The global forex market averages daily trading volumes of over $6 trillion. It is the largest financial market in the world, with plenty of opportunities around the clock, and it offers easy accessibility for any new or experienced investor.
To get exposed to this market, you need to sign up with an online forex broker. Investing is generally a decision-making activity, and choosing a broker is one decision you need to get right.
Brokers provide you with access to the global financial markets. Some of their offerings could include access to a trading platform (for buying and selling global financial assets), charting tools, educational resources, and practical 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 with maximum peace of mind.
Forex Regulation
Forex is a global decentralized market, and this inherently makes it difficult for a single body to oversee the entire industry. Depending on your jurisdiction, there is a relevant regulatory body that sets the standards and guidelines that online brokers must comply with.
In the financial world, the purpose of regulation is to protect investors from fraud or any other undisclosed risk. But regulation varies from jurisdiction to jurisdiction, with some bodies considered to be stricter on their rules and guidelines, whereas others are very lax. Some of the major regulatory 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 and authorized in multiple, strict jurisdictions. Generally, stricter jurisdictions provide more client protection compared to the less strict ones.
To earn the trust and credibility of both local and international customers, reputable brokers pursue regulation in stricter jurisdictions where failure to comply to set guidelines can be very costly.
There are other offshore locations where regulatory bodies are considered to be more lenient or rather very lax in implementing their rules.
While such jurisdictions make it easy for newer brokerage firms to emerge, they may also not provide the much-needed peace of mind that investors require.
Why Are Some Forex Brokers Unregulated?
There are also plenty of brokers that are not regulated. Regulation is generally considered the first sign of a genuine broker.
Not all unregulated brokers are frauds, but the lack of oversight and accountability makes it easy for some of them to engage in unethical activities. Some of the reasons some online brokers operate without any license could include undercapitalization, high cost of compliance, and tax avoidance measures.
Pros and Cons of Regulated 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 in segregated bank accounts, and never use the funds at any given time for their own company operations.
Furthermore, in some jurisdictions, investor funds must be insured so as to guarantee reimbursement in case a company becomes insolvent.
Transparent Services
Regulated brokers tend to provide honest and transparent services because there is a body that oversights their operations. Some of the biggest forex scams include identity theft, platform manipulation, and dishonest promotions.
Regulatory agencies perform random checks on the operations of companies under their jurisdiction to ensure that they remain honest and transparent in all their operations and service offering at all times.
Favourable Dispute Resolution
One of the best reasons to trade with a regulated broker is that you will be guaranteed fair resolution in the event that any dispute arises.
Regulatory bodies are mandated to protect investors, which means that you can expect just treatment in case you ever want to resolve any issue that arises 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 available brokers, trading instruments, such as synthetic indices, as well as trading conditions, such as much higher leverage.
Pros and Cons of Unregulated Brokers
Pros
Plenty of Bonuses
Regulatory compliance is a huge cost for brokers. Additionally, most unregulated brokers tend to be new companies focused on attracting new clients.
These reasons can result in a huge budget for marketing, which will translate to generous bonuses and promotions for both new and existing customers.
Easy Accessibility
Unregulated brokers typically place little restrictions on accessing their services. No matter your location or circumstances, you can easily sign up with them and start trading online.
For instance, some countries do not permit online trading or have placed strict laws on how it should be conducted within their jurisdictions. If you reside in such locations, unregulated brokers can provide easy access to the world of online financial assets trading.
Attractive Trading Conditions
Some unregulated brokers are able to provide beneficial trading conditions such as high leverage and diverse trading instruments such as synthetic indices. Investors who need such conditions might prefer to trade with an unregulated broker.
Cons
High Risk
When you trade with an unregulated broker, you are basically dealing with a company that is not accountable to anyone or any entity. They do not operate according to any set of rules or guidelines, and there is no guarantee that your funds are kept safe or that even your confidential information is secure.
Since no one is overseeing and regulating their operations, there is no way to figure out whether the intentions of the company are genuine or shady.
These types of brokers y can easily manipulate their platforms so that investors easily lose their trade positions or they could even run dishonest promotions that are merely designed to rip investors off rather than to be redeemable.
Unfair Dispute Resolution
When you have a dispute with a regulated broker, the relevant regulatory agency will act as the mediator. In contrast, if you have a dispute with an unregulated broker, the company will act as both the defendant and judge. The lack of any just recourse means that you will not be guaranteed any fair judgment.
Regulation is an important consideration for any investor. A good broker will ensure that you will have the best environment so that you can trade with maximum peace of mind. The first sign of a potential bad broker is the lack of regulation.
Nevertheless, it is important to assess the type of regulation that your preferred broker possesses. Achieving multiple regulations in top jurisdictions such as Japan, the US, Israel, and Australia can be a good sign of a safe and trustworthy online CFDs and forex broker.
