$60,000 fine from NFA for Nextsource Trading for exercising discretion over customer accounts

Introducing broker Nextsource Trading Corporation, which is a self-clearing member of all four CME Group Inc (NASDAQ:CME) exchanges, including the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, and Intercontinental Exchange Inc (NYSE:ICE), has entered into a settlement agreement with the National Futures Association (NFA) to pay a penalty of $60,000 for exercising discretion over customer accounts without authorization.

The NFA’s hearing panel filed its decision to issue a $60,000 penalty to Nextsource Trading Corporation on March 12, however the initial complaint by the NFA was filed in September 2014 alleging that the firm’s principal Stewart Wilson placed trades in customer accounts without having written authorization to do so.

The clients concerned, listed by the NFA as by their first names in the NFA complaint, were Nextsource Trading Corporation account holders in whose accounts Mr. Wilson placed trades, however the NFA states that Mr. Wilson did this without contacting them prior to placing such trades and without have written authority from them to trade their accounts on a discretionary basis.

Moreover, Mr. Wilson failed to fully inform these customers that he was required to have written authorization from them to trade their accounts on a discretionary basis.

ln 2013, Nextsource Trading Corporation maintained 163 active customer accounts. Mr. Wilson had power of attorney (POA) over 14 of these accounts and he provided trading recommendations on a non-discretionary basis to a majority of the remaining accounts which, in turn, traded pursuant to wilson’s recommendations.

Commissions and fees for Nextrade Trading Corporation’s customers ranged from $10 to $83, per round turn, and more than half of Nextsource Trading Corporation’s actively traded accounts were charged at the highest rate.

Of the 163 active accounts which Nextsource Trading Corporation maintained in 2013, 38 of these accounts experienced overall trading losses in the aggregate amount of $237,000 and were charged commissions and fees in the additional amount of almost $95,000.

The remaining 125 customer accounts experienced gross trading profits of a combined $514,000; however, they were assessed total commissions and fees of $773,000, or 150% of the gross profits earned. After factoring in the impact of the commissions and fees charged to the customers who experienced gross trading profits, the number of unprofitable Nextsource Trading Corporation customers in 2013 ballooned from
38 to 127.

ln 2012, Nextsource Trading Corporation had 203 active customer accounts, 81 of which experienced trading losses totaling approximately $378,000. ln addition, these accounts paid commissions and fees of $65,377. The remaining 122 customers experienced gross trading profits totaling $1,059,196; however these accounts were charged total commissions and fees of $852,249, or 80% of the gross profits earned.

When commissions and fees are taken into account, nearly half (57) of the 122 customers who experienced trading profits ended up with net losses. NFA conducted an examination of Nextsource Trading Corporation in October 2013 after Nextsource Trading Corporation had entered into a purchase agreement with NFA lB Member, lnvestcore Partners, to acquire approximately 100 broker-assisted customer accounts. The examination included interviews with Nextsource Trading Corporation customers and analysis of the trading activity in customer accounts, among other inquiries.

The NFA’s examination of Nextsource Trading Corporation’s operations identified a number of areas of concern. For example the examination revealed that Nextsource Trading Corporation and Wilson allowed unregistered individuals to perform the functions of APs, failed to disclose material information to customers, placed trades on a discretionary basis without having written authority to do so, used trading strategies that maximized commissions while ignoring the best economic interests of customers, failed to make and maintain required records, and failed to supervise.

For the official announcement from the NFA, click here.


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