banks, dealers, and broker companies in the FOREX market, established
by government agencies) are of primary importance because traders have
to entrust their money to the dealers. First, it is better for traders to make
sure that their money is safe and that the breach of trust is impossible for
the dealer.
I am not a lawyer, so I have no right to advise my clients on legal matters.
The vast majority of dealer companies function in many countries,
with various rules and regulations of which I am not aware. My recommendations
are, therefore, based on my personal experience and preferences.
In any case, you had better survey the problem yourself and
preferably ask a lawyer for legal advice. The following sections outline my
personal opinion concerning dealer choice, considering the security of
capital invested in FOREX operations.
The Problem of Dealer and Broker Companies
Abusing Client’s Trust Exists on a Large Scale
Many countries lack any legislative jurisdiction governing dealer-customer
relationships regarding the FOREX market, or government control over
dealer and broker companies involved in speculative currency trading. That
is the main cause of abuse of clients, especially when the client’s money is
used for market speculation and when unlawful extortion is charged.
The Majority of Broker Companies—
Especially Small Ones—are Bucket Shops
Bucket shops are companies that do not have direct relations with the
FOREX market, and do not execute real transactions on the real market.
What they do is create an illusion of trading operations whereas, in reality,
they only make mutual bets around rate changes between a client-trader
and themselves. These bets are based on real current market quotas, but
actually have nothing to do with the real market. If the client wins, the
client gets paid from the broker company’s own funds. If the client loses,
the money remains in the broker’s pocket.
In General, Operations of Bucket Shops Are
Legal and Are Not Controlled by a Government
Many experienced traders know about practices of bucket shops but do not
pay adequate attention to them. They think that the sources of gain or loss
coverage are of no great importance. However, in reality, this belief leads to
serious mistakes. When brokers try to maximize clients’ losses, it aggravates
contradictions between a client-trader and a company offering brokerage
service. This can have very grave consequences for the client. Usually, such
brokers do everything possible to make a client’s operations on the money
market difficult. They have at their disposal a wide variety of tools, ranging
from various commission charges and other fees that the client is required to
pay for the supposedly offered services, to quota manipulations that offer
the client prices that are different from current market prices. There are
some cases in which such companies have been liquidated, and their owners
have disappeared with the clients’ money. On the Internet, you can find numerous
reports of clients deceived by such companies.
How to Determine If a Broker Company
Is a Bucket Shop
You can determine with great accuracy if a broker company is a bucket
shop by conducting these basic features of the company:
• The minimum necessary trading account size is less than $10,000.
• The initial margin is less than 2 to 4 percent or is not fixed at all.
• Positions are transferred to the next day not in accordance with the
generally accepted rules based on the corresponding current LIBOR
rates but with some other plan, and a trader is required to pay the interest
charge at some fixed or floating rates.
• There are some extra charges in the form of commissions for each
transaction and/or storage fees.
• Both opposite positions can be kept indefinitely (the so-called lock
or hedge) for the same currency rate that is reflected in the client’s
statement.
• The setting of automatic stop and limit orders is governed by certain
unreasonable restrictions, preventing order setting too close to the
current market price if the fixed existing limit is exceeded, or by some
other simulated restrictions on using automatically executed orders.
Bucket Shop Practices Are Widespread,
Mainly among Dealer-Broker Companies
in the United States, Eastern Europe,
Southeast Asia, and Offshore Zones
Because bucket shop practices are so widespread, I would not recommend
dealing with companies in the United States, Eastern Europe,
Southeast Asia or offshore zones. It’s better to be safe than sorry. I think the
best area to open a trading account for FOREX operations is Western Europe,
especially Great Britain. The reputable and easily checked European
companies, or the European subsidiaries of reputable international banks,
are the best choices to provide reliable service. Furthermore, Great Britain
has a governmental agency—Securities and Futures Authority (SFA)—
which overrules the dealer companies in the FOREX market as well.
Before Making a Final Decision, Remember to
Check the Terms of Opening the Trading Account
and Corresponding Transactions
The terms to consider, about opening a trading account and carrying out
transactions, include: adding interest to the deposit, the opportunity to
open a segregated account, the opportunity to trade under a bank guarantee,
the time schedule for money transfers from one account to another,
rules governing conflicts and settlements, and such. The right choice of a
dealer greatly influences the results of your trading operations.
Read More : WHAT ARE THE RISKS OF DOING BUSINESS WITH “BUCKET SHOPS”?
