The Importance of Forex Regulation

The Forex market is the world’s largest financial market so far. In a globalized economy, the importance of the Forex market to the everyday consumer cannot be underestimated. The rate a currency can be exchanged in the Forex market determines the price consumers pay for products, vacations, the interest rate on deposits and loans and the rate of the return of our investments. Despite the importance of the Forex market, it continues to be largely unregulated.

Forex transactions can be classified into two types – speculative and commercial. A speculative transaction is a transaction taken merely to make profit from currency moves. A commercial transaction is a transaction that is backed by underlying economic activities, such as loan to an overseas company or payment for an import.

In the Forex market, speculative transactions widely exceed commercial transactions and account for larger portion of Forex trading volumes over the years.

Online Forex trading by retail investors has expanded in the past years, with transactions contributing from about 125 billion USD to 150 billion USD in daily Forex turnover. Apart from the evident risks such as large losses due to excessive leverage and fraudulent activities, Forex investors must be familiar with the following risk factors:

Information disadvantage: Retail investors are succumbed to disadvantages in the unregulated Forex market since they do not have access to information about large commercial transactions which is available only to the big investors who dominate the market. This information lack of balance makes it harder for the average retail investor to gain advantage over the professional investors.

Heightened Volatility: The rise in speculative activity, in particular high frequency trading dominated by algorithmic trading, might result in higher currency volatility, which increases the risk of runaway losses for the small investor or trader.

While the Forex market regulation was almost nonexistent in the past years, the swift growth of Forex trading among retail investors has led to regulation by commercial bodies such as Commodity Futures Trading Commission (CFTC). The CFTC has jurisdiction over Forex transactions in the US, and it requires all Forex brokers to be registered and meet financial standards set by the National Futures Association (NFA).

The biggest risk in non-regulated Forex trading is that of fraudulent activities, which include boiler room tactics, excessive fees generated by churning trading accounts, Ponzi schemes and misrepresentation.

With almost 27,000 US traders having lost 460 million USD in Forex trading between 2001 and 2008, the growth in Forex fraud cases led the CFTC to set up a dedicated task force to deal with the problem.

Strict regulations introduced in the US IN 2010 in order to protect Forex traders have exterminated Forex fraud in the US to a large extent. However, in other countries the regulation status has remained mixed.

In Japan, the Financial Services Authority (FSA) proactively regulates Forex transactions. One of its achievements is lowering the maximum leverage that is available to Forex traders to 25:1 in August 2011, after cutting it to 50:1 the year before. In the UK and continental Europe, regulation is limited and leverage has few limits, with levels reaching as high as 200:1.

For institutional traders, local central banks regulate Forex market. However, there isn’t any global regulator for the worldwide Forex market. There are several reasons why institutional Forex regulation is necessary:

High Hedging Costs: Increased currency volatility caused by excessive speculation results higher costs incurred by corporations and other commercial players for hedging currency risks

Preventing Enrichment of a Few at the Expense of Millions: Exaggerated or unjustified currency transaction can adversely affect a nation’s economy. Even though such moves may be supported by underlying economic fundamentals in some cases, in many other cases temporary weakness in a currency can be brutally exploited by speculators, sending it into free fall. This may result in capital flight and a prolonged recession rushed by severely higher interest rates in order to defend the currency.

A regulatory levy such as the Tobin Tax may restrain wild Forex speculation by retail and institutional traders and may offset the costs of more Forex regulation. However, any suggestion to introduce regulation for the institutional Forex market is likely to meet opposition by major currency traders. As a business owner or investor, you may occasionally have a justifiable need to trade Forex to hedge currency risk for your business or investment portfolio. But be watchful of the risks of speculative Forex trading.

Do a diligence research before putting a Real Money on your Trading Broker, 

what else do you want to include as a reminder?  

Written by: Trading Growth

Top 5 Things to Look For in a Forex Broker

To get a piece of the action in the $5.3 trillion forex market, you will first need a broker.  Brokers provide access to price quotes and processes trading orders. Deciding which broker to work with is without a doubt, one of the most important choices a trader will make.

The right forex broker will provide you with a seamless trading experience, where all you have to worry about is placing the right orders. The rest of the process should work like clockwork. On the other hand, if you trade with a mediocre, or even worse, fraudulent broker, your future as a trader is likely to be full of headaches and uncertainty.

Many traders find it extremely difficult to choose a broker. This is likely because there are simply so many to choose from! There are hundreds, if not thousands, of brokers currently operating in the marketplace. Therefore, the first challenge for any new trader is sifting through them and choosing one that is trustworthy and dependable. To help make this decision easier for you, let’s discuss the most important things to consider when choosing a forex broker.

CONTENTS

• 5. Regulation
• 4. Type of broker
• 3. Cost of trading
  • Minimum opening balance
  • Fee structure
• 2. The trading experience offered
  • Spread and liquidity
  • Pairs available
• 1. Customer support

5. REGULATION

The forex market, just like other financial markets, is regulated in most countries. Before even considering anything else about the suitability of a broker, the most important thing to ensure is that it is registered with a reputable and independent regulatory body.

Different countries have their own regulatory bodies that enforce unique sets of rules. Their main focus is typically making sure that the brokers they are supervising are well capitalized and that their clients’ funds are protected. Furthermore, they ensure that brokers do not engage in unfair practices against their traders.

The map below shows some of the most well-known and respected regulatory bodies. Most keep a public record of any broker who does not comply with their regulatory rules, as well as any disciplinary action taken against their members. It is extremely important that the broker you register with complies fully with the regulatory body they are associated with.

4. TYPE OF BROKER

Forex brokers can be divided into two broad categories; dealing desk and no dealing desk.

A broker with a dealing desk takes the other side of their clients’ trades.  At times, this aspect may raise the issue of a conflict of interest between the broker and their client. They give price quotes to their clients that closely follow the prevailing market prices but are not always exactly the same.

Dealing desk brokers are often called market makers. A market maker provides its clients with liquidity, as well as prices and is obligated to accept every trade a client executes. Market makers typically make their money through spreads in the quotes they give to clients.

No dealing desk brokers do not trade against their clients. Also known as Straight Through Processing (STP), these brokers pass their clients orders directly to interbank participants and typically either charge a commission for every trade taken or mark up the spread.

Electronic Communications Network (ECN) brokers also do not use dealing desks. Unlike market makers, they do not have an obligation to provide liquidity for their clients.  ECNs bring together client orders and price quotes from liquidity providers into one market. True ECNs have variable spreads which tend to be very low. They are also able to show their clients the depth of the market. They charge a small commission for every trade taken.

3. COST OF TRADING

MINIMUM OPENING BALANCE

It is important to be well informed about the exact cost of trading with a specific broker. The most immediate cost is the minimum account opening balance. The brokers that are accessible to you will largely depend on the amount of money you are able to deposit into your account. Different brokers have different initial balances, with some requiring only $10 while others require a minimum of $100,000. Most market maker brokers require a deposit of between $100 and $300.

FEE STRUCTURE

When considering broker fees, you need to ask yourself whether you would rather pay commissions per trade or have wider spreads built into the quotes you get. Having to pay a commission may at times allow you to save on costs, especially when you are using decent ECN or STP brokers. 

2. THE TRADING EXPERIENCE OFFERED

SPREAD AND LIQUIDITY

Low spreads minimize your trading costs and high liquidity ensures that you are able to get in and out of a position at the time and price you want. These two go to the heart of what a forex broker’s business is all about. A good broker must be able to consistently provide you with low spreads and high liquidity. As most traders learn eventually, not all brokers can do this.

There are no shortcuts here. After conducting real research and coming up with a few potential brokers, you will have to look further into the ones you shortlisted to test whether their services match up to your requirements. There are no amount of reviews or online material that can do this job for you. You will need to test out their services yourself.

PAIRS AVAILABLE

What pairs do you want to trade? Do you want to trade CFDs? While all brokers enable you to trade major currencies, CFDs and exotic currency pairs are not nearly as common. Make sure your broker offers a wide variety of instruments to ensure you are always able to diversify your trades. This can easily be done by testing a broker’s demo account. 

1. CUSTOMER SUPPORT

A broker’s customer service center is the simplest, most effective way to contact your account manager or get assistance with your trades. As such, you need to make sure, before you open your account, that your broker has an effective team that is able to give you the assistance you need.

Does your broker have service representatives who can speak in your mother tongue? It is important that you are able to communicate clearly in a language that both you and the person you are speaking with understand well.

Being able to contact your broker in an emergency is also important. How many modes of communication are you able to contact customer support with?  At what times are they available? At the very least, any decent broker should have email, phone and live chat options available during the days when markets are open. You should also consider whether you are comfortable with the quality of the support. Email response times, professionalism of the service reps and quality of support given are just a few things to look out for when inspecting a broker’s customer support team. 

 

This is useful, what do you want to add on that is not included on the list? 

Source By: Prime Pair