The difference between being "regulated", "licensed", and "something else..."

Yesterday, I was entering a new (unidentified) company in our Forex brokers database. Their website was professionally designed and the company offered commission-freetrading on more than 100 currency pairs with spreads as low as 0.5 pips on the MetaTrader4 platform.

VERY NICE!

They have seven (7) offices with very impressive addresses around the world in cities like Vienna, London, New York, Chicago, Mumbai, Moscow, and Saint Petersburg.

IMPRESSIVE!

You can open an account with them for as little as $200 USD and even get a special-purpose personal loan for up to 200% of your deposit amount.

UH-OH, RED FLAG!

Did I read that right? A special purpose loan? I know about trading on margin but I've never heard of getting a personal loan from a broker to trade Forex. Maybe they just used unusual phrasing to describe margin trading. I had to check into this a little further.

I decided to investigate their regulatory status and they listed the ICC. I googled "ICC" and found the ICCInternet Chess Club, ICC IllinoisCentral College, ICC InternationalCricket Council, and finally the ICC International Chamber of Commerce. Oh! Heavens to murgatroid! The company's only certification of their legitimacy was registration with the International Chamber of Commerce.

RED FLAG #2!

Well, that was very laudable for the company to voluntarily register with the International Chamber of Commerce. The ICC "is the voice of world business championing the globaleconomy as a force for economic growth, job creation and prosperity", but the ICC is NOT a regulatory authority and provides no trader protection.

I had to dig a little deeper so I called their New York office. No answer. I thought it might have been a little late in the day so I called their Chicago office. After six rings I got a recording with a British accent requesting that I leave a message.

I HAD ENOUGH!

There are many international Forex companies adept at giving the appearance of being a professional brokerage with all the trappings of financial success including registration with a sanctioned regulatory authority. However, while the named body may be completely authentic, it might not be a "regulatory" agency with a public or governmental mandate for financial oversight. A true regulator is responsible for overseeing the behavior, services and products of a company in the financial services sector and has the power to fine, enforce punitive actions or even stop a firm from trading by removing its license.

Being licensed is different from being registered with a regulatory authority. While a Forex broker's license might provide you some degree of comfort, you still have little or no protection compared to trading with a properly regulated firm. A license can be obtained if a firm meets the criteria for operation and agrees to follow a code of conduct.  In the UK, for example, the body that grants licenses is HM Revenue& Customs, while the regulatory body is the Financial Services Authority (FSA). In the U.S. their counterparts are the National FuturesAssociation (NFA) and Commodity FuturesTrading Commission (CFTC).

A licensing body doesn't perform the same administrative functions as a regulator, nor does it have the same enforcement powers. Failure to comply with licensing rules or operating code could result in a license being revoked and stopping the firm from trading. But a licensing body has little or no power to arbitrate a dispute you might have with your broker.

A regulatory authority, however, can not only investigate and take action in a broker-trader dispute, but can even intervene when trading practices need to be changed; even if those practices are not deemed illegal, just not in the best interest of the trader. A regulator can protect a trader against poor practices which, while not in violation of any license code, may still be deemed as otherwise unfair.

With such wide diversity in regulatory oversight between regulatory authorities around the world, it is incumbent upon anyone considering trading Forex to check the agency with which their chosen broker is registered. If you are trading with a broker in a country where the company is not registered, you are NOT protected. Take a look at how GAIN Capital protects itself and its traders by employinga regulatory umbrella where they do business. This is why we are changing our company profiles to include the broker's regulatory registration data.

Make sure to check our list of International Regulatory Authorities to verify with which agency your broker should be registered.

By the way, I will still probably put that company, with its seven websites, into my database because that's what I do. I make the information available and I don't pass judgment. That's your job, but please be diligent.

We did a quick review of our MT4 brokers list this week and found:

Our original list contained 132 brokers around the world that offer MT4 as a trading platform. I'm sure that 132 is not an accurate count but it gave us a good foundation to work from.

From that list, there are 56 brokers in our MT4-Brokers quick list.These are companies for which we have already completed a company profile in our database.

This is a great list for anyone seeking MT4 brokers.  Just take a look at the MT4-Brokers quick list, as resource-wise it's pure gold.

29 of the original 132 are either out of business; or we could not connect to their website; or they are up for sale; or they don't offer MT4 as a platform anymore, etc.

Defunct MT4 Brokers
Former MT4 Broker	Former URL
1st Trader Company	http://www.1sttrader
Adamaz Forex	http://fractal.uniweb.ru/
CFGTrader LLC	http://www.cfgtrader
COESfx (COES Inc.)	http://www.coesfx
CompassFX	http://www.compassfx
Dunhill Scott, Inc.	http://www.dunhillscott
EuroNet Financial Network LLC	http://www.euronet-fn
FINEX Group GmbH	http://www.finex
Forex Global Investment LLC	http://www.forexgi
Forex India	http://www.fxindia.org/
Forex Private	http://www.forexprivate.ru/
FX4us	http://www.fx4us
GoldMany Investment Holdings Ltd	http://www.goldmany.org
Inforex IB	http://www.inforex.org/
INTX (Inteks)	http://www.intx.ru/
Joy Financial Group	http://www.joyfg
Lefco Bank	http://www.lefco.ru/
Masterpiece Futures	http://www.masterpiecefutures
North Shore FX	http://www.northshorefx
One World Forex	http://www.1world-forex
Performance Capital	http://www.fxpcil
PFEC	http://www.eforex-asia
ProFXBroker	http://www.profxbroker
SNC Investments	http://www.sncfx
Solid Gold International	http://www.sgfs.us/
SpaceVision Switzerland SA	http://www.spacevision-fx.ch/
Spencer Financial	http://www.spencerfx
Tradeco Clearing Group	http://www.tradeco
Tradex Indo (Tradex Swiss AG)	http://www.tradexindo

We will add the remaining 47 MT4 brokers to our profile database over the next couple of weeks. We'll try to keep up with this. New MT4 brokers open their doors for business every day.

Cyprus seems to be the choice of many Forex brokers who have opened their doors for business in the last few years.  Why do they select Cyprus to headquarter their companies?  Maybe its because of the high security and privacy which applies to all registered companies in Cyprus.

Simply put, the operators can hide their identity; their location; and most of all - their money.  So, for example, when you open a trading account with a Forex broker located in Cyprus, you really don't know to whom you're giving your money. I'm not accusing all the Forex brokers in Cyprus of being dishonest or even shady, but why operate behind a veil of secrecy if you run an upstanding, honest business?

Here is one possible explanation: Cyprus joined the European Union in 2004 but it still enjoys the unique advantage of being able to structure tax free offshore companies.  It is very easy to incorporate a company in Cyprus and open a business bank account which includes an internet banking platform (that can be used for both business and personal Forex trading); and a  virtual office with telephone, fax and mail forwarding services. You can actually operate a Cyprus business without ever stepping foot on Cypriot soil.  In fact, not physically operating in Cyprus is the preferred modus operandi.

A company can operate tax free offshore and still enjoy the benefits of being incorporated in the European Union. There is no withholding tax on the payment of dividends, interest or royalties by a Cyprus non-resident company, to non-resident individuals or companies.

To be non-resident, the company must be managed and controlled from outside of Cyprus. This means that the Directors and Shareholders must be non-resident and not do business within Cyprus. The company can continue its non-resident status even if it has an office in Cyprus, but it is then taxable on profits arising only within Cyprus, at the low rate of 10%.

Yes, operating a business in Cyprus can be an extremely lucrative enterprise. Ava Financial, Easy Forex, eToro, Forex Yard, FxPro, GIGFX, Lite Forex, UFXBank, and Windsor Brokers are just some of the Forex brokers I found operating out of Cyprus.  Cyprus Investment Firms (CIFs) register with the Cyprus Securities and Exchange Commission.  I checked their register and only found Easy Forex and Windsor Brokers listed.

If you take into account the similar Forex companies operating in Seychelles, Belize and British Virgin Islands (BVI), you begin to understand why the trading public's perception of Forex brokers leans toward the negative.  

Here's a real world example.  Last July, I was in Antigua for a few days and decided to pay a visit to the FXCast offices at 241A Peninsula Drive in Jolly Harbour. That's the address they publish on their website. I couldn't find Peninsula Drive anywhere in Jolly Harbour but I did find 241A Jolly Harbour Drive. It was an empty villa for rent. Maybe just a coincidence.  When I returned home I sent FXCast an email asking for clarification on their office location and they responded that, "in the summer, the FXCast staff is either in St. Johns or in Europe."  

Maybe I just couldn't find the correct address that day and went to the wrong place.  But if that was the case, why didn't the FXCast staff member who responded to my email tell me that I had the wrong address? You just never know, with offshore companies, who you are dealing with.

It gives me a sense of comfort when I can walk into my local Charles Schwab office to transact business.  If there is an issue with my Schwab account I know exactly how to get in touch with them by phone or (and this is the point) in-person.  

You can't do that if your brokerage company is in Cyprus and you really don't know where the broker is.

 

If you have been following along, remember that we're trying to illustrate that asking the question "Who is the best broker?" should be revised to "Who is the best broker for me?"   Read my previous post, DataInsight Broker Evaluation.

Within the DataInsight Market Profile, Niche Players are companies which rank lower on both the Level of Maturity and Range of Services scale. Typically, these companies are relatively new in the market serve a smaller customer base.

Instead of the next big company, there are a myriad of small companies with simple ideas that fill the Forex landscape. They don't try to be all things to all people but rather, they strive to do one thing extremely well.  Niche players aren't bad choices because they are young or small.  Sometimes these companies make a strategic decision to be a niche player to serve a different type of client - fill a different need.  Niche players may just be the right fit for you.

Think about this. Do you really need a company that provides trading, training, market and technical analysis, trading systems, trading signals, and managed accounts?It doesn't make a lot of sense to declare that Company A is a better broker than Company B simply because it is bigger, older, or more popular. Yet, there are dozens of Top Ten broker rankings that only consider the size of a company or the number of website visits they receive daily.

Let's say, for example, that Broker A is a niche player serving 1,000 clients with an average account size of $100,000. Broker B, on the other hand, is a full service company with 20,000 customers with an average account size of $5,000. You can see how these companies fill a different need and might appeal to a different type of trader.

Again, what we illustrate with our Market Profile Sectors is that Forex companies fit an identifiable profile and, once you determine which type of broker profile suits your needs, then you are more likely to find a broker that meets your personal requirements.  Bigger is not necessarily better.

Tomorrow, Early Risers.

When it's time to open a trading account, novice traders always cruise the online forums asking the same question, "Who's the best broker?" Well, the fact is, there is no way to answer that question in a manner that is optimal for all traders. Brokers come in all shapes and sizes and sometimes it takes a little while to find the "right" one for you.

I have accounts with several brokers and the only thing that they have in common is that they alluse MetaTrader 4 as a platform. I have a self-imposed ceiling that limits the amount of money I entrust to any broker so, when an account reaches my predefined limit, I open an additional account with another broker. I am always interviewing potential brokers so I have developed criteria that my candidate brokers must meet before I give them my hard-earned money. Nobody expects the Spanish Inquisition -- expecially brokers -- but if they don't want to answer any tough questions then I look elsewhere for a broker who will. Believe me, there are tons of them out there.

I don't believe in rankings to find the right broker. Visit any number of websites that rank online brokers and you will find that none of them agree on the top ten. Forget about the top 150. So, over the years, I have developed my own system to help me identify the right broker for the style of trading that I plan to use. I trade my self-directed IRA, for example, with a broker who allows me to tax their mini-account server with hundreds of auto-trades a day. Most brokers wouldn't trade-off precious bandwidth for the pennies they're making on the spread from those trades, but this one doesn't mind. I also place longer-term EUR/USD position trades with another broker, and I day trade the 1-minute chart during the London session with yet another firm. I selected each of these brokers based on the trading style I wanted to use. No broker rankings that I can think of would have been helpful in making those selections.

In general, I look at two major areas when evaluating a broker: (1) Level of Maturity (LOM) and (2) Range of Services (ROS). In determining a company's LOM I collect a range of data (some quantitative, some qualitative) from a number of sources that identify and/or define attributes like age, trustworthiness, customer service, consumer confidence, and financial viability. Determining ROS is a little easier because I have a pretty exhaustive list of easily measurable services, features, and offerings that a broker should provide if they are going to get my business. Within these two categories (LOM & ROS) I have defined 62 data points that make rating a broker an objective, statistical analysis exercise. It's a time consuming process, but my money is at stake so I take the time. It's called due diligence.

Over the course of the next few weeks I'll be explaining pieces of my broker selection methodology here on Turtle Soup. We're working very hard at ForexTurtle to automate the process and incorporate it into our DATAINSIGHT facility.  Our goal is to provide a more accurate, objective, and efficient web-based broker comparison tool. We think that ranking brokers from 1 to 10 will soon become obsolete. So stay tuned...