100% transparency

Preface. About bankruptcy of brokers.

Most often, we hear that “liquidity gap”, “cash gap”, “piled up withdrawals” and the like as the causes of bankruptcy of brokers. To make such excuse look real, brokers give as an example other kinds of financial organizations, such as banks, that indeed went into bankruptcy for these reasons.
As usual, all these are generally nonsense and lies).
A bank can really go bankrupt because of lack of liquidity (for example, when there is banking panic) –not all the bank’s assets are liquid. For example, a bank can hold part of its funds in loans, business, real estate, etc., depending on its goals.
By definition, a Forex broker cannot go bankrupt for this reason because all the funds of a Forex broker are with trading and payment counterparties: liquidity providers, bank accounts, EPS accounts. Funds from them can be withdrawn in a fairly short period of time (with the exception of cases where such funds are frozen by the bank or regulator or for legal reasons). Withdrawals cannot pile up a priori. Maximum delays can occur for a while.
In fact, when brokers give you this as a reason for their bankruptcy, you need to always understand that this is a lie. In reality, there could be two reasons for this development:

  1. The company was a pyramid.
  2. The company was a bubble (had a liquidity gap).

The difference between these structures is very simple: the pyramid lacks the funds for full-fledged activity and the liquidity gap grows spontaneously. In a bubble, there are enough funds and liquidity gap does not grow spontaneously.

This structure can either be the normal HYIP (where everyone earns) or a “real” broker who does not have enough funds to conduct a full-fledged activity. Full-fledged activity means there could be real overlap of trades to ensure customers’ profit/loss match with overlap in the company’s accounts.
For example, if customers earned $1,000 in their trades, the company could both hedge their trades and pay them from the counterparty”, and not hedge and pay them “from their own pocket”. To hedge positions, a certain amount is required (usually 30-70% depending on the leverage provided to customers). In the pyramid, either there is not enough money for a complete hedge (the company may not do this even if there are funds, we will omit this), or money is just “invented” in accounts, and it is actually impossible to hedge there.
The pyramid is forced to pay profit from “itself”. In this case, if clients’ profit grows, there is nothing to pay – and the pyramid goes bankrupt.
There are cases where a bubble becomes a pyramid. This is discussed below. This situation occurs much more often.

Let me immediately note that there is some overlap with exchange terminology (an overpriced company), but the value is somewhat different, although it has something in common with stock bubbles.

Bubbles are much wider than pyramids among Forex companies. It’s no exaggeration to say that 99% of Forex brokers (of course, I wanted to say that 104% of brokers are bubbles, but “you never can tell”) are bubbles, with a certain liquidity gap “weight”.
The reason lies in the very specifics of the nature of this type of companies (well, of course, the well-known honesty of Forex brokers, of course): any broker works with a higher counterparty with a leverage, just like a client works with a leverage with a broker. The margin used by customers is distributed over time and never equals even half of the leverage provided (see, for example, our Composite*6 – A-rated managers use a leverage of 50-100 or more, while indexed managers does not exceed 30. And the more the number of clients/traders across which trading volume is distributed, the lower (as a rule) the weighted average. Therefore, to hedge client positions, the client does not necessary have to have a full amount of funds. As a rule, 50-70% of the funds are enough to cover all positions (100% A-book). Given the proportion of trades that are usually hedged (slightly more than “none”, as a rule), this figure becomes several times lower. Particularly arrogant owners generally take the necessary reserve (for the “necessary amount of funds”) for possible statistically average withdrawal by customers. The rest of the money goes to real business, the real estate of owners and other “good things”. These are all quite real stories that no one in the Forex circles (except clients) is any longer surprised of. Occasional massive delays in payments are as a result of insufficient available capital to cover withdrawals (one is compelled to borrow, organize mega-profitable deposit promos, sell yachts and so on).
A bubble can exist for any length of time (many Forex brokers have proven this with their long-term existence), until it is overwhelmed by withdrawals. At a certain point in time, with an increase in the liquidity gap to a level at which funds cease to be sufficient to conduct full-fledged activity, the bubble becomes a pyramid with all the consequences. By the way, the reverse process is also possible (if clients are losing much or depositing a lot).
The main danger of a bubble is that liabilities are greater than available funds. In the case of mass withdrawals, there may not be enough money for everyone. Even if the funds are sufficient for withdrawals, a certain withdrawal amount (which is not sufficient to cause a bankruptcy) could turn a bubble into a pyramid, and the process of expanding the liquidity gap starts.

Liquidity gap and marketing capital.

The term liquidity gap refers to insufficiency of company’s funds to meet its obligations or to carry out full-fledged activities.
Liquidity gap should not be confused with unsecured capital (for example, marketing capital).
Clients very often wonder whether non-withdrawable bonuses are secured in a number of companies. I often hear questions about Darwinex, since they have at least half of the marketing capital in the investment system.
In fact, a non-withdrawable bonus should not be 100% secured. The following 3 components should be 100% secured:

  1. Liabilities (what the client can withdraw).
  2. Pledge (the amount of funds needed to hedge positions).
  3. The amount of possible risk (how much a client, who received a bonus, can lose from this bonus).

For example, if a company issues you a non-withdrawable bonus of 1000 USD, which is subject to drawdown, and max(DD) is limited to 50%, then it must be secured with 500 USD. For the reserve, a little more. The rest will just lie like that.

We often receive such question as: “Do you secure the capital issued to A-rated managers tested by us?” I can answer that we secure it to the maximum, that is, close to 100%. Although about 50% will be enough to meet the above three conditions. First, we are undergoing an audit and it is not yet clear how the auditor would “react” to our marketing capital. Secondly, we execute all trades, and even the minimal probability of crashing into a Stop Out of the liquidity provider is very undesirable for us. Perhaps, as the company’s capitalization grows, the level of securing marketing capital will decrease, as the share of marketing funds in the total capitalization will decrease and, as a consequence, the burden on real capital at their expense.

Absolute transparency

As already said, ICE FX 2.0 will have new privileged client statuses.
Among other privileges, the Elite status (following the VIP status in terms of deposit amount) will come with the opportunity to request for demonstration of the company’s funds with trading counterparties and with the bank (to be sure there is no pyramid in the making and scam that would follow).
The process will be similar to the process of demonstrating position hedging: the client requests a demonstration, and in the process, the company’s online employee (via Skype) demonstrates to the client the balance on all liquidity providers and bank accounts. 178 lvl transparency, in general. I hardly imagine that one of my “colleagues” would repeat this (well, it’s a “trade secret” and so on, well you know what I mean))
As far as Elite customers will be small, at least in the first years of ICE FX’s operation, as such, the effect per se of this opportunity will be very minor (well, all Elite clients confirming the company’s capitalization will be surely declared affiliated clients)).
Proceeding from this, we decided to go further and offer the opportunity described above – for a certain period of time – to all ICE FX clients (through the “Absolute Transparency” promo). Moreover, it is quite possible that this promo event will be cyclical and the opportunity to view the company’s funds will be periodically available to any client, for example, for several months in a year.
I think, in conjunction with the already implemented transparency attributes, this is the maximum level that a company can give to a client.

For people who on my blog for the first time or are not that much familiar with ICE FX, I will briefly lay out the main elements of the company’s transparency policy:

I. 100% A-book.
We demonstrate the hedging of any positions with an external counterparty for any client.
For more information, please check here: https://ice-fx.com/trade/backoffice

II. Performance audit.
At the end of 2017, we plan to recruit one of the world’s leading auditors to audit our financial indicators. The audit will be publicly made available on the company’s website.

III. The “Absolute transparency” promo, which is described in this article.

IV. Transparency of investments:

  • Display of the equity of each Managed Account (MA) in online mode;
  • Display of all closed trades of each А-rated MA;
  • Display of not only the returns of an account, but also the investor’s yield in the MA statistics;
  • Compulsory connection of A-rated MA to a third-party external monitoring system;
  • Providing an investor password for monitoring the manager’s trading activity in real time;
  • Demonstration of execution of trades on A-rated MA at external counterparties.

You can get more details here: https://ice-fx.com/investor/transparency

The presence of Swiss Asset manager in the group of companies, with the same investment products as in ICE FX.

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