What are the benefits of trading with a regulated broker?
In an ever evolving world of the internet, it is now just as easy to set up an elaborate business to attract clients or customers only to shut shop and disappear. Anyone who has bought something or used a service at some point might have had their brush with some kind of scam at one point.
With the retail forex world which has grown by leaps and bounds, as a trader you too must have question the legitimacy of a regulated forex broker and an unregulated forex broker. So what exactly are the benefits or trading with a regulated forex broker. Do they offer something different that unregulated brokers do not and more importantly, what exactly do you, as a trader receive in terms of benefits when trading with a forex regulated broker.
Find the answers to these in this article.
Regulation - What is it?
You might have heard of some fancy names. Cysec, FSA, ASIC, many more. These are financial watchdogs, whose sole purpose is to regulate the financial markets in their jurisdiction, which covers other entities such as insurance companies and of course forex brokers.
What many traders miss out on is that the financial watchdog is limited in their supervision and investor protection to their respective jurisdiction.
For example, this is what CySec says about itself. "The Cyprus Securities and Exchange Commission (CySEC) is the independent public supervisory Authority responsible for the supervision of the investment services market and transactions in transferable securities carried out in the Republic of Cyprus"
In other words, when a broker or any financial institution that is "regulated" by the respective authority, they receive a license to operate in the jurisdiction and adhere to the respective rules and regulations such as submitting one's business to regular audits, ensuring transparency and more importantly protecting investor interests.
Therefore, if you were a resident of Germany, then your best shot is at looking for forex brokers who are licensed by BaFIN, which is the Federal financial supervisory authority. The regulation ensures that your best interests are looked at first before looking at claims from customers who are not residents of Germany.
Are there any benefits of trading with a regulated forex broker?
In reality, there is no such thing as a guarantee. No matter how well a forex broker is regulated, there is no telling that your money will be safe.
Some examples includes MF Global, a well known US based broker went bust despite being regulated by the CFTC, known as one of the most strict financial watchdog in the US. Likewise, in Europe, Alpari UK had to shut shop after the January 2015 SNB shock. Despite being regulated by the FSA (Financial Services Authority) in the UK, latest reports show that customers are getting $0.79 on the dollar in terms of the money that was lost.
However, don't let the two examples make you judgmental about regulated forex brokers as they do have their own advantages.
Here’s what a regulated forex broker offers
Audits – Transparency: A regulated forex broker due to the constant supervision of the financial watchdog, submit to the rules and regulations. This includes little things such as audits which has a tangible effect on the trader. For example, a forex broker that is listed as a straight through processing or an ECN model cannot manipulate the trades such as B-booking for example (the process of executing your order in-house, if you are profiled as being consistently losing your equity)
Compensation - Insurance: There are also higher chances that if your forex broker goes bust, you can expect to see at least some of your money back. Depending on the applied rules, some financial authorities offer additional level of security. For example Cysec brokers are required to be part of the Investor Compensation Fund which is a pool of funds used to settle any customer claims. This however varies from one jurisdiction to another, which a trader needs to first look at the terms and conditions and legal documentation from the forex broker.
Anti-Money Laundering - Legal: Money laundering is an issue that plagues governments across the world and is partly responsible for financing illegal activity. When trading with a regulated forex broker, traders are often subject to providing some documentation such as a Photo ID and proof of address. It might sound tedious to some traders, but it is always better to be part of a regulated forex broker where due diligence is applied than to be part of an offshore forex broker with no regulation and no details on how your funds are used.
In conclusion, a regulated forex broker is the best and safest forex broker to trade with, both in terms of legality as well as in terms of security and safety of your funds… and let’s now forget the issue of trade execution and transparency.
Trading is all about risk management therefore manage your risks better by opting for a regulated forex broker than having to deal with obscure and dodgy unregulated brokers who are domiciled in offshore tax safe havens and have to accountability.
