Essentially, the regulation of foreign exchange markets was virtually non-existent in early years. Fast developments in foreign trading among retail financial traders sparked increased scrutiny and the emergency of Forex regulators or bodies. So what does this means for retail Forex trader? Does it really mean a big risk that goes hand in hand with non-regulation? Is that of outright fraud or illegal activity?
Let’s first define fraudulent activities. These include unusual commissions brought about by individuals that “churn” their customers’ accounts using, call them high-pressure “boiler rooms” tactics, misrepresentation and Ponzi schemes. It is a fact that about 26,000 individuals in the U.S. alone lost approximately $450 million in Forex related swindles between 2001 and 2010. Is that a thing of the past? You cannot rule out the existence of opportunistic brokers posing to take advantage of unsuspecting individuals bearing in mind the fact that Forex trading is becoming more and more complex. This leaves us with one question—does this mean I should stop working with unregulated brokers?
Before we answer this question, let’s try to take a keen look on how some of these processes come to play. Agreeably, the introduction of tough regulations in the U.S. back in 2010 has really stamped most of the currency related frauds to a large extent. In spite of this, this entire story of regulatory bodies is mixed in several other countries. So what keeps them running? In the UK and Europe at large, regulation is limited. Also leverage has very few limits with levels as large as 200:1 almost non-existent.
#ironbr300x250#At the end of the day, regulation of the foreign exchange market represents less than 3% of the average daily Forex trade turnover across the globe and this is just but a tip of the iceberg! What about non-regulation in the larger part of the gigantic institutional foreign exchange market?
The truth is that there is no global regulator right now that polices the entire world’s Forex market. Here are the reasons why governments choose to establish Forex trade regulators:
Higher Hedging Costs: Increased volatility of currencies sparked by excessive speculations automatically leads to high costs which at the end of the day are incurred by corporations as well as other Forex trade players for hedging currency risk.
Systemic Role of Big Banks: While Forex exchange losses were not conspicuous in the biggest exchange losses posted by financial institutions and corporations to date, we cannot rule out the potential for multi-million dollar losses on wrong-cash bets. Despite the fact that currency exchange is a zero-sum game, any massive loss incurred by a big corporation could spark a ripple effect on the world’s economy due to its systemic significance. So it’s ideally about playing safe.
Undue Enrichment of a Few Individuals at the Expense of Millions: Unjustified or exaggerated currency shifts can have an adverse effect on any one nation’s economy. Despite the fact that some of these moves are entirely justifies by other underlying economic fundamentals, in most other cases a temporary weakness in a certain currency might be exploited mercilessly by speculators, sending it into a compete freefall in self-fulfilling prophecies. The effect of this is obviously a capital flight as well as a prolonged recession period characterized by sharply high interest rates to defend that particular currency.
These scenarios cannot be ruled out having played out on different occasions in the past two decades; one of the notable instances being the downfall of the Thai baht in July 1997 followed by the Asian crisis. While Forex speculators raked in profits, several millions of others in different regions suffered big wealth erosion coupled with long period of unemployment and hardships.
Advantages of the Unregulated Forex Market Brokers
Productive medium and long term Forex exchange styles in any one market sector ideally include working in accordance with the underlying trend by exchanging its overall direction. This has a tendency to hold true regardless of whether the market being traded is occupied in an upwards drift, commonly referred to as a bear market. The relatively unregulated Forex brokers offer their clients opportunities to effortlessly exchange with the trend, regardless of whether it’s heading up or down. Then again, Forex exchange traders need to consider other different factors coming up as a result of regulation intended to prevent potential Forex trade market crashes.
Most unregulated brokers are separate from several other entities and by virtue of being non-regulated, these brokers offer strategic benefits to both the account holder as well as the company. From the brokerage point of view, most current regulations are among the toughest, strictest and most expensive ever seen with noticeable impacts on several brokerages within the very short period that it has been in operation. From the client or Forex trader point of view, choosing to trade with an unregulated broker may be very beneficial. For example, it may help the trader avoid being affected by any future changes in the regulatory system that has direct impacts on an individual’s trading strategy or style. Clients that choose to go with unregulated brokers would therein remain untouched by any of these future changes in regulations that they easily rely on the broker’s financial stability as may be shown in its publicly accessible financial data.
Moreover, the Forex market is largely a totally free and unregulated market despite the existing regulatory bodies. This market’s moves tend to be dictated by the trend of things ad orders as well as the existing market forces of demand and supply, though most central banks still intervene at some points to smooth out any undesirable or sharp exchange rate fluctuations affecting the currency under it. Another advantage of the unregulated Forex trade market is that all currencies cannot decline at ago simply because they exchange in pairs against each other.
Generally, there is a lot of freedom that comes with trading with an unregulated Forex broker. For instance, their free market is more efficient like no other and allows Forex traders to reap profits easily and equally from either bear or bull markets that may fortunately be prevailing in more currency pairs.