Running strategies on other people's capital

Graduate · enrolled learners

This lesson opens with Forex Capital Trading (Forex CT), 2017 to 2019.

What happened

Forex Capital Trading Pty Ltd (Forex CT), an Australian licensee, sold retail clients margin foreign exchange contracts and contracts for difference, leveraged up to 400 to 1, that it issued itself. The Federal Court recorded that, as issuer, Forex CT was the counterparty to every trade a client placed and did not directly hedge those trades, so it benefited whenever a trade closed at a loss to the client and lost whenever a trade closed at a gain. Its 209 call-centre representatives were rewarded on clients' net deposits and trading volume, a bell or gong was rung when clients deposited certain amounts, and account managers pressed clients with little or no experience to deposit more, trade more and bigger, and leave losing trades open, while delaying withdrawals. On 180 occasions they made misleading statements, including that the firm's interests were aligned with the client's: one account manager told a client that when you are making money, the company makes money as well. Between 1,203 and 4,046 clients a month traded with Forex CT between 1 January 2017 and 1 April 2019, and they realized net losses of 77,619,916 Australian dollars, which the court recorded as a corresponding net gain to Forex CT. The contraventions were admitted. On 29 April 2021 Justice Middleton of the Federal Court declared them, including an unconscionable system of conduct, ordered Forex CT to pay a 20 million Australian dollar penalty, and ordered its sole director, Shlomo Yoshai, to pay 400,000 Australian dollars and disqualified him from managing corporations for eight years. ASIC had already cancelled the firm's licence. Nothing here is a market-risk story: the clients' real adversary was the firm on the other side of their trades, which was paid when they lost and told them it was paid when they won.

The decision point

Trading a strategy on someone else's capital, through a proprietary-trading firm, a funded account or a leveraged broker account, adds a risk that has nothing to do with the market: counterparty and incentive risk, the risk that the firm providing the capital is itself the counterparty, and that its incentives are served by the trader losing rather than winning. Forex CT is the case: a broker that the Federal Court recorded as the unhedged counterparty to every client trade, whose clients realized net losses of about 77.6 million Australian dollars that became its gain, and whose staff told clients the company made money when they did. The lesson that closes this track is that a trading system does not run in a vacuum; it runs inside a business arrangement, and that arrangement is part of the system's risk. Who provides the capital, who is the counterparty to the trades, and who profits when the trader loses are questions as important as the strategy itself, because a brilliant strategy run through a firm that profits from your failure is a strategy working for someone else. So the discipline is to assess the honest economics of any capital arrangement by asking who profits when you fail: if the firm makes money when you lose, its interests are opposed to yours, and its promises deserve the scrutiny of a counterparty, not the trust of a partner. Forex CT is what a capital arrangement looks like when the answer to who profits when you lose is the firm itself, and it is the last reminder of this track that the engineering of a trading system includes the business it operates inside, because a system whose counterparty wins when it loses is not an edge; it is a trap dressed as an opportunity.

Recorded loss

$60,200,000

Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.

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