When you select a Forex broker, too many traders focus on the spreads and swap rates, as these can be some of the biggest influences on your profitability but are these the most important? I would say that the regulation the broker is under should be the first port of call to see if you should trade with it. I have been in the industry for many years and have seen brokerages pop up around the world offering great spreads, free this, free that and some even guarantee you a percentage income. Anything that sounds too good to be true usually is and I have seen people lose hundreds of thousands if not millions by putting their funds with poorly regulated brokers.
As the forex market is decentralized with no central exchange, the regulatory agencies need to act as the bouncers to stop poorly run and dishonest brokers entering in the market. These regulatory agencies are the ones who provide licenses to a broker and the stricter the regulator is, the stronger the broker is.
Which are the best regulators?
It is hard to say if any one regulator is stronger and the firms under them safer but there are a few you will want to lookout for.
FCA – The bellwether for Forex companies. ¾ of FX is traded through the UK and their regulatory body has been around for one of the longest times compared to many others. The FCA also provide the FSCS which guarantees up to 50k GBP for any trader with an account with a FCA regulated broker. This means that even if the broker goes under, you will still be able to claim up to 50k back. I have seen this through many broker that have gone under and each time every retail trader got all or up to 50k back (although it can take a year)
ASIC – A new but very well respected regulator and has been operating since 2006. Although they do not have the same compensation scheme the criteria for being able to get hold of a license are very stringent. They are also very heavy on new traders and to open an account with the ASIC regulated broker you will need to take a test before you can even open an account.
FMA and AMF – These are the German and French regulators which both have good records as well so if you are located in one of these two companies you should not be worried by the regulator.
CFTC and NFA – The US regulators requires all online FX brokers to be registered and meet strict guidelines with regards to finance trying to stop any company with inadequate resources to becomes brokers. One of the differences for US brokers is everything has to be made completely transparent from profitability to amount of accounts. Due to this very few non US brokers go to the US and not many brokers around the world will accept US residents and sometimes even citizenship can become an issue.
Regulators to avoid
No Regulator – I am still surprised to see traders opening up account with unregulated brokers, many countries around the world do not have regulators in place for this but due to this brokers can get away with far more than any regulated broker can. All the rules on client money can be thrown out the window and there are many examples of brokers going under and all clients losing their funds. When there are no rules on client money the managers of the brokerage can use your funds for other purposes. There have also been many cases for traders opening up accounts and then being refused the return their funds. As there is no regulator there is almost nothing the average guy can do. They can even be more nefarious by charging excessive commissions, high pressure selling techniques and full on Ponzi schemes.
CySec – Cyprus has been one of the most popular places to start new brokerages. This is mainly due to the ease of being able to get hold of a license and the poor regulation. There are many things such as taking on non-regulated money manager and more that can lead to brokerages being able to open up there which can lead to activities such as churning where a money manager places as many trades to make money from the commission. Although this comes under MIFID which allows brokers to open up all around Europe this is one of the weakest regulators and can sometimes be used as a back door.
ISFC – This is the Belize regulator but I could also replace this with half a dozen regulator based on small islands that are mainly used as tax havens. The main issue is again the ability to gain a license is far easier than in many places around the world although they do provide a minimal protection and enforce strict accountability but this can just lead to brokers being shut down but after they have caused the damage.
Overall one of the first things you should look at when finding a broker is the regulator they operate under. Once these criteria have been met you can move on the execution type, spread, swap etc.