Why Trade with a Regulated Forex Broker?

Like any other business, a Forex broker needs to be regulated. Consider you’re starting a new business: any business in any sector. You’ll need to go to different authorities, get your licence number, obey laws, etc. The same is valid for a Forex broker. A Forex broker that is not regulated is not a legitimate business. Would you give your money to an entity that is not entitled to operate legally? Probably not, and this is what regulation really stands for: the legitimacy of a business.

Reasons for Trading with a Regulated Broker

When it comes to Forex brokers or other companies that offer financial services, a financial authority should regulate the business. This authority will step in if things go in the wrong direction. In the case of a Forex broker, if the broker goes bust, the financial authority will step in, as there is a whole process to follow when dealing with these situations. This is for the customers’ good; and if the business is not regulated, there is no protection against such situations.

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Protection Against the Broker

So protection against the broker is the first reason why a trader should trade only with a regulated broker. To be more exact, the financial authority is there to help the trader if something bad happens with the broker. What can go wrong, one may ask? Well, a lot of things can go wrong, and the Swiss National Bank (SNB) example from January 2015 is the perfect case study.

The SNB and the EUR/CHF Peg

For years, the SNB pegged the EUR/CHF rate to the 1.20 level. This meant that no matter what the cost, the EUR/CHF could not dip below the 1.20 level. From a trading point of view, this was somewhat unexpected, but not unprecedented. There are many other central banks around the world that peg their currency to some other currency, especially to the US dollar. However, the SNB is not just any central bank; it is one of the most influential central banks in the world. In pegging the EUR/CHF to the 1.20 level, the SNB basically put a floor on the pair. However, things in the Eurozone deteriorated, and inflation threatened to go negative. As such, the European Central Bank (ECB) was poised to cut rates and move them into negative territory, not to mention embarking on a bond-buying program (quantitative easing). Facing the adversity from the ECB, the SNB had no choice but to drop the EUR/CHF 1.20 peg. What followed was a nightmare for both brokers and traders. The move caused the whole Forex market to move aggressively as the CHF was bought by High-Frequency Trading (HFT) algorithms. There was virtually no market for the EUR/CHF pair all the way down to the 0.85 area. Other CHF pairs witnessed similar moves, and brokers were faced with an extremely weird situation: They couldn’t fill client’s orders for the simple reason that there was no market. As a result, by the time things calmed down a bit and dust settled, a few brokers went bust as they did not have enough liquidity to support the SNB disaster.

In this type of situation, if these brokers are regulated, the financial authority will step in and start the process of distributing the segregated funds back to the customers. It may take a few months, but everyone can rest assured that they will get their funds back. After all, it wasn’t anybody’s fault, but the broker and the financial authority makes sure customers do not suffer alongside the Forex broker. In this way, traders are protected against the possibility that the Forex broker will default.
forex regulations

Proof that the Broker is a True Business

A brokerage house has many potential sources of income: commissions from every trade, spreads, and even profits made from trading against all or some of their clients. There is nothing wrong with that, as, after all, a brokerage is not a charity. So how can traders know that a broker is a regulated one? There are a few things that can be done:

The first thing to do is to check the broker’s Web page for details regarding regulation. These details are to be found usually on the “Home” page, or “About Us”, or something like that. Regulated brokers are proud of that, and will try to make it as visible as possible, so you should not find it difficult to dig out the information, as it will be placed in a visible spot. If it happens that you’re having trouble finding what kind of entity regulates the broker, and there’s no licence number to be seen, you should start asking yourself whether this is a broker you want to trade with. A regulated broker strives for transparency, and will have all the relevant information easy to find on its website.

If the licence number is not displayed, but the broker claims its business is regulated, the next thing to do is to look for its licence number with the financial authority. This should be displayed on the website, but many brokerage houses fail to do so. A simple Internet search will bring up the information needed. If this fails, the broker has some serious question marks hanging over it. Moving on, ask on the live chat for the licence number. If it is provided, inquire on Google or other search engines for more details, and even ask the financial authority whether that information is correct. While all these steps seem to be unnecessary, it is important to know as much information as possible about the party you’re allowing to handle your funds. No one says it’s wrong to be suspicious, but being careful is certainly the right thing to do when it comes to your money. The aim of this article is to stress the importance of trading with a regulated broker, as a financial authority is also a reactive one. Just because a licence is granted at the start of activity, it doesn’t mean it is there forever, as a broker’s licence can be suspended. As a matter of fact, brokers are obligated to inform all of their clients if the licence is being suspended. This can happen for various reasons, but it’s usually because the broker no longer meet the requirements of being regulated, and so in turn, its clients may suffer. To avoid that, the financial authority suspends the licence. This is a very bad sign for a broker’s business and regulation, as from this moment on trust is lost; and without trust, there is no business when it comes to Forex trading. The sooner brokers and traders understand that, the better.

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