David Waring

In our last lesson we began a new module on choosing a forex broker, with a look at why this process is so confusing for traders new to the forex market. In today's lesson we are going to continue our free forex trading course, with a look at two of the most important factors to consider when choosing a forex broker, regulation and financial stability.
As we touched on briefly in our last lesson, the regulatory environment for the retail forex market is different from that of the futures and equities markets. While most countries have had regulations in place which govern activity in the futures and equities markets for quite some time, as the retail forex market is relatively new, its regulations are still evolving in many countries, and in some countries do not exist at all.

As the InformedTrades community is made up of traders from all over the world, I would love to be able to go into the specifics of regulations for each country. Unfortunately however this would not be feasible from a time standpoint, so I am going to instead give a framework that traders can use to evaluate the regulatory environment in any country, by walking us through how I would evaluate a US Brokerage Firm. For those who have knowledge of, or questions on, the regulatory environment in other countries, I encourage you to post in the comments section of this lesson on InformedTrades.com.

To make a long story short, the retail forex market came under the Jurisdiction of the Commodities Futures Trading Commission (CFTC) with the passing of the Commodity modernization act in 2000, and is currently going through some changes after the recent passing of the farm bill. The industry body that currently enforces the laws set by the CFTC is the National Futures Association (NFA), and if you go to their website National Futures Association - NFA is a regulatory service provider for the derivatives markets, you can read about all the different requirements that firms offering retail forex trading in the United States have placed on them. Also on this website, in the upper right hand corner of the site, is a link that says "Broker/Firm Information". If you click this link you can enter the name of the firm that you are researching and see who the owners of the firm are, as well as any complaints or actions that the NFA and/ or CFTC has taken against the firm. One thing to keep in mind here is that, as we covered in our last lesson, there are many firms with very few clients who offer forex trading, so it is important to consider the size of the firm when researching complaints, so you can make sure you are comparing apples to apples.

The next webpage that is of interest to many traders when researching which firm to trade with, is the CFTC's financial data page, which reports how much capital each of the Forex Broker's have. This is important because, unlike in the stock and futures markets, if the forex broker you are trading with goes bankrupt, your account is not protected under current regulations. If you visit the page for this lesson on InformedTrades.com, I have included a link to the CFTC's financial data page, where traders can get up to date figures on the financial stability of US based forex brokers, just below this video.

After clicking this link you will see a report with all the US Futures and Forex firms listed on the left hand side. Then, scrolling across the top there are 2 columns that are important to us. The first is the column that says "Net Capital Requirement". This is the amount of funds that the firm is required to have in liquid assets, or in other words assets that are easily convertible into cash. This number is set by the CFTC to make sure that a firm has enough cash on hand to cover itself if something goes wrong. If a firm drops below this requirement, the CFTC will step in and shut the firm down in order to protect client funds.

Now that we understand this, the next logical question that many traders will ask is, how close is the firm they are trading with, or considering trading with, to falling below their "Net Capital Requirement"? On this same page you should see a column that says "Excess Net Capital" which gives us the cushion that a firm has, before they would get into a potentially troubling position.

The last thing that it is important to keep in mind here, is that the CFTC has recently upped the Net Capital Requirement to a minimum of $20,000,000 for all forex firms, a level which will be phased in over the coming months. With this in mind, it is important to be sure that the firm you are trading with not only has plenty of excess capital to meet current requirements, but also future requirements.

If you are considering opening a forex account with a Non US Firm, then I strongly encourage you to do your research into what the regulatory environment is in that firm's country, so you can make sure that the neccessary protections are in place to protect your capital, in the event that the firm you are trading with runs into financial difficulty.

That's our lesson for today. In our next lesson we will look at how to evaluate the next factors many traders consider before opening a forex brokerage account, execution and transaction costs.

As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

okmich

After reading the very educating section, I downloaded the financial data from the site of the regulatory body. I was surprise not to find some US-based forex broker I know. One checking the broker's site, I find clauses like "We are backed by a large financial institution that ....".
How do you think this sound? Shouldn't the individual trader know the structure of his/her broker?

David Waring

Hi okmich,

Glad to hear from you and yes I think it is always a good idea for traders in the forex market to understand the structure of their brokers.

Ultimately what you want to know from a safety of funds standpoint is what the name of the instution is where your account is being held. Not the bank where the firm's account is but what firm owns the client funds account, and then the financial stability of that firm.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

FinTrader

I have been thinking about opening account with FXCM, untill I did some DD.

CFTC Press Release 4892-04

Federal Court Issues Final Judgment in Trial of Fraud Action Brought by the CFTC

U.S. Commodity Futures Trading Commission Files Action Against Futures Commission Merchant Forefront Investments Corporation d/b/a CFG Trader For Failure to Maintain the Minimum Amount of Net Capital Required by Federal Law

I wonder if the crooks Jayson Kline, Charles Fremer and Edward Johnson are still on board??

...hard to find honest and clean FX Broker, that would have also competitive pricing and good platform... i quess you get what you pay for...?

David Waring

Hi FinTrader,

Glad to hear from you.

While FXCM is involved in the complaint that you reference if you have another read through it you will see that the company that the people you reference are from and FXCM are two separate companies.

The reason why FXCM was named in the complaint is because the options traders and company who committed the fraud were trading them at FXCM, not because they worked there.

Hope that helps.

Best Regards,
Dave

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InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Guest

Hi David,

Your website is great. It is a great service you are doing and i really appreciate that.

1) I was comparing big player like Deutsche Bank Securities with FXCM.
Net capital ratio requirement is 30 X bigger, Excess capital/Net Capital ratio for Deutsch is 13 and 5.8 for FXCM.

How do you compare Deutsche Bank and FXCM on all fronts.
What value added services does small players provide wrt to big ones to stay in the game and stay ahead of the curve.

2) Is Daily Fx part of FXCM?

Best Regards
Suresh

David Waring

Hi Suresh,

Glad to hear from you.

Thanks for the compliment but I only deserve part of the credit as its our community and our members willingness to share knowledge and help each other learn that really makes this site great.

Before the financial crisis I think you could say that you hit the nail on the head that the advantage that a firm like DB has over a firm like FXCM was the size of their balance sheet. I think that is still somewhat true today, but definitely less so now where many traders look more favorably from a financial stability standpoint on a firm like FXCM that is not really affected by the financial crisis like a bank is.

With this in mind I think one could make two strong arguments for trading with DBFX over a smaller forex broker:

1. Safety of funds.

2. Research - An account with DBFX gets you access to a lot of the same research that DB's institutional FX clients get some of which is in my opinion a step above what you can find at the retail forex brokers.

The downsides are:

1. No micro account and higher account minimums.

2. FXCM gives you more value added services like trading signals, webinars etc that I don't think you get access to at DBFX but I may be wrong.

I don't know if they are legally the same company but if not they are at least run by the same people.

Hope that helps.

Best Regards,
Dave

Hope that helps.

Best Regards,
Dave

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InformedTrades University | IT Shopping Guide | Site Map


Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Unregistered

Hi David,

Thank you for your good work, I have benefited a lot as a newbie in FX.

I called NFA (National Futures Association) 1.800.621.3570 to find out about a FX company in US as I couldn't find the company listed at NFA's website and I was concerned about my investment to the company. They told me that the requirement of registeration is only for commodity futures, not forex. Hence, there is no need for a company to register to NFA is it is doing business only in Forex market.

freiheit

What do you think about the reviews of FXCM on ForexPeaceArmy?
FXCM | fxcm.com reviews and ratings by Forex Peace Army

I learned about FXCM on InformedTrades, so I was expecting positive reviews, so this was like a shock to me. Most brokers have some negative reviews, I think from people that lost money, that's obvious. But when I see them complain about orders being not executed for minutes, or stop orders being ignored, this makes me think twice.

TheRagsToRichesStory

Being one of the largest brokers then it is inevitable that there will be more complaints IMO, personally I have seldom had issues, and when I have they have been sorted as here http://www.informedtrades.com/498982...rketscope.html

Hope that helps

Graeme

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