Those of you reading this that are familiar with my trading, and those who follow along with my blog at Diary of a Currency Trader (www.diaryofacurrencytrader.com) will be all too aware that – over the last few weeks – a number of us in the community have had some difficulty with a particular brokerage.
While I won’t mention the name of the brokerage in question or of anybody who is involved with the company, I will say that it was run by someone I considered a close friend and the core team that made up the operational side of the brokerage I knew very well as both traders and on a personal level. To cut a long story short, the brokerage was recently delisted and a number of its clients lost capital, me notwithstanding.
Well, for me, luckily, the loss was far from terminal, as I mitigate the risk across a number of brokerages to shield against exactly this sort of thing. There are a number of individuals however that will not be able to recover, and will have to start again from scratch, if at all. So, with that said, I thought it a perfect opportunity to run through a few of the key elements I’m looking for as I hunt for a new brokerage – and hopefully in doing so, I can help readers avoid a similar experience.
As a quick aside, you may be saying, well, if Samuel found himself in this situation, who is he to be giving us advice on how to avoid it? Well, as I mentioned, the individuals involved have been close friends of mine for a number of years and I assumed this allowed me to overlook some of the inherent risks that come with a young brokerage. I now know that was wrong, but I hope it offers you some insight into how and why I find myself on the wrong end of a bad situation. So, anyway, let’s get to it.
First up, and most importantly, is regulation. This should go without saying, but you would be surprised how many people either overlook or do not delve deep enough into whether, or where, the brokerage they are looking at is regulated. Different geo-locations offer regulatory services on different terms, and some are much more lax than others when it comes to foreign exchange. There are two things to consider here. The first is the reputation of the regulatory authority in question. Does it have a tight grip on the industry? Is it easy for a new brokerage to receive regulatory approval, or is it something that must wait months or years to receive?
As an example, two of the top global authorities are the Financial Conduct Authority (FCA) in the UK and the Australian Securities & Investments Commission (ASIC). There have been numerous occasions on which both of these authorities (or the FSA in the UK, as the FCA was previously known) have pressed charges against fraudulent behavior in the foreign exchange industry. This is what we should be looking for.
The second key point is that you want to make sure that the broker is headquartered (and is actively operating out of) the country in which its regulatory authority has jurisdiction. You must look closely. A number of brokerages will register shell companies in the jurisdiction of their regulatory authority, while operating from another country altogether. This is a red flag and should turn you off to any potential account opening.
The next thing I’m looking for is a smooth deposit and withdrawal process. Fully compliant brokers will always segregate funds. This means that the deposits received from clients are placed and stored securely in a completely separate account from that which the brokerage in question operates on a daily basis. This ensures that when it comes to depositing and withdrawing, there are always enough funds to pay out what is owed. All too often the demise of younger and less reputable brokerages comes about as a result of funding daily operations with deposits. It’s hard to believe, but it happens. Don’t be fooled.
Deposits – depending on method, obviously – should be quick; instant for electronic methods such as credit card or PayPal and no longer than three or four days for wire transfer. Similarly, withdrawal speeds should match deposit speeds. This is important. The delaying of withdrawals in any brokerage is, once again, a serious red flag. Even if a client has abused his or her position – i.e. through swap abuse or scalping a brokerage that does not allow scalping – a reputable brokerage will close down his or her account and return the full initial deposit with a warning. They can withhold profits, but not deposits.
Finally, don’t be duped by bonuses and the promise of razor tight spreads. Large reputable brokerages do not have to offer percentage deposit bonuses or no deposit bonuses in order to gain clients. Further, if they offer low commissions they cannot afford to offer razor tight spreads, at least not sustainably. A combination of low commissions and razor tight spreads should always be a warning sign. If an incumbent is unable to offer these conditions despite the economies of scale that comes from being a large operation, an upstart brokerage certainly cannot.
Really, and as a final note, it all just comes down to common sense. We have the luxury of a huge resource of reviews and recommendations online, and serious consideration should be given to this resource before handing over hard earned capital, especially in the forex markets.