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.