When trading with speculative financial products, it is not just about the right strategy and good risk management. Choosing the right broker also plays an important role. In the past, unfortunately, some brokers have experienced scalability issues. Fortunately, there are also many providers who work honestly and seriously. The following article tells you how to separate the wheat from the chaff and which brokers you should avoid.
What is the meaning of good regulation?
Licensing of brokers and their associated supervision by a regulatory authority is to ensure that clients’ rights are respected and their data and funds are well protected. Protection against money laundering and fraud is also an important function of regulatory authorities. However, being regulated by a particular regulator, brokers have to adhere to standards that are set by them themselves and differ from authority to authority. For this reason, it is important to keep a close eye on the competent authority. Even though this is not an absolute guarantee of seriousness, if a broker is regulated by a very reliable and rigorous authority, the broker has permission to offer its services and must follow certain rules.
Client funds are managed separately
An important standard set by all European authorities and many non-European regulators is the segregated management of client funds. These are ultimately the property of the client and hence cannot be used for other issues of the broker. So the broker has to raise money for advertising, administrative costs or other expenses. The clients are fully serviced to provide the required margin in deposit trading. The clear separation of these funds makes it possible in many cases, even in the event of bankruptcy of the broker, to repay the funds to the clients. A good regulator also helps in this matter and ensures that the insolvency proceedings are conducted properly and the clients of the insolvent clients get their money.
Besides the fact that client funds are managed separately, it is also important where they are managed. Again, it speaks for the broker, if it manages a financial institution for a high ranking bank.
Regulators are looking for evidence of price manipulation
Controlling the proper design of trading prices is also one of the functions of a good regulator. However, this is relatively difficult, especially for broad market makers, in this case brokers, who own the prices and are thus at least legally in business as direct competitors of the client. A reputable seller avoids potentially loss-making trades by internally balancing all of its clients’ trades through an automated process and placing a trade in the opposite direction of switching positions with another seller. Thus, the broker makes its profit exclusively with the trading fees it receives from the client. In this case the conflict of interest between the broker and the client no longer exists, as it does not matter for the benefit of the broker, whether the client makes a profit or a loss.
However, by not hedging against their clients on the financial market against direct trading losses, but manipulating prices so that clients end up losing significantly more money than they would have secured, it is possible for them to earn higher profits. In order to detect and punish such frauds, strict regulators precisely control the price developments of all brokers. Should it come to irregularities, it will be pursued. If fraud is detected by price manipulation, a broker is facing high fines and immediate withdrawal of license.