Is Your Forex Broker a Scam?

If you do an internet search on forex broker scams, the number of results is staggering. While the forex market is slowly becoming more regulated, many unscrupulous brokers remain.

When you’re looking to trade forex, it’s important to identify reliable brokers and avoid those that are not. To distinguish strong and reputable brokers from weak or shady ones, we must go through a series of steps before depositing any significant amount of capital. Trading is hard enough, don’t let your broker make it harder!

Key Takeaways

• If your broker does not respond to you, it may be a red flag that they are not looking out for your best interests.
• Do your research, make sure there are no complaints, and read through all the fine print on documents.
• Try opening a mini account with a small balance and make trades for a month before attempting a withdrawal.
• If you see buy and sell trades for securities that don’t fit your objectives, your broker may be churning.
• If you are struggling with a withdrawal from a bad broker, review all documents and think through your course of action before taking more drastic measures.

Separating Forex Fact From Fiction

When researching forex brokers, traders must learn to separate fact from fiction. The internet is full of strongly-worded forum posts, negative articles, and disgruntled comments from people blaming forex losses on their broker.

Traders often complain that a broker was intentionally trying to cause a loss and say things like, “as soon as I placed the trade, the direction of the market reversed” or “the broker stop-hunted my positions,” and “I always had slippage on my orders, and never in my favor.”

The truth is, these types of situations are common in the job of a forex trader, and it is very possible the broker was not at fault.

Rookie Traders

In reality, many new forex traders fail simply because they don’t have a tested strategy and don’t stick to a trading plan. They often make impulsive and irrational decisions that more experienced traders can take advantage of. Frustrated and down on money, it is easy to seek someone else to blame. In many such cases, however, the broker is not at fault. It is simply a failure by the trader to understand market dynamics.

Broker Failures

Failures by the brokers do happen. This can occur when a broker attempts to rack up trading commissions at the client’s expense. There have been reports of brokers arbitrarily moving quoted rates to trigger stop orders when other brokers’ rates have not moved to that price.

Luckily for traders, these situations are more of an anomaly. Trading is usually not a zero-sum game, and brokers primarily make commissions with increased trading volumes. It is in the best interest of legitimate brokers to have long-term clients who trade regularly and generate commissions for them.

Behavioral Trading

The slippage issue can often be attributed to behavioral economics. It is a common occurrence for inexperienced traders to panic. They fear missing a move, so they hit their buy key, or they fear losing more and hit the sell key.

In volatile environments, the broker cannot ensure an order will be executed at the desired price. Sharp market movements often result in slippage. The same is true for stop or limit orders. Some brokers guarantee stop and limit order fills, while others do not.

Even in more transparent markets, slippage happens, markets move, and we don’t always get the price we want.

Communication Is Key

Real problems can begin if communication between a trader and a broker breaks down. If a trader does not receive responses from their broker or the broker provides vague answers to a trader’s questions, these are common red flags that a broker may not be looking out for the client’s best interest.

A good broker should be helpful and display good customer relations. One of the most detrimental issues that may arise between a broker and a trader is the trader’s inability to withdraw money from an account.

Broker Research Protects You

It is crucial to perform thorough due diligence before deciding on a broker. The following steps can help you make an informed decision:

• Look up online reviews and try to find personal experiences of other people using the broker. Even the best broker will have a share of negative reviews, try to get a feel of whether these come from disgruntled traders or are a signal of more serious issues.. A good supplement to this type of research is BrokerCheck from the Financial Industry Regulatory Authority (FINRA), which indicates whether there are outstanding legal actions against the broker. It also never hurts to get a better understanding of the U.S. regulations for forex brokers.
• Make sure there are no complaints about not being able to withdraw funds. If there are, try to contact the user and ask them about their experience.
• Read through all the fine print when opening an account. Incentives to open an account can often be used against the trader when attempting to withdraw funds. For instance, if a trader deposits $10,000 and gets a $2,000 bonus, and then the trader loses money and attempts to withdraw some remaining funds, the broker may say they cannot withdraw the bonus funds. Reading the fine print will help you understand all contingencies.
• If you are satisfied with your research on a particular broker, open a mini account or an account with a small amount of capital. Trade it for a month or more, and then attempt to make a withdrawal. If everything goes well, it should be relatively safe to deposit more funds. If you have problems, attempt to discuss them with the broker. If that fails, move on and post a detailed account of what happened online so others can learn from your experience.

Fast Fact:

It should be pointed out that a broker’s size cannot be used to determine the level of risk involved. While larger brokers grow by providing a certain standard of service, the 2008-2009 financial crisis taught us that a big or popular firm isn’t always safe.

The Temptation to Churn

Brokers or planners who are paid commissions for buying and selling securities can sometimes succumb to the temptation to effect transactions simply to generate more commission. Those who do this excessively can be found guilty of churning—a term defined by the Securities and Exchange Commission (SEC) that denotes when a broker places trades for a purpose other than to benefit the client. Those who are found guilty of this can face fines, reprimands, suspension, dismissal, disbarment, or even criminal sanctions in some cases.

SEC Defines Churning

The SEC defines churning as follows:

“When a broker engages in excessive buying and selling (i.e., trading) of securities in a customer’s account without considering the customer’s investment goals and primarily to generate commissions that benefit the broker, the broker may be engaged in an illegal practice known as churning.”

A good reason to suspect churning is when aggressive trading does not benefit your account in a clear and systematic way. If you’ve given your broker the authority to trade your account, and the balance remains the same or drops despite heavy trading on their part, you need to find out what exactly they’re doing and why. While it is possible your broker is genuinely trying to grow your assets, it is advisable to stay vigilant for any red flags.

Churning only applies to cases where traders give brokers the authority to trade on their behalf. It does not apply to standard accounts where you make all the trading decisions.

Evaluate Your Trades

One of the clearest signs of churning is when you see your broker place trades that don’t fit your investment objectives. For example, if your stated goal is to generate a current stable income, then you should not be seeing buy and sell trades for small-cap equity or technology stocks or funds.

Churning with derivatives such as put and call options can be even harder to spot, as these instruments can be used to accomplish a variety of objectives. But buying and selling puts and calls should, in most cases, only be happening if you have a high-risk tolerance. Selling calls and puts can generate current income as long as it is done prudently.

How Regulators Evaluate Churning

An arbitration panel will consider several factors when determining whether a broker engaged in churning. They will examine the trades that were placed in light of the client’s level of education, experience, and sophistication as well as the nature of the client’s relationship with the broker. They will also weigh the number of solicited versus unsolicited trades and the dollar amount of commissions that have been generated as compared to the client’s gains or losses as a result of these trades.

There are times when it may seem like your broker may be churning your account, but this may not necessarily be the case. If you have questions about this and feel uneasy about what your advisor is doing with your money, then don’t hesitate to consult a securities attorney or file a complaint on the SEC’s website.

Already Struggling with a Withdrawal from a Bad Broker?

Unfortunately, options are limited at this stage, but there are a few things you can do. First, read through all documents to make sure your broker is actually in the wrong. If you have missed something or failed to read the documents you signed, you may have to assume the blame.

Next, discuss the course of action you will take if the broker does not adequately answer your questions or provide a withdrawal. Such steps may include posting comments online or reporting the broker to FINRA or the appropriate regulatory body in your country.

The Bottom Line

Not every loss is your broker’s fault, but broker failures do happen. A trader needs to conduct thorough research on a broker before opening and funding an account. If there are no obvious red flags, a small deposit can be made, followed by a few trades and a withdrawal. If this goes well, you can trust the broker with a larger deposit.

If you are already in a problematic situation, you should try to prove that the broker is conducting illegal activity (such as churning), attempt to have your questions answered, and if all else fails, report the company to the SEC, FINRA, or another relevant regulatory body.

Read the original article on Investopedia.