The global forex market averages daily trading volumes of over $6 trillion.It is the largest financial market in the world, with plenty of opportunitiesaround the clock, and it offers easy accessibility for any new or experiencedinvestor.
To get exposed to this market, you need to sign up with an online forexbroker. Investing is generally a decision-making activity, and choosing abroker is one decision you need to get right.
Brokers provide you with access to the global financial markets. Some oftheir offerings could include access to a trading platform (for buying andselling global financial assets), charting tools, educational resources, andpractical trading tools.
In essence, a broker is your partner as you seek to explore the markets.Forex is a volatile market, so you need a partner that will provide you withmaximum peace of mind.
Forex Regulation
Forex is a global decentralized market, and this inherently makes itdifficult for a single body to oversee the entire industry. Depending on yourjurisdiction, there is a relevant regulatory body that sets the standards andguidelines that online brokers must comply with.
In the financial world, the purpose of regulation is to protectinvestors from fraud or any other undisclosed risk. But regulation varies fromjurisdiction to jurisdiction, with some bodies considered to be stricter ontheir rules and guidelines, whereas others are very lax. Some of the majorregulatory bodies include the US’s CFTC, Cyprus’ CySEC, Australia’s ASIC,Israel’s ISA, and Japan’s FSA.
Forex brokers, such as AvaTrade, are licensed andauthorized in multiple, strict jurisdictions. Generally, stricter jurisdictionsprovide more client protection compared to the less strict ones.
To earn the trust and credibility of both local and internationalcustomers, reputable brokers pursue regulation in stricter jurisdictions wherefailure to comply to set guidelines can be very costly.
There are other offshore locations where regulatory bodies areconsidered to be more lenient or rather very lax in implementing their rules.
While such jurisdictions make it easy for newer brokerage firms toemerge, they may also not provide the much-needed peace of mind that investorsrequire.
Why Are Some ForexBrokers Unregulated?
There are also plenty of brokers that are not regulated. Regulation isgenerally considered the first sign of a genuine broker.
Not all unregulated brokers are frauds, but the lack of oversight andaccountability makes it easy for some of them to engage in unethicalactivities. Some of the reasons some online brokers operate without any licensecould include undercapitalization, high cost of compliance, and tax avoidancemeasures.
Pros and Cons ofRegulated Brokers
Pros
Safety of Funds
One of the major conditions for regulation is protecting investors’funds. Regulatory bodies typically require brokers to hold client funds insegregated bank accounts, and never use the funds at any given time for theirown company operations.
Furthermore, in some jurisdictions, investor funds must be insured so asto guarantee reimbursem*nt in case a company becomes insolvent.
Transparent Services
Regulated brokers tend to provide honest and transparent servicesbecause there is a body that oversights their operations. Some of the biggestforex scams include identity theft, platform manipulation, and dishonestpromotions.
Regulatory agencies perform random checks on the operations of companiesunder their jurisdiction to ensure that they remain honest and transparent inall their operations and service offering at all times.
Favourable Dispute Resolution
One of the best reasons to trade with a regulated broker is that youwill be guaranteed fair resolution in the event that any dispute arises.
Regulatory bodies are mandated to protect investors, which means thatyou can expect just treatment in case you ever want to resolve any issue thatarises between you and the broker.
Cons
Limited Choice
There is practically no disadvantage to trading with a regulated broker.Still, adding regulation as a filter can limit your choice of availablebrokers, trading instruments, such as synthetic indices, as well as tradingconditions, such as much higher leverage.
Pros and Cons ofUnregulated Brokers
Pros
Plenty of Bonuses
Regulatory compliance is a huge cost for brokers. Additionally, mostunregulated brokers tend to be new companies focused on attracting new clients.
These reasons can result in a huge budget for marketing, which willtranslate to generous bonuses and promotions for both new and existingcustomers.
Easy Accessibility
Unregulated brokers typically place little restrictions on accessingtheir services. No matter your location or circ*mstances, you can easily signup with them and start trading online.
For instance, some countries do not permit online trading or have placedstrict laws on how it should be conducted within their jurisdictions. If youreside in such locations, unregulated brokers can provide easy access to theworld of online financial assets trading.
Attractive Trading Conditions
Some unregulated brokers are able to provide beneficial tradingconditions such as high leverage and diverse trading instruments such assynthetic indices. Investors who need such conditions might prefer to tradewith an unregulated broker.
Cons
High Risk
When you trade with an unregulated broker, you are basically dealingwith a company that is not accountable to anyone or any entity. They do notoperate according to any set of rules or guidelines, and there is no guaranteethat your funds are kept safe or that even your confidential information issecure.
Since no one is overseeing and regulating their operations, there is noway to figure out whether the intentions of the company are genuine or shady.
These types of brokers y can easily manipulate their platforms so thatinvestors easily lose their trade positions or they could even run dishonestpromotions that are merely designed to rip investors off rather than to beredeemable.
Unfair Dispute Resolution
When you have a dispute with a regulated broker, the relevant regulatoryagency will act as the mediator. In contrast, if you have a dispute with anunregulated broker, the company will act as both the defendant and judge. Thelack of any just recourse means that you will not be guaranteed any fair judgment.
Regulation is an important consideration for any investor. A good brokerwill ensure that you will have the best environment so that you can trade withmaximum peace of mind. The first sign of a potential bad broker is the lack ofregulation.
Nevertheless, it is important to assess the type of regulation that yourpreferred broker possesses. Achieving multiple regulations in top jurisdictionssuch as Japan, the US, Israel, and Australia can be a good sign of a safe andtrustworthy online CFDs and forex broker.
