Don't Trust Your FCM

As the Chinese general Sun-Tzu Ollce said. "Keep your [riends close and your
enemies even closer." All traders should heed this advice and keep a watchful eye on their FX broker. These days. dodgy activity seems 1O be more oflen the norlll than the exception, so it is imperative to conduct your own due diligence on your broker before opening an account. Do not assume that because they proclaim to be large and "well respected" in the industry that that makes them upstanding guys.
According to the NFA, before choosing a broker you should keep some of these
things in rnind :
You arc relying on the dealer's creditworthiness. Basically, if Ihey go down. you go down. Since retail off-exchange forex trades are not guaranteed by a clear¬ing organization, the funds that you have deposited are nOI insured and do not receive a priority in bankruptcy. Even customer funds deposited by a dealer in an FDIC•insured bank account are not protected if the dealer goes bankrupt (remem¬ber REFCO anyone?). so you should first check with the CFTC's website and see the state of their balance sheet.
There is no central marketplace. Unlike regulated futures exchanges (CBOT. CME), in the retail off•exchange forex market there is no central marketplace with many buyers and sellers. The forex dealer determines the execution price. so you are relying on the dealer's integrity for a fair price.
The trading system could break down. If you are using an internet-based elec• lronic system to place trades. some part of lhe system could faii. In the event of a system failure, it is possible that, for a certain lime period, you may not be able to enter new orders, execute existing orders, or modify or cancel orders that were previously entered. A system failure may also result In loss of orders or order priority. You could be a victim of fraud. As with any investment, you should protect yourself from fraud, Beware of investment schemes thaI promise significant returns with little risk. You should take a close and cautious look al the investment offer
itself and continue to monitor any investment you do make. As of now, the minimum net capital requirements have been raised to several million dollars and the once-nonexistent audits have been stepped up dramatically. A futures commission merchant who is not in compliance with these requirements has ten business days 10 achieve compliance or immediately cease doing business and go imo liquidation, which still leaves retail clients out in the cold. Slowly but surely this has begun to weed out most of the dangerously under-funded brokers, yet Illany more "borderline" brokers still remain. The only way to ensure the safety of your funds is to only trade with brokers who are well above their minimum capital requirements. FCMs are required to file monthly reports with the CITC stating their current finances, but remember that since these reports are only audited once a year you are for the 1110st pan relying on your broker's word.
The bottom linc is that loday's relail spot FX market is the Wild West of the investment world, where virtually anything goes. Government oversight of such a complex and fundamentally OTe market is very hard to implement, but if the shoddy dealings continue then look for much tighter regulations to be implemented down the line, although the retail FX brokers will surely not go down without a fight. In fact, FX brokers are raking in so much money these days (hundreds of millions of dollars) that they have even hired their own lobbyists to keep govern¬ment at bay. You know yOll have hit the big time when you can afford to buy a lobby!
For the retail trader to get a fair shake, the deceptive dealings (long outlawed in most other markets) must simply come to an end. How can the FX brokers defend their actions (some of which call for jail time in other markets) and continue to tell the general public that intra-day FX trading is a great "investment" and deeming it "easy"? How can they continue to do business with people that solicit clients through false marketing and fraudulent claims?
New regulation needs to be put into place that will guarantee transparency in pricing and safety of funds to the retail client, but it is up to the average trader to plant the seeds of change by complaining vigorously to the government authorities at the slightest hint of dishonorable dealings. We will all be in better place once a fair set of rules are adopted that lets both brokers and traders flourish. After all. fair dealings should be every broker's duty, not choice.