The forex market is the biggest financial market in terms of daily trading volume. To participate in this market, you need a broker or intermediary that allows you to place orders & also match your orders against other participants in the forex market.
This is where a Forex Broker steps in. A Forex Broker acts as a bridge between the market and the traders.
A broker will provide traders with an online platform where they can place their orders. Normally this trading platform will have different instruments like currency pairs, & CFDs on other instruments like cryptocurrencies, stocks, bonds etc.
The primary objective of a Forex Broker is to help traders facilitate trades on their platform.
There are hundreds of regulated forex brokers that offer trading services across many countries and traders are often spoilt for choice. But not all forex brokers are the same.
Understanding the role of a Forex Broker
Let’s say there is news of high inflation in Turkey, and because of this, you have concluded with research that the US dollar price will go up against the Turkish Lira.
But how do you buy or sell a currency?
The simple answer is that you can place a buy order for USD/TRY through a regulated forex broker in your country.
A forex broker acts as an intermediary between you and other traders. Like you, there will be millions of people who will either want to buy or sell US dollars. Find a buyer and seller for your orders is the main job of a forex broker.
The role of a forex broker is to offer a good trading platform so you can open & close your trades seamlessly.
On the backend, the broker could be sending your orders to their Liquidity providers like prime brokerages, large banks & financial institutions, etc. Or some brokers may act as market makers, and take the opposite side of your trades.
Forex Broker Regulations
Though there are thousands of forex brokers out there, only a few are licensed to provide trading services.
The reason why there are only a few licensed brokers is mainly due to stringent regulations involved.
Each country has their own regulator that regulates the capital markets like retail forex trading. They also maintain oversight on the market participants & issue license to forex brokerages that meet their requirements.
These regulators exist to protect traders from being scammed or cheated by unregulated brokers.
Strict regulations are in place today for forex trading in many countries. Tier1 regulators like FCA, ASIC, ESMA have put major restrictions on forex & CFD brokers in the recent years.
Prior to the intervention of the regulators, brokers used to offer as much as 1:2000 ratio to traders, and traders incurred huge losses due to high leveraged trading.
Due to lack of strict regulations, brokers offered such high leverages to traders and made them suffer catastrophic losses. Not only did they offer such high leverage limits but there have been numerous instances where traders have never got their money back.
Most of the brokers were offshore entities which meant that local governments could not help traders recover their money. This way, millions of traders have duped off their money.
Seeing such schemes, regulators around the world deeply scrutinized the CFD trading industry and brought about regulations that would ensure that traders don’t suffer heavy losses.
One of the biggest and most important regulations like ESMA, FCA & ASIC brought was reducing the leverage to 1:30. This meant that even if the traders wanted more leverage, they will not be able to get it from regulated brokers.
Apart from reducing the leverage limits, regulators also introduced mandatory features to be provided by brokers to the traders. Some of these features include stop-loss protection, negative balance protection etc.
Major Forex Trading Regulations
Below is a list of regulators across the world. If you are from the country of any of these regulators then it serves as a good starting point for you to visit their website and read about their regulations for the Forex industry.
Some of the most important regulators in Europe are:
- ESMA – The European Securities and Markets Authority
- BaFin – The financial regulator for Germany
- CySEC – The Cyprus Securities and Exchange Commission
- FCA – The UK Financial Conduct Authority
- Finma – The Swiss Financial Market Supervisory Authority
- CONSOB – The financial regulator for Italy
- CNMV – The financial regulator for Spain
Some of the most important regulators in Asia:
- Australia – Australian Securities and Investment Commission (ASIC)
- Monetary Authority of Singapore, MAS
- Financial Services Agency of Japan, FSA Japan
- Bappebti – Commodity Futures Trading Regulatory Agency (Indonesia)
Some of the most important regulators in Africa:
- Kenya – The Capital Markets Authority (CMA)
- Nigeria – The Securities and Exchange Commission (SEC)
- South Africa- Financial Sector Conduct Authority (FSCA)
Why does regulation matter?
The Forex industry is one of the most volatile and risky markets to trade-in. This is mainly due to various factors affecting the price of the currency pairs & the risks involved in trading CFD instruments.
Due to market volatility, the prices can drop or gain a few pips within a matter of seconds. Traders who are not familiar with such market volatility will find it hard to survive in such a market. Combined with high leverage limits in CFD trading, there are possibilities of traders losing more than what they invested.
Regulators act as the police in the forex & CFD industry, and they ensure that the brokers, as well as the traders, follow all regulations.
By having an authorized regulator in your country, only licensed brokers will be allowed to offer services in your country. This means that brokers will have to adhere to all rules and regulations. If in case there is any dispute between the broker and the trader then the regulator can resolve such disputes.
Regulators offer protection and security for both the trader as well as the broker. If the regulator suspects that a broker is offering services without a valid license then they can be heavily penalized. The regulator can also penalize traders for trading with offshore entities.
What should you do if your country does not have a regulator?
Not all countries have a regulation in place for Online Forex trading. Many countries in Africa & Asia are still in the process of creating a regulatory framework.
If you are from any such country, you can still trade with foreign licensed brokers as long as forex trading is not illegal in your country.
As an example, as per ForexTrading.NG, Nigeria is the second biggest forex trading market in Africa and has the highest number of traders on the continent. But online retail forex & CFD trading is still unregulated in the country although it is not illegal. A few popular foreign forex brokers are operating locally in Nigeria like FXTM, Hotforex & OctaFX, and these brokers have also set up a local office in the country.
Similarly, there are examples of foreign brokers operating in many other Asian & African countries.
Most reputed brokers are registered with multiple regulators all around the world, so in case you want to trade with a broker then you can choose a globally reputed broker after checking where all they are registered.
How to choose a Forex broker?
It all comes down to this, which broker do you choose?
There are several factors to consider before arriving at the decision, but here are a few factors that can influence your decision:
Available instruments: There are various instruments that you can trade, it varies from currency pairs to CFDs on cryptocurrencies. As a trader you must first know which instrument you are going to trade.
Not all brokers will offer all instruments on their platform, so you need to check whether the broker has the instrument you want to trade.
But it’s advised that you choose a broker who offers all instruments since it gives you options to trade in other instruments in the future.
Trading fees: This is the most important factor as fees/charges can severely affect your profits. Examples of some charges are withdrawal fees, conversion fees, trading fees, transaction fees, etc.
As a trader, your main goal is to reduce fees/charges and maximize profits. So, your first step would be to compare the various charges by different brokers and choose the least expensive broker for you.
Some brokers offer online calculators on their platforms to calculate costs to conduct a trade, you can use that option to understand what all costs you will incur.
There are some brokers who charge commission on your trading volume, for example, 2% of your daily trade volume. This means that the higher you trade then the higher you will have to pay. It’s also important for you to remember that brokers who charge commission on trade volume will charge you regardless of the fact that you making profit or not.
So, bear in mind these charges before you choose a broker.
Features: Each broker has different features but some of the features that might help you are stop-loss function, negative balance protection, free demo account trading. Some brokers offer seminars and webinars to train new traders and train help trade better in the market.
Choose a broker who offers good risk management features.
Customer support: It’s vital that there is a good backend team to help you with your queries all the time. It’s not easy to navigate across a new platform since there are so many functions.
Apart from this, there are procedures like KYC which is mandated by regulators for every trader to comply with. You will need to keep in touch with a customer support team to ensure that you have submitted all necessary documents to start trading.
Without a proper backend team, it gets hard as a trader to get your questions answered. Choose a broker who has a team to help you 24×7.
The forex market is a huge industry and there are many brokers who operate in the market but not all of them are regulated.
As a trader, your first priority should be to check who is the regulator in your country and who are the licensed brokers. Once you have got this information, you can use the factors mentioned above to choose the best broker for you.
Nearly 75% of retail traders who trade in the forex market lose there, so make sure you are aware of all the trades you make, and fully understand the risks.
All things being said, use this article as a guide to help choose a good broker in your country.