Choosing the right broker is vital to your success as a trader. There are different factors that can affect your decision. We cover them in a series of articles. In the first one, you are going to learn more about Broker regulation.
The first thing you should consider when looking for a broker is the regulation under which it operates. To be more clear, the choice is not between a regulated and unregulated broker, but between brokerages under different regulations.
Unregulated is a “brokerage” company that operates without any license. As you noticed “brokerage” is in quotation marks as such a company can not be considered a real brokerage. Most of these are not even real companies, but just a website and call center. As they don’t formally oblige under any regulation, the security of the funds you send them is practically zero, so trading with such establishments should be avoided. While some of these unregulated “brokers” might actually be “honest” (they will pay out your winnings and process your withdrawals), it must be clearly understood that trading in an unlicensed “broker” is a huge risk as they tend to disappear along with their clients’ money.
Regulated is a brokerage company that operates under a license. There is a good choice of brokers that operate under different regulations. Some of the brokers operate under more strict regulations. This gives you as a retail client a higher protection against fraud.
You can have high confidence in any brokerage regulated under the FCA in the UK, EU brokerages under ESMA, ASIC in Australia, FSA in Japan, FINMA in Switzerland and CFTC in the USA.
Other brokerages prefer to operate under more flexible regulations like the Bahamas, Belize, BVI, St. Vincent and other, mostly “offshore” destinations. While there might be some bad apples, operating in such destinations does not always mean that these companies are doing some shady business. In most cases the offshore destinations are chosen because of their lower regulatory reporting requirements and more flexible rules. For example, offshore brokers usually allow higher leverage compared to the brokerages regulated in other countries. Some of the biggest international brokerages operate under more than one regulation in order to serve their clients from different parts of the world and with different needs better.