Professional traders understand that long-term success in financial markets is harder than it appears from the outside. For a long time, the brokerage industry had been lax in disclosing the exact risk factors involved in leveraged trading. The huge decentralised FX industry
especially lacked substantial regulatory oversight to preserve market integrity.
But, the industry is no longer an exclusive domain of large financial institutions and banking giants. In recent years, financial regulatory bodies around the world have stepped up their game, not only to make the markets more transparent but to also prohibit trading practises that heighten market volatility.
The Most Coveted Licenses
Although most countries today have their own financial watchdogs, a few regulatory bodies are highly coveted, on account of their strong and pro-active strategies to protect investor concerns, including protecting traders from increasing cyber security risks. They have set high standards for financial services firms, and procuring licenses is a complicated affair nowadays. Some of the most trusted broker firms have licenses from:
- The Financial Conduct Authority (FCA) of the United Kingdom
- The European Securities and Markets Authority (ESMA) of the European Union
- The Securities and Exchange Commission (SEC) of the United States
- The Australian Securities and Investments Commission (ASIC)
- The Cyprus Securities and Exchange Commission (CySEC)
- The Commodities and Futures Trading Commission (CFTC) of the United States
For a professional trader, the support of a regulated broker is essential, especially if they aim for a long-term profit potential and access to superior trading technologies. Whether an FCA-regulated broker or a CySEC licensed one, here are some common benefits of trading with a regulated broker.
Regulations ensure that trader funds do not get mixed up with the broker’s own capital. Client funds are stored in separate bank accounts, which means lower risk of fund misappropriation. This also means that a broker can always fulfil withdrawal requests promptly, should a trader wish to access their funds.
In the event that a broker goes bankrupt or faces litigation dictating closing of the business, a trader can remain assured that their funds will be compensated for. For instance, the UK Financial Services Compensation Scheme (FSCS) works closely with FCA-regulated brokers and investment firms in this regard, providing a guarantee of up to £85,000 per person, per institution, should the firm become insolvent.
Clients can also receive 90% of the next £20,000. In 2018-19, the scheme paid out a total of £473 million to over 426,000 customers of failed financial firms.
No Promotional Activities Promising Free Money
Brokers sometimes promise special benefits to attract potential clients, and often these are for risky trading activities. At other times, there are hidden policies that do not provide any benefits to traders in the long term. Such problems can be avoided with a regulated broker.
For example, the ESMA
temporary product intervention measures for CFD trading
, launched in 2018, and now permanently adopted by many European regulatory bodies, prohibit brokers from promising benefits to incentivise trading.
Standardised and Compulsory Risk Disclaimers
Leveraged trading products can be risky, which is why regulated brokers issue risk warnings on all their marketing materials and websites. In this way, traders are prevented from getting too adventurous in the markets, in the pursuit of greater profits. According to the MiFID II guidelines released by the ESMA, all brokers not only need to publish these disclaimers wherever necessary, but also maintain similar product information across all marketing channels.
High leverage ratios might seem lucrative to traders looking for quick success. However, leverage also magnifies losses which can seriously derail market structure over the long-term, causing many traders to lose money during high volatility conditions. Regulated brokers are bound by leverage restrictions on risky financial assets. For instance, the FCA encourages a leverage limit of 30:1 for major currency pairs and 2:1 for cryptocurrency trading. The US SEC allows a 50:1 leverage limit on major currency pairs and 20:1 limit on minor pairs.
Reporting and Audit Obligations
Most financial regulators require broker firms to undergo periodic audits of their accounts and financial statements by external audit firms, to rule out money laundering and fraud. It is also mandatory for broker partners to provide complete and regular account statements to traders, so that they remain in sync with their trading activities and account balances. Data reporting formalities are taken very seriously under the Data Reporting Services Regulations 2017, imposed by the UK FCA
No Manipulative Practises
A licensed broker will not manipulate client trades, by tweaking their trading system. Such practises are severely punished by the regulatory authorities, leading to lifetime bans, fines and even criminal proceedings in some cases. Regulations ensure that traders have access to transparent and robust trading systems. They remind brokers that providing high-quality consumer products and safeguarding investor interests are extremely important. All this means that a financial firm cannot focus solely in its profit margins.
Educating clients about market risks is not limited to risk warnings only. This is why reputed brokers take steps to educate clients about trading, market behaviour, macroeconomic factors and the trading terminals. Demo accounts are provided to help traders familiarise themselves with the market and trading system, while also trying out different trading strategies.
Regulated brokers are necessary not just for investor protection, but also to preserve market integrity. It is a matter of accountability, law and establishing trust in the domestic financial markets, which is essential for the growth of the overall economy.