As more information comes out on FXCM and how the lack of a Forex Broker transparency brought down the largest broker in the US. What was thought to be a competitive advantage turned into a regulatory nightmare?
The idea that many brokers market themselves that they are 100% STP when they do not need to stop. The risk management of a forex broker is a very complicated subject. The problem is that it is too tempting to use this as a marketing bullet point. The public needs to understand that in these, OTC markets there is always someone assuming the risk of the trade. It can either be a bank, or it could be the broker itself.
Forex Broker Transparency Means best Business Practice
The broker should determine risk management based on revenue and best business practices. Brokers must make sure they are capitalized above any regulatory requirements. FXCM decided that they would go 100% STP and saw that at some point their revenues were not optimized. Instead of taking the risk on some of the flows and making more money FXCM was boxed in based on how they marketed themselves. FXCM had every right to take the risk of some their clients. Brokers like Gain Capital and Onada have done well and have been clear that they do act as a market maker.
Forex Broker Must Disclose Where They Operate From
Another area where Forex Broker transparency have not been there has been where they operate from. The most prominent offenders have been Israeli Binary Options Brokers that would claim to be in the UK or some other location when they are in Tel Aviv in a call center. One example that was recently brought to light by Finance feeds is the case of BD Swiss. The CySEC regulated broker was recently fined for misrepresentation in their marketing materials. BD Swiss is only regulated by CySEC, but they are promoting a German address listed on their website and featuring local German phone numbers. The name of the broker is misleading itself as it is not located in nor regulated in Switzerland.
If Forex Brokers are to regain any of the lost credibility, there must be a concerted effort and a focus on transparency with the public.