Retail forex is a fairly new business, having started in 1998, and really only taken off in 2001. Initially, many forex brokers started with little capital. As the market has matured and become more mainstream, the requirements to stay in business have become more rigorous. The NFA (National Futures Association) is increasing capital requirements for US based firms – forex dealers will now need to have at least US$5 million in net excess capital.
This is a relatively small amount for a large firm, but only 1/3 of forex brokers will be able to meet these requirements. That leaves around 10 brokers in the US. The remainder will have to either find new capital or close their operations later in December when the new regulation takes effect.
The risk is that there may be delays in getting your money back if your broker is forced to close.
Checking Up On Your Broker
If your current currency trading broker is in the US, you can check on them to see how much net excess capital they have. Visit www.cftc.gov/marketreports/financialdataforfcms/index.htm. The more capital a firm has in excess of the $5 million minimum, the better the protection for your funds.
If you have a non-US fx based broker, check where they are regulated. Europe, Canada, Hong Kong and Australia have strong regulators and capital requirements. If your firm is based in a third world backwater, the regulation may not be particularly strong. You would need to ask why a firm would locate where there is less regulation – is it because they are perhaps less reputable?
To determine the broker’s strength, you should look at the number of employees. If they are a large, strong firm, they will have hundreds of staff who can provide 24 hour support. They should also have tens of thousands of accounts. A firm that has only a handful of staff is unlikely to have a huge capitalization or be able to provide the support you need.
Other factors include the broker’s spreads (the difference between the buy and sell price), and slippage (the difference between the quoted price, and what your order is filled at.
The latter is very important because it is not normally disclosed. In my experience, the worst slippage is when a firm does not actually put your order into the market, but instead trades against you. A firm that does this should be avoided at all costs. It in their interest for you to lose so that they can take your money. I have found that when a position goes my way, it can be impossible to close it out at any price when the fxbrokerage is trading against you.
Increasing regulation and capital requirements will cause an industry shakeout which may delay release of your funds. Avoid the hassles by checking on your current broker, and if they are not up to scratch, look for a new broker that is well-capitalized, and regulated firm.