Foreign exchange (forex) is the largest financial market in the world, trading over $6 trillion per day. The forex is a system in favor of massively outlying amounts of money. It, therefore, is important to have a regulation in place to safeguard traders and loyal markets.
The forex market is accessible to traders through forex brokers. They can be either regulated or unregulated. Government-regulated brokers are licensed and supervised by agencies usually armed with the charge of overseeing the development of financial markets and the practice of the rules and standards on an estimated budget. On the other hand, unregulated brokers do not answer to any regulatory body.
A forex trader’s choice between a regulated and an unregulated forex broker is one of the most important decisions that one will make. The two are very different in terms of reliability, safety of funds, trading costs, transparency and recourse, which traders need to take into consideration.
In this guide, we explain how that works and examine the different forex brokers that operate under the compliance umbrella of regulations and which fall into the category of unregulated forex brokers.
Regulated Forex Brokers
Regulated Forex brokers for US traders are licensed by government-backed financial regulators. Brokers themselves and these regulators monitor brokers and their activities to keep a close eye on them to see if they are in compliance with stringent rules established to protect traders and practice the business in an ethical way.
Examples of regulatory agencies that oversee forex brokers around the world include:
- The Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in the United States;
- The Financial Conduct Authority (FCA) in the United Kingdom;
- The Australian Securities and Investments Commission (ASIC) in Australia;
- The Cyprus Securities and Exchange Commission (CySEC) in Cyprus;
- The Monetary Authority of Singapore (MAS) in Singapore.
These agencies enforce strict standards that regulated forex brokers must meet related to financial resources, trade execution policies, risk disclosure, handling of client funds, record keeping, reporting, and more. Regulators also periodically audit brokers to ensure ongoing compliance.
Here are some of the key benefits of choosing a regulated forex broker:
Increased Safety of Funds
Brokers are required to keep client funds in segregated accounts at top-tier banks as per regulators. It prevents a broker from using client money for its own use in the event of bankruptcy. In addition, regulators require brokers to maintain minimum operating capital levels to safeguard against default.
In the unlikely event that a regulated broker becomes insolvent, compliance schemes such as the FSCS offer compensation for losses suffered by traders to the limit of $50,000 – $85,000.
Enhanced Transparency
Regulators mandate that brokers accurately disclose important information to clients, including:
- commissions, spreads, and all trading fees;
- order execution policies;
- risk warnings;
- conflicts of interest;
- shareholder structure.
This transparency allows traders to clearly understand a broker’s offering and business practices before opening an account.
Unbiased Trade Execution
Trader brokers make fair deals possible through regulatory requirements, which ensure that prices are not manipulated and client orders are not exploited. For instance, the regulator might verify that the broker’s advertised spreads are the same as the actual spreads. Brokers must report the trade strictly and provide the client with monthly statements outlining account adjustments, trade details, and any fees incurred.
Recourse Channels
In disputes, regulators act as intermediaries between brokers and clients. Brokers must provide processes for traders to make formal complaints of unfair treatment, and disciplinary procedures can fine unscrupulous brokers or remove their licenses if their behavior is repeatedly or egregiously repeated.
Cons of Regulated Brokers
While regulated brokers provide significant benefits and protections to traders, a few potential drawbacks exist:
Higher Fees
Compliance with extensive regulatory requirements comes at a cost, which brokers offset by charging slightly higher fees on things like spreads or commissions.
Slower Execution
Strict oversight of order execution could mean that regulated brokers’ systems cannot execute trades as quickly as unregulated brokers, who do not guarantee fairness in the execution process. That said, for most traders, the difference would amount to microseconds and have little practical impact on trading.
More Account Restrictions
Regulators impose restrictions on leverage amounts, trading access for residents of certain jurisdictions, and, in some cases, additional verification requirements to comply with local laws. These measures will slightly limit account options to those available at less regulated brokers. Nevertheless, these measures are primarily aimed at protecting clients.
Unregulated Forex Brokers
Unregulated brokers are not bound by rules governing licensing, ethics, risk management, handling of client funds, trade practices, reporting, and more. They operate outside government supervision based on their set policies and procedures.
Some unregulated brokers are fair, while most of them are not regulated, and they do unscrupulous practices that put trader funds and interests at risk.
Some of the main risks traders face when dealing with unregulated forex brokers are as follows:
Higher Risk of Fraud or Misuse of Funds
In the absence of mandated segregated accounts to safeguard client money, unregulated brokers have full access to deposited funds and have been known to misappropriate them for business or personal objectives when in financial distress – even if their terms claim otherwise. This leaves traders with little recourse to recover lost money.
About 500 unregulated forex brokers were bankrupt or closed by authorities between 2020 and 2022, with $10 billion in client losses from stolen funds.
No Assurances of Fair Trading Conditions
Brokers can advertise one spread and then manipulate prices to execute trades at wider spreads in order to make more profit from clients without regulation. Similarly, they can boast of fast execution speeds, but nobody checks the system performance or trade details on the back end.
Lack of Transparency
Brokers that operate unregulated are not required to provide accurate and complete information about trading conditions, order execution policies, risk warnings, fees and commissions, company ownership, and other important details, and do not. The broker’s word is not reality, and traders are forced to rely on it. This makes it harder to diligence a broker’s offering or trust its practices prior to opening an account.
No Official Complaints or Settlement Body
There is no regulatory body for traders to complain to in order to settle disputes or get their money back if they suspect unfair or abusive treatment. Their only options are to initiate legal proceedings independently or walk away empty-handed, both of which are impractical in most cases.
Banned from Regulated Markets
Unregulated brokers are prohibited from accessing regulated institutional liquidity sources. Instead, they gain market access through unregulated “bucket shop” liquidity providers, which profit from trader losses and permit dishonest practices like aggressive slippage and extreme spreads. This further disadvantages traders.
Warning Signs of Unregulated Brokers
While no foolproof methods exist for assessing unregulated brokers, these warning signs should prompt elevated caution:
- unrealistically low spreads or commissions;
- guaranteed promises of profit;
- lack of contact details or vague addresses on the website
- website or platform full of grammatical errors
- no demo account is available
- asks clients to deposit funds in personal bank account.
Though regulation does not provide an ironclad assurance of ethical operations, traders are statistically safer sticking to regulated entities. Unregulated offshore brokers have no accountability and no incentive to operate transparently, and most scams and broker blow-ups are involved.
Regulated Broker Recommendations
For most traders, a regulated forex broker is the safest choice. Below are regulators with strong reputations and firm oversight of licensed brokers:
- United States – CFTC, NFA;
- United Kingdom – FCA;
- Australia – ASIC;
- Singapore – MAS;
- Europe / Cyprus – CySEC.
The following brokers are currently licensed and in good standing with their respective regulators:
- Forex.com – CFTC, NFA, FCA;
- IG – CFTC, NFA, FCA, ASIC;
- OANDA – CFTC, NFA, FCA, ASIC;
- Saxo Bank – FCA, ASIC, MAS;
- Pepperstone – FCA, ASIC, CySEC;
- AvaTrade – ASIC, FCA, CFTC, NFA.
This list is by no means exhaustive, but provides a starting point. Whenever you open an account with any broker, always double-check licenses with the relevant regulator.
Things to Consider When Choosing a Forex Broker
While regulation status is important, traders should factor in a number of other variables when choosing a broker.
Costs – Comparing all trading fees, including spreads, commissions, swaps, and conversion fees, between brokers to see who has the most cost-efficient trading option.
Platform capabilities – Ensure the broker’s trading platforms and tools meet your requirements for performing technical analysis, placing orders, using automation, and more.
Asset classes – Beyond forex, brokers offer access to stocks, bonds, indices, cryptocurrencies, commodities, and more. Choose one that provides access to all markets you wish to trade.
Execution quality – Review detailed reporting to ensure the broker’s execution system delivers speed and slippage within expectations during peak trading times.
Trading models – Brokers offer different account types, like standard trading accounts or swap-free Islamic accounts that cater to specific trader requirements.
Customer service – Test drives each broker’s customer support and account services teams to evaluate responsiveness and problem-resolution capacities.
Mobile trading – If using a mobile device, ensure the broker’s mobile platforms offer full functionality present on the desktop equivalent.
Fund safety – Understand where and how a broker holds client funds and which investor protection schemes may apply in case of default.
Company longevity – Research when the broker was established, its regulatory history, management team qualifications, profitability, and other factors that demonstrate overall reliability and financial stability. An extensive track record suggests dependability.
Due diligence across these key aspects provides a more complete picture of a broker’s offering. It helps match one that best suits individual trader needs and preferences beyond the regulatory scope.
The Bottom Line
Ultimately, all traders need to determine if small cost savings with an unregulated broker are worth exposing their hard-earned trading capital to exponentially higher risk than their regulated alternatives can provide.
Regulated forex brokers are the best option for most, in particular, those with limited trading funds as the extra degree of security and of guaranteed fair trading practices are the key here.“ Built-in consumer protections, ethical oversight, and transparency give them a slight bump in fees, which provides a significant advantage.
Of course, regulation is not infallible. Nevertheless, due diligence is still important before choosing any forex broker. However, avoiding unregulated brokers altogether removes the biggest threats to traders today.
Featured image credit: DepositPhotos.com
