banks and also by managing the risk from the trading volume that clients generate. In the old days, principal brokers made money at the expense of clients. These Forex dealers knew that 80% to 90% of new clients would lose all their initial deposit within 90 days, so rather than send a trade to the interbank market, they kept it in their books, or dealing desk. When the client lost a trade, the broker dealer not only made money on the spread, they pocketed a profit equal to the trading loss of the client. There are good and bad ways to run a dealing desk. When a principal desk is using technology to execute trades in a way that maximizes its own profit or hurt traders, traders usually complain and leave the Forex dealer. The firms that keep a dealing desk model today are very aware that they do not have a lot of room to play games or to earn a bad reputation for trade execution. There are ways to make money as a dealing desk based on the pool of trades (all buyers and sellers of a currency) in a way that does not hurt individual traders. But the negative side with this is that the wrong currency bets by the dealing desk puts at risk the capital of the whole firm. Sometimes when a Forex dealer reports sizeable reductions in Adjusted Net Capital from month to month it is due to trading losses the firm has realized.

Scalping: Typically, scalping is defined as a trade that has a very short duration and a small profit target. A scalper will typically identify a currency pair that has a well defined range of volatility. If the price gets to the top of the projected range, the scalper sells and expect the price to return to the mean. A scalper may stay on a trade from a few seconds to a few minutes. Scalping can take place manually or through an automated strategy. Forex dealers used to dislike scalping because it would hurt their dealing desks (death by a thousand needles) or because it would clog up their trading systems. Advances in processing technology and a migration towards Agency brokers has allowed scalpers to have more room for action.