NFA Compliance Rule 2-43(b)

Broker Discussion Forex Brokers
1

Hey guys!
Can someone explain why the NFA is doing this?
I don’t like hedging but I don’t get why Price Adjustments.
Check this out:

"Notice I-09-12
May 05, 2009
Revised Effective Date for Portions of NFA Compliance Rule 2-43(b)

Notice I-09-10, issued on April 13, 2009, stated that new NFA Compliance Rule 2-43(b) would be effective for any positions established after May 15, 2009. Rule 2-43(b) prohibits Forex Dealer Members (FDMs) from carrying offsetting positions in a customer account and requires that they be offset on a first-in, first-out (FIFO) basis.

NFA has received several requests to extend the effective date due to the complexity of the programming changes required to comply with the FIFO requirement. After considering those requests, NFA has decided to extend the effective date for the FIFO part of the rule until July 31, 2009. Therefore, FDMs may not carry offsetting positions in the same account if either of those positions was established after May 15, 2009, but FDMs may offset positions on some basis other than FIFO through July 31, 2009."

2

I’ve actually written about this on my blog a couple of different times:

No More �Hedging� for Forex Traders

New NFA Rule Impacts More Than Just Forex Hedging

The first post has had a very intense running debate (160 comments at last count). The subject of hedging definite gets people riled up.

Basically what the NFA is doing is forcing retail forex trade accounting in line with that of other markets like stocks and futures. That means if you buy a lot of EUR/USD and then short a lot of EUR/USD you are going to be shown as flat (some brokers have always done this) rather than having a long and a short. Also, your trades will be closed in the order in which they were opened (with some potential exceptions), meaning if you scaled into a position, for example, you cannot pick which of the trades you close first.

3

The trades shown in this video and in the article example assume you will close the original long position in loss while closing the short in profit. In which case they’re right, the math is the same. But if you open that long order because all indications say the market is going long, and then shortly after it goes short for a little while, you should be able to open a short position, ride that for a while and close it in profit, but NOT close your long position just because it went into a little drawdown, and then when the market moves back up after that, allow the long position to close in profit as well. This way, instead of netting -$105, you profit $100 ($50 long and $50 short). PLUS, if after that short stops and reverses you open another Long, that could add another $50-$100 to your profit. Not always does the market do what you expect it to, but to chicken out and close your long order just because it’s in a little drawdown would have not earned you the profit it could have had you just had patience and risk tolerance for the temp drawdown.

I totally agree that opening a long and short position at exactly the same instant (which I refer to as hedging) is just a waste of time and money, and really doesn’t even look like you’re using a strategy at all. But if you, and your account, can handle some trades going into a little drawdown before acheiving their ultimate profit, then while that trade’s in drawdown, you should still be able to open additional trades to continually follow the market movement.

And I DO know this is profitable because I program metatrader EA’s (for myself, not commercially), and I’m looking at my FXDD account right now, which has both long and short positions open, and in 2 weeks my equity has gone up $9,030.95. That’s 90.3% Profit in 2 Weeks! I’ve bought and tried several commercial EA’s, including the “Best” in the industry, and NOT ONE OF THEM, including the obviously targeted one (by this NFA campaign), can pull that off, especially without the ability to have Long and Short positions open in the account at the same time (though again, not opened at exactly the same instant).

So if this bureaucratic NFA says there’s no evidence that it is profitable, they’re just blowing smoke up our … and expecting us to buy it. And no matter what they try to say to convince me to the contrary, I can see my account right in front of me, so it’s not going to work. I could probably make a screenshot available, but I won’t give out trade secrets, nor am I interested in giving out or selling any of my EA’s at this time.

(And by “you” I don’t mean any person on this or any other board in particular, I only mean the NFA and any supporters.)

4

I watched the video, but didn’t see any numerical examples? Where did you get these P&L figures from?

And I DO know this is profitable because I program metatrader EA’s (for myself, not commercially), and I’m looking at my FXDD account right now, which has both long and short positions open, and in 2 weeks my equity has gone up $9,030.95. That’s 90.3% Profit in 2 Weeks!

Just because you made money in your account doesn’t mean the hedging has anything to do with it. In fact, I’d suggest it didn’t at all. If you did the exact same transactions in a non-hedging account you’d have had the same bottom line result. By all means, if you think I’m wrong show me a side-by-side of a set of your executions as they would looke in a hedge and non-hedge account and demonstrate my error.

5

I wanted to try a [GBPUSD] daily breakout strategy that tells you to place a pending buy stop 50 pips above the NY session’s Close price. That order would have a stop loss of 27 pips. This strategy also tells you to place a pending [same currency pair] sell stop 50 pips below the NY session’s Close price. That order would also have a stop loss of 27 pips. If one pending order’s price gets hit, it will either proceed into profit-land or get stopped out before the other pending order would get activated.

When I tried to enter these into my MBTrading demo [MT4] account, it placed my buy stop order but refused my sell stop order. (The screen said “Too many orders”, which was ridiculous because I had no other orders, live or pending.) I called MBTrading Tech Support, and the Rep said my 2nd order was rejected due to the new NFA Compliance Rule that bans hedging. I told him I thought that was “overkill” because there’s no way my 2 orders can be live at the same time. I told him I was going to try entering these same 2 pending orders on my Interbank FX demo MT4 account. He said if that broker accepts my 2 pending orders, it’s because “they probably have an office location outside of the U.S and are able to offer clients the MT4 platform with the ability to hedge their positions.” He said MBTrading’s proprietary Navigator platform would have accepted both orders but would never have executed either of them. (Kinda like when Craigslist ghosts an ad because it doesn’t meet all their Terms & Conditions.)

IBFX’s demo MT4 account accepted both orders. But they were apparently “ghosted” because when the GBPUSD’s (ASK) price arrived at my buy limit’s price+spread, my buy limit order didn’t get activated. I ended up deleting both of those pending orders.

I have read the NFA Compliance Rule 2-43, and it doesn’t mention anything about pending orders. I am going to email NFA’s Compliance Managing Director, and ask him to explain if the NFA intended for this new Rule to apply to the type of orders I was trying to place. I’ll let you know what I find out.