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 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.

 

With America on the verge of financial crisis, people are thinking seriously about pulling their deposits out of their local banks.  Most of us think the term "deposits" mean funds that you deliver to the bank for safekeeping, but for nearly 200 years, the courts have sanctioned an interpretation of the term "deposits" to mean a loan to your bank.

Combine that fact with the latest headlines you’re reading about big name banks needing bailouts and you have a rude awakening of just how unsafe your bank may be.

Get expert, informed, and independent information on what you can do to protect your money, right now.

Elliott Wave International, the world’s largest market forecasting firm, has just released a free report, Discover the Top 100 Safest U.S. Banks.

• - The Top 100 Safest U.S. banks (two for each state)
• - How you can choose a safe bank.
• - Five incredibly risky banking conditions.
• - How even the FDIC can't really guarantee your money.
• - Tips on international safe banking.

Most novice Forex traders are unaware that the price for a currency pair can differ from broker to broker. The price, in fact, is set at the discretion of each individual broker. Although retail forex is regulated by the Commodity Futures Trading Commission (CFTC), it is still a market without a central exchange, controlled by brokers who designate the Bid and Ask price. The buyer pays the Ask price and the seller pays the Bid price and each individual broker determines what the Bid and Ask will be. The currency pair's spread is the result of an algorithm that averages the Bid and Ask prices of different liquidity providers and is then widened by the broker based on how much of the spread he wants to keep. So the price for a currency pair that you see on a trading platform is the price that the broker wants you to see.  Careful study of Figure 1 - Broker's Price Feed Window can illustrate how the broker is able to modify the Bid and Ask prices from the incoming price feeds.

Why Do You Care?

Brokers manipulate prices to different degrees and for different reasons.  Inexperienced traders generally seek out brokers with the narrowest spreads.  But do broker offer smaller spreads for profitability or marketability? It makes sense that a company that processes multiple thousands of trades a day can afford to offer their customers a smaller spread than a company that processes fewer trades per day.  So, should you always select the broker with the smaller spreads?  This is really only one part of the dynamic that differentiates one broker from another and its a direct reflection of their Level of Maturity (LOM) as we define it.  This is why, when evaluating brokers, a trader must take more than just a cursory look at their website to determine a broker's suitability and LOM. To quote America's own homegrown financial genius Flavor Flav, "Don't believe the hype."  (marketing hype, that is...)  What does a novice trader, opening their first live account, need to know about a brokers LOM?  How about their financial stability?

CFTC To The Rescue

The CFTC requires all trading firms, including forex firms, to report their net capital every month.  Any trader can access this information and peer into the financial stability of a brokerage firm. CFTC's Financial Data for Futures Commission Merchants report can be downloaded from CFTC's website monthly in either PDF or Excel format. It details the actual amount of capital a forex firm has and how much excess capital there is above the CFTC-imposed minimum of $1 million. The FCM report can also be used to determine which firms operate on the margins and which firms are relatively stable. Firms having less than $1 million in excess capital could be on the hairy edge.  Would you want to be a customer of a marginal firm if a regulatory issue arose or a CFTC fine was imposed?  Brokers which experience regulatory difficulties usually also experience mass client flight, putting them in danger of insolvency.

What About The LOM?

To help me get that warm and fuzzy feeling about a firm’s LOM, I always ask my candidate firms:

• - How many retail forex customers do you have?
• - What is the average size of your retail accounts?

Most of them don't want to answer those questions and, in that case, I just move on.  I won't place my money with a broker who won't answer those questions because, armed with the FCM report, number of retail customers, and average account size, I can begin to paint a picture of the type of broker with which I'm dealing.  Brokers with an equal amount of capital but different size accounts can present a very different picture.  Take a look, for example, at Brokers #1 and #4 in the following three graphs.

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 all use 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...