The Expert Opinion of Reed Smith LLP on IronFx Criteria for identifying Abusive Trading (dated 14.7.2015) was made available to us.
This Expert Opinion is an explosive document, because it reveals the methods applied for removing profit and refusing withdrawal by IronFx Global Ltd, under the pretext of having identified “abusive trading”.
Initially we thought we would finally learn the reasons why a huge number of clients were accused of having used abusive trading practices. However, we discovered that the Expert Opinion is only the fabricated justification of existing practices. These practices are described in detail and to an extent that had remained hidden from the public until now .
In conclusion, we found out that the described criteria for identifying Abusive Trading
- are so generic that every client can be regarded as „Abusive Trader“. Among the features of Abusive Traders there are trading patterns which are usual among retail traders, such as always trading the same currency pair or using a big portion of the available margin for holding a position.
- are applied without any verification on individual accounts. Clients can be classified as „Abusive Traders“ just because they are under an Introducing Broker who earns excessive commissions or because they connect from a similar IP address. The criteria are applied by means of electronic routines looking for defined “trading patterns”, without a verification on individual accounts. If a client is classified as „Abusive trader‘, profit and bonus can be removed and withdrawal requests denied.
The Epert Opinion has nothing scientific. The English law firm that created this Opinion has received other orders of IronFX and therefore was in conflict of interest. The “experts” were neither independent nor neutral.
The Expert Opinion was kept secret until now. We will publish the entire document soon.
A critical resume of the content
Reed Smith LLP legitimates the IronFX Criteria for Identifying Abusive Trading as „reasonable and rational“.
First, the documents examined for reaching the conclusions of the Expert Opinion are listed. This document list shows that the experts have examined only on the basis of sample accounts and examples that have been provided by IronFX. Abusive trading has not been tested under real conditions.
In the following it is explained that IronFX is unable to investigate all clients account due to the large number of clients. Therefore IronFX has developed automated methods by which signs of Abusive Trading can be detected through electronic routines.
There would basically 3 categories of Abusive Trading:
- internal hedging abuse
- hedging external abuse
- internal transfer abuse.
For the uninitiated: Hedging is trading of opposing positions, whose gains and losses offset each other to a zero-sum game. A hedging strategy normally consists in stopping the loss position early and running the winning position. This technique is difficult and hardly mastered by retail traders. If you don’t master the technique, you can suffer a total loss. Hedging is not a risk-free technique.
Internal hedging takes place within an account or on multiple accounts held with a broker. The broker is therefore able to detect and prove internal hedging.
External Hedging is performed on accounts that are held at different brokers. Without insight into other accounts, a broker is not able to find evidence for external hedging. However, we repeat, only professional traders use such techniques. The average client has no idea of hedging.
The report explaines that IronFX has developed a method by which you can track all 3 categories of Abusive Trading via electronic routines due to recurring trading patterns. Abusive Trading would be recognizable on the basis of certain patterns. IronFX attempts to locate these patterns, by monitoring the accounts of clients and looking for the following suspicious behaviors (Art. 24 of the Expert Opinion)
- Due to IronFX size it is clearly impossible to verify more than a small percentage of accounts. Therefore it is important to have tools for identifying the accounts which need further verification, through the use of certain „triggers“. In respect to IronFX we are aware of the fact that, in principle, they proceed to the investigation of accounts, in order to detect the presence of the patterns referred to above, in these cases:
(i) 90% of trades (by number or volume) opened within a short period of time have the same direction and the client requests the withdrawal of funds as soon as positions are closed, and
(ii) the client requests a withdrawal of funds at a time in which less than five trades are open.
Read carefully: Trading more positions in the same direction and requesting funds withdrawal immediately after the closing positions is sufficient to justify a suspected Abusive Trading. These conditions seem suited to label as many (successful) to clients as „Abusive Trader“.
Abuse by External Hedging: a questionable dragnet
The experts themselves admit that external hedging cannot be proven
in the examples relating to abuse by external hedging we repeat that the information we have been provided by IronFX are too limited, to substantiate the suspicions. In particular, the data on hedged transactions are missing.
Despite the facht that „abuse by External hedging“ cannot be proven, this category was possibly used to detect a wide range of clients by IronFX.
According to this rule, clients who held a single position for a long time and have thus made profits are suspected to have run an opposite (hedged) position at another broker.
For the uninitiated: It’s as if your depository bank would refuse to pay your profits because you have only „Apple“ shares in your depot.
That is a very general grid where each client can be captured. This grid has been possibly used to remove profit and refuse any payout to a huge number of clients.
Account is blacklisted because the Introducing Broker earns too much
It is further acknowledged that IronFX also applies „macro methods“, which completely disregard an individual examination
We also know that IronFX oversees certain accounts related to certain IB, to see a volume of disproportionate IB commissions was generated.
This means that a client can be detected as Abusive Trader without having performed any trade.
This is the case of clients who are run under a Introducing Broker who has earned too high commissions.
For the uninitiated: Introducing Brokers are companies that advertise a broker and earn commissions for each acquired client or per transaction.
The Expert Opinion affirms that a check on the level of Introducing Brokers is sufficient to categorize the client as Abusive traders and to blacklist his account.
Connecting through an IP address having similarities to the IP address of a suspicious client may be also a sufficient reason to have one’s account blacklisted.
Abuse by Internal Hedging: holding 2 accounts is sufficient to be labeled
As mentioned above, Internal Hedging is the only category of Abusive Trading which can be detected and proven. The broker just needs to verify transactions on all client’s account.
However IronFX omitted to carry out such an individual verification and used generic patterns to label clients as “abusive traders” in this case, too. These are the patterns:
opening and closing transactions in the same direction within a short period of time
opening and closing hedged or correlated transactions to other accounts at the same time
use of small positions to disguise the abusive behavior. Use of more accounts, in order to make possible abusive transactions.
Read the last sentence: “Use of more accounts, in order to make possible abusive transactions”.
This means that running multiple accounts is completely sufficient to be detected as „internal hedger“. Evidence that internal hedging was actually performed is not required.
Numerous clients who held multiple accounts with IronFX were possibly labeled as “internal hedgers”. Profit was removed and withdrawals denied, just because they had multiple accounts.
The Expert Opinion of Reed Smith LLP describes unsound practices in details.
We can deliver this document to police or regulator authorities (contact).
Here is an excerpt