Unregulated Forex Brokerages

You may have noticed that there are literally hundreds of Forex brokerages out there, all of them vying for your attention. Some of these brokerages are regulated in well known regulatory jurisdictions while other brokerages operate without any regulatory oversight often from offshore territories. So what exactly is the deal with these brokerages which choose to operate from unregulated jurisdictions?

Why do brokerages choose to operate without regulation?

1) Regulatory Costs

Many of you will know that obtaining authorisation from one of the more well known and established regulators is particularly costly. Firstly, firms are required to set aside significant amounts of capital to ensure that the firm is able to operate safely. Secondly, there are significant legal and administration costs for firms wishing to obtain and maintain a regulatory licence in a jurisdiction with a tough financial regulator. While financial regulation provides significant protection for customers, many newer companies often have a hard time raising the funds to become regulated in countries with tough regulatory laws. In recent times there has been a trend among brokerages to start out operating from an offshore location before moving onshore when they have raised enough funds to become licensed. 

2) Tax Reasons

Many off the offshore locations popular among Forex brokerages have very favourable tax legislation. Many of these offshore tax havens require that companies registered in the jurisdiction are not required to pay tax on profits made outside of the territory. As the vast majority of the firm’s clients are based outside of these offshore havens, the firm will be required to pay very little if any tax on their profits. Operating from a favourable tax jurisdiction can help smaller firms remain competitive with their larger counterparts and is clearly a big reason why many firms choose to have offshore operations. 

3) Rogue Firms

While many firms which operate without being regulated are not rogue and do not mistreat customers there have been a number of cases where firms have manipulated/mistreated their customers. The fact firms are able to operate from secrecy jurisdictions and without any regulatory oversight means that there can be very little comeback for clients if the firm decides to mistreat their customers. As with many other financial products, rogue individuals have been attracted to operating such companies and firms, which has left many people with a rather bitter taste. Often it is this reason why many individuals are keen to avoid doing business with unregulated firms. 

Should customers avoid unregulated brokers?

This is quite a tough question as peoples experiences with unregulated brokerages vary massively. It is important for traders to realise that if they choose to trade with an unregulated brokerage, they won’t receive many of the valuable protections provided by operating with a brokerage regulated in a tough regulatory regime. Recent scare stories regarding unregulated brokerages are sure to have put off many individuals, with 4XP recently appearing to have gone under possibly with significant amounts of client money. Situations like this certainly makes it worth your while to follow sites like ForexMagnates and Fx View which cover a lot of the important regulatory news. On the other hand many people have only positive things to say about some brokerages which operate offshore and aren’t currently regulated. The fact that there are many regulated brokerages which provide customers with a very high level of service should be enough for most people to avoid trading with an unregulated brokerage.

What is an STP Brokerage?

Many of you who are new to Forex may have heard that trading with a STP brokerage is often better than trading with brokerages which operate using the Dealing Desk model. But what exactly does it mean to be an STP broker and why are STP brokers considered superior than brokerages that operate a Dealing Desk? Today we are going to provide an explanation of what an STP broker is and how they differ from brokerages which operate a Dealing Desk. We will also explain some of the benefits of opting for a STP brokerage.

What is an STP Brokerage?

STP stands for Straight-through-processing and refers to specific type of execution. When a trader places a trade with a brokerage which operates using such a model, there trade is processed straight through to a liquidity provider. What this means is that the brokerage doesn’t take the other side of your trade and simply matches you up with a liquidity provider. The STP model is often contrasted with the Dealing Desk model, where a brokerage may hedge or simply take the other side of a customer’s trade. This can often mean that the profits made by a Dealing Desk broker are equal to the loses made by the client. 

STP brokerages avoid this conflict of interest, by placing the clients orders with other institutions and liquidity providers. In fact when trading with a brokerage which operates as a STP brokerage, it is in the brokerages interest for clients to make money. This is due to the fact that STP brokerages make money by charging commission or marking up the spread, which means the more volume a client can trade the greater the potential profits for the broker. It is for this reason why the majority of retail Forex traders favour retail brokerages. 

Hybrid STP Brokerages

Not all brokerages which claim to operate a Straight-through-processing (STP) model do so for all of their trades. Brokerages which do this are often referred to as operating hybrid model placing some trades with their liquidity providers while often keeping the smaller trades on their books. This can mean that some of your smaller trades will see the brokerage operating as the counter party, while your larger trades will be passed onto the firm’s liquidity providers. This can often be due to some liquidity providers being willing only to take on trades of a certain size, but is sometimes a conscious choice made by the brokerage. While hybrid models are often seen as superior to Dealing Desk execution, it is generally agreed that such an execution model is inferior to a pure STP model.

What to takeaway

STP stands for Straigh-through-processing and is an execution model which sees a brokerage pass trades through to one of their liquidity providers. Many traders prefer STP brokers over brokers which operate a dealing desk, as they feel the STP model removes any potential conflict of interest. Not all brokerages which advertise themselves as operating a STP model operate a true model with some brokerages only passing on larger trades to liquidity providers while keeping smaller trades on their own books. Well known STP brokerages include names such as FXCM and FXPro.

Plus500 launches Litecoin

In recent weeks, many people have been talking about virtual currencies with Bitcoin recently reaching the heady heights of $1,000 per coin. The recent strong performance of Bitcoin has also got many in the FX industry interested in offering virtual currency products. Plus500 have been a pioneer when it comes to offering their customers virtual currency products, having launched a Bitcoin CFD product early this year. This made them the first brokerage to offer a Bitcoin product (Plus500 is a CFD service), and it wasn't long until other brokerages who offer CFD's got in on the act and begun to offer their clients Bitcoin CFD's. Following the lead of Plus500, well known retail Forex brokerage begun offering a Bitcoin CFD product on their platform. Those interested in learning more about Plus500 can do so here.

Now Plus500, has further ventured in the world of virtual currencies and has began offering a LiteCoin CFD product. Those not in the know, may be wondering what a LiteCoin is. LiteCoin is a virtual currency and a potential rival to Bitcoin, working in a similar way to the more established virtual currency. The main difference being the cryptology involved in mining LiteCoin is different and doesn't favor those with high computing devices in quite the same way, which means many people see LiteCoin as a more democratic virtual currency. Though exchanges using LiteCoin have struggled to survive with the worlds biggest LiteCoin exchange shutting down only a couple of months and ago, with it reaming to be seen whether there is much demand for LiteCoin trading products.

Plus500's experience with virtual currencies hasn't been plain sailing with the company having recently changed the conditions of its Bitcoin CFD product. Clients aren't allowed to roll positions overnight, with their being a fixed expiry date for every position entered into. These measures may have been in response to some of the difficulties involved in offering a Bitcoin CFD product, with their being no natural way to hedge Bitcoin positions brokerages are faced with a serious risk management problem. This has meant that spreads have typical been quite wide and that leverage has been rather limited, both helping brokerages limit their exposure to the volatility of these virtual currencies. By preventing clients from continually rolling over their positions the brokerage also helps limit their risk, which may be why both the Bitcoin and Litecoin CFD available at Plus500.

Has 4XP shut up shop for good?

Forex and CFD broker 4XP has been making the Forex headlines for all the wrong reasons, with numerous FX news outlets covering the recent woes of the brokerage. First off, Cyprus’s financial regulator CySEC issued a warning to investors stating that the firm wasn’t and never had been regulated by the body. Originally many interpreted this warning as pointing to the fact that 4XP had been cross promoted with other regulated CySEC brokerages who were using the same FX services firm. There has also been speculation that this warning was released due to the regulator having received complaints about the firm, with some forums suggesting that 4XP had not been paying out client withdrawal requests for some time.

The situation has preceded to get worse with it being known that the firm had cut ties with the Israeli based services firm which was responsible for customer support, marketing and other brokerage related services. The reason why 4XP severed its agreement with the FX services firm which provided all of the client facing services is not known, however customers 4XP have reported that they have been unable to get into contact with anyone from the brokerage. Which has understandably worried customers who are unsure whether they will be unable to get hold the cash that they had deposited with the firm. In response to this the pseudo-regulator the FMRCC announced that it would be revoking the licence of the firm.

Finally, 4XP sent an email to their customers stating that they would be unable to process withdrawals and deposits due to the BVI’s Financial Services Commission having put out a cease and desist regarding the firm. While it was true that the countries regulator had put out a cease and desist regarding the firms act ivies from the offshore territory of the British Virgin Islands, this notice specifically stated that the order would not prevent the firm from processing withdrawals. So to many this suggested that the brokerage had concluded that it was time to shut up shop and run off with depositors cash. This seems to have been confirmed by the fact that the brokerages website 4XP.com is down at the time of writing this article. If it is the case that the brokerage has opted to shut up shop, it provides individuals with a good warning to why they should never deposit with an unregulated brokerage.  

It does appear that 4XP has gone belly up and the firm has managed to disappear off with the clients assets. This isn’t the first time that firms have collapsed and disappeared only to leave their clients high and dry, 4XP’s sudden closure may become one of the larger straight out FX frauds which have occurred over the last couple of years. This really highlights the dangers of doing business with an unregulated brokerage, with proper financial regulation providing traders with some level of protection against such happenings.

    

Caesar Trade becomes a NZ Financial Services Provider (FSP)

Forex and CFD broker Caesar Trade has just recently announced that it has become a recognized New Zealand Financial Services Provider (FSP), prior to this the brokerage had operated offshore and was based in the Seychelles. The brokerage had previously stated that they would be pursuing some sort of regulation on their website, but it wasn't until the other week the firm announced it had become a registered Financial Services Provider. This sees Caesar Trade join a long line of Forex brokerages who are already FSP's, with other well known brokerages such as XM.com and FXOpen who also operate brands which claim FSP membership.

What is a NZ Financial Services Provider? 

New Zealand has a rather interesting regulatory system, with it being possible for companies based offshore to become listed on the countries Financial Services Provider register. Brokerages based in New Zealand are regulated by the governments financial regulator and will not be on the Financial Services Provider register which is exclusively for offshore companies. What being a member of the FSP register does for a company is allow them to operate within in the country and also to state that they are dual regulated. The costs involved in being featured on the register are much smaller than the costs of becoming a fully regulated New Zealand entity, though in 2012 the country increased what was required from companies wanting to list themselves as a Financial Services Provider. Companies now have to one full time member of staff based on Kiwi soil, who are responsible to ensure certain regulations are complied with. Additionally, those who are trading with a brokerage who operates as a Financial Services Provider can take their complaints and disputes to an specific organization based in New Zealand.

NZ FSP's: Should I Trade With One? 

Brokerages "regulated" as FSP's are used by a large number of traders worldwide, however it is important to realize that the FSP system doesn't provide the same kind of protection as a proper regulatory authority would. However FSP registration is still superior to no regulatory oversight at all.

What Is Social Trading?

The profile of Social trading has risen considerably in the last couple of years with a huge number of social trading and copy trading products popping up. The proponents of social trading say it has the power to revolutionise the way people access and trade financial markets. Built on the back of Web 2.0 technology, social trading networks allow individual traders to see the positions of other traders as well as share their opinions regarding the markets. An important aspect of social trading, is what is generally known as copy/social trading which allows traders to automatically copy or mirror the positions of successful traders. 

Social trading has the potential to democratise the financial markets as it means that those who don’t have experience and trading knowledge could potentially make money from the financial markets. Brokerages have been quick to catch onto this and realise that social trading may help them reach out to new clients who wouldn’t have otherwise been interested in trading financial markets. At this point you may be asking yourself why successful traders would be willing to share their successful trading strategies with others. Social trading networks are set up in the way which means that the top traders/signal providers receive commission based on the amount of business they bring to a brokerage or social trading network. These commissions can add up and it is estimated that some of the top traders on ZuluTrade make $20,000+ a month in commission.   

Does Social Trading Work?

As with most forms of social trading there have been horror and success stories. Many people have made some pretty impressive returns with social trading while others have seen their accounts blown up. Social trading success depends on the signal providers you opt to follow delivering high quality trade signals and employing proper risk management. There have been many top traders who have performed well for a while before going onto to blow up their accounts. This has led many people to be very sceptical of social trading in general. While social trading doesn’t require trading skills parse, it makes you into a fund manager where you have to identify which traders will provide you with consistent and long term return.

In response to worries about the quality of signal providers many networks have introduced strict monitoring and requirements in order to become a signal provider. This has helped improve the situation as it helped crack down on high risk signal providers who put users money in serious jeopardy. However there still remains a huge risk when using social trading networks and it is strongly recommended that you don’t trade with money that you can’t afford to lose.

The Major Social Trading Networks

eToro

eToro launched way back in 2008 claims to be the world’s largest social trading network with over 200,000 users. The network allows users to trade a range of different instruments including Forex, Stocks, Commodities and Indices through CFD’s. The eToro social trading network feels very much like more traditional social networks and encourages users to interact with each other, creating a lively and active community. 

ZuluTrade

ZuluTrade launched back in 2008 boasts over 30,000 active signal providers ensuring that users have a huge choice when picking a signal provider to operate with. The ZuluTrade network has less of a social feel and is broker independent which means users can pick one of over 40 brokerages to use the platform with. ZuluTrade is particularly popular with signal providers due to the platform syncing with MetaTrader 4 allowing users to provide signals using EA’s. ZuluTrade continues to be one of the biggest names in the world of social trading.     

MyDigiTrade 
While MyDigiTrade is not as well known as other the copy trading networks already mentioned, those interested in social and copy trading may want to consider the service. Unlike ZuluTrade MyDigiTrade does not charge users of the service and instead makes it's revenue from acting as an introducing broker to the twelve brokerages that support the service. The platform boasts an impressive range of signal providers to choose between and those looking for a decent alternative to ZuluTrade or eToro would not do badly to try out a free demo account with the service. It should be noted that the platform does feature a number of traders using high risk strategies and the service seems to do little vetting before signal providers are able to start earning commission from their trading activity.