Regulation is used to try to protect investors from the potentially dangerous nature of day trading. But with as few as 5 percent of brokers being supervised, it’s not always straightforward to get that security. However, as this page will prove, both traders and brokers will benefit from the fx, stocks, CFDs and binary options trading regulations. But first, if you start trading with a controlled broker and platforms, it is good to take a look at the significance and security on offer.
Regulation – What is it?
Trade policy is essentially self-explanatory. The stock markets and brokers are regulated by regulatory bodies and watchdogs. They follow a number of consumer rights laws and regulations. See the common rules and stipulations below.
Note there is a common misconception that brokers may be supervised by regulatory bodies across multiple jurisdictions. Often times, regulatory remit within a particular jurisdiction is limited to such brokers.
For instance, The Cyprus Securities and Exchange Commission (CySec) states that they are the independent public supervisory authority responsible for overseeing the investment services sector and transactions in transferable securities conducted in the Republic of Cyprus.
For example, they obtain a license to operate within that jurisdiction when an FX broker is regulated, as long as they adhere to certain rules and regulations.
In comparison, unregulated brokers operate without having to obey a set of guidelines. Therefore they may not have the same interest in protecting your interests.
Also worth noting is that day-trading regulations can cover various trading aspects. Some brokers, for example, would have to meet minimum capital rules, margin requirements, pattern day trading rules and more.
Regulation Protection & Benefits
So, what kind of safety and benefits are you getting if you pick from a regulated broker list?
- Risk alerts – One effect of the legislation is that before you sign up for an account, your broker will need to show specific risk alerts. It means that you have the full picture before you start trading.
- Transparency – FX brokers usually have to submit to daily audits, for example. Unless the brokerage is classified as using an ECN model, the trades can not be manipulated. This will also help to keep you safe from dishonest brokers and scams.
- Leverage caps – Another manner in which legislation can protect customers is by reducing the overall leverage. Trading on leverage effectively lets you borrow your broker’s money. This, however, also prevents you losing more than your initial money. Therefore, regulatory bodies impose overall leverage caps to prevent borrowing disproportionate sums from individuals.
- Segregation – Another regular and fair day trading rule is that all working resources must be kept separate from company assets. This will ensure that your broker respects demands for withdrawal, and can still afford to pay you.
- Payment – Compensation plans are another benefit of controlled brokers. That means you should hope to get at least some of your funds back if your broker goes bust. CySec traders, for example, must sign up to the Investor Compensation Program.
- Anti-money laundering – Opting for a broker that meets regulatory guidelines also brings legal benefit with it. Sometimes you’re asked to have identification, such as Photo ID and/or address evidence. Although this can be time consuming, it helps deter money laundering, which is a problem that torments governments across the globe.
Regulation ultimately helps ensure your broker provides you with a quality product, equal pricing and straightforward processes.
Trading laws do not favor merely traders. There’s still a lot to learn from brokers including:
- Credibility – The biggest benefit is that regulation by regulatory bodies helps to create a credibility that is trusted. This helps brokers to distinguish themselves from dishonest brokers and scams. As a result, more consumers can be drawn and their income boosted.
- Stability – The other advantage day trading laws offer is that brokers in other places, such as leverage caps, don’t have to actively try to beat each other. It makes for a more secure and manageable future, to some degree.
- Checks & balances – Regulatory oversight serves to remind brokers that it is of utmost importance to deliver high quality products to customers and to protect their interests. This means that legislation will help discourage businesses from relying on profit margins alone.
Yet what happens if a broker finds trade rules unreasonable and breaks them? Well, a regulatory agency will take a range of measures then. It can potentially pursue criminal, civil, and regulatory actions.
Obviously one choice is to withdraw the status from the controlled broker. It can do serious harm to their image and can deter potential customers. Regulatory bodies will then publish notifications and send warnings to prospective customers, both locally and overseas.
Such regulatory bodies possess massive quantities of influence in many respects. With scams growing in recent years, traders are looking for trustworthy, reliable and controlled brokers more than ever. For example, if a broker does not conform to trade regulations for commodities, bitcoin or futures, they may easily lose much of their customer base.
Are all Regulatory Bodies the Same?
It is important to remember that not all regulatory bodies provide the same safety requirements. For example, entities outside your financial authority might not be in a position to offer such robust legal redress if there is a problem.
Bodies also impose laws to varying degrees. All FCA traders, for example, must segregate the funds from the dealer. Whereas this law does not extend to CySec. Additionally, FCA-approved brokers need to automate and process client withdrawals immediately, while CySec brokers will postpone withdrawals by months.
It’s not always the case that some brokers are less interested in searching for their customers. Other issues can lie at stake. FCA permits, for example, are comparatively costly. A lot of tiny but still decent brokers opt for CySec as a result.
You need to also verify whether they’re a licensed broker or an agency-regulated brokerage. The former has legal permission to provide services within a state. Whereas a regulated broker must abide by the regulator’s rules and guidelines.
The underlying argument is that there is often a disparity between regulatory bodies about effectiveness and degree of safety. It’s important to do your homework, therefore, and not just hit the Sign Up button as soon as you see ‘controlled broker.’
Automated Trading Regulation
Recent years have seen a significant rise in high frequency electronic trade. In addition, these algorithmic systems make up to 70 per cent of trades. The high-speed and dynamic design of automated systems does, however, pose problems for regulators. For starters, algorithmic traders took the blame for the 2010 ‘flash crash’ which in just a few minutes caused the Dow Jones to drop 7 per cent.
Significant steps were then made, predictably, to implement high-volume, automated trade regulations. In addition, the US CTFC accepted proposals unanimously in 2015, known as ‘Regulated Automated Trading.’ Such regulations were to incorporate a range of other protections, including risk management and accountability mechanisms.
The automated regulations are summarized below:
- New algorithmic trader definitions
- Compulsory exchange controls to avoid self-match
- Registration requirements for easy access to FCMs in the US and exchanges
- Pre-trade risk management for both cancellation schemes and limits of execution
- Compulsory test environments and source code store algorithms for automated trading systems
Other countries and organizations are gradually looking into the threats presented by automated systems. As a result, high-frequency day trading laws and regulations in the United Kingdom, Australia, Europe, Canada and India could rise in the coming years.
The rules and regulations on day trading are somewhat ambiguous in that there is no single global approach. Regulation is then in effect at local level, with each brokerage applying for legislation at a particular venue.
Some of the regulatory bodies which are most involved include:
US-Based Regulatory Bodies
- US National Futures Association – The NFA is the basis of several day trading rules for the USA. Their aim is to protect customers while safeguarding business integrity.
- US Commodity Futures Trading Commission – This body is independent of the government of the United States and oversees all FX brokers in the States. This body is vigorously investigating companies that participate in fx market fraud.
- The Financial Industry Regulatory Authority – FINRA is a private company that acts as a self-regulated organisation. They are concerned primarily with controlling US stocks. It is the agency that imposes rules on regulating pattern day trading.
- CFTC – Founded in 1974, this independent US government agency oversees markets for futures and options. The Commodity Futures Trading Commission also plays a role in algorithmic trading legislation, as described above.
Non-US Regulatory Bodies
- FCA – Formerly the FSA, UK’s FCA is Europe’s largest regulatory agency. Some of the steps it takes is to set limits on the amount of leverage brokers it may sell.
- Australian Securities & Investments Commission – The regulator is basically the Australian equivalent and variation of the US CFTC and the UK FCA.
- The Federal Financial Supervisory Authority – Also known as the BaFIN, it is Germany’s financial oversight agency.
- Markets in Financial Instruments Directive – MiFID is the nearest regulatory framework the world has to an all-encompassing regulatory body. It was introduced into the UK in 2007, and has since been the foundation stone of the financial regulatory frameworks of Europe.
- CySEC – This is Cyprus’ financial regulatory agency and is part of MiFID regulations. Ironically, CySEC is being sought for licenses from a range of overseas brokers. This is because it is felt that the standards are less strict than many other European regulators.
- MAS – The Monetary Authority of Singapore regulates a number of markets, including Singapore commodity trading regulations.
- SFC – The Securities and Futures Commission regulatory body regulates Hong Kong’s electronic trading regulations.
Forex ranks among the biggest markets. In addition, the amount of daily trade exceeds $5.3 trillion. For example, this is significantly more than equities and futures markets. So, it’s no wonder that forex trading regulations are all on the rise in India, the United Kingdom, the States and Canada. Nonetheless, nations and institutions around the world are increasingly seeking to effectively track and control the strong FX marketplace.
Japan for example is one of the most competitive retail forex markets in the world. There, all markets, including FX, are governed by the Financial Services Authority (FSA). The body is pro-active, reducing the full limits of leverage available to traders.
SEC rules also clarify in the US that those who are not registered with Retail Foreign Exchange Dealers (RFEDs) would not be able to provide retail fx services. As a Retail Foreign Exchange Dealer , brokers have to obey specific customer protections regarding risk control and other regulations.
Alternative Trading Systems
Alternative trading refers to a simple framework where standard exchange regulatory supervision is lacking. Such electronic communications networks (ECNs) actually match buying and selling orders, instead. Most regulations require registration as broker-dealers, rather than exchanges.
Note that these alternative schemes do not enforce laws to control user behaviour. They just deal with the electronic matching of orders. In addition, these systems play an important role in the provision of liquidity, and their global prominence is growing.
Copy Trading Regulations
In the absence of a full book, simple rules are increasingly regulating copy trading. That is because the consumers are copying other traders’ tactics. In fact, a number of bodies bring in regulations now which require copy services to register as investment managers.
Disadvantages of Regulated Brokers
Electronic trading rules have both pros and cons. The first downside of a controlled broker option is that you are restricting your access to a large number of potential brokerages. All of which will deliver excellent trading features and high quality items. For example, CherryTrade and Porter Finance are both unregulated brokers receiving glowing reviews from customers.
There is another big downside, as well. If you’re a US resident, there’ll be plenty of controlled brokers out there, but out of your reach. That’s because stringent local laws and limits on US traders prevent many legal yet wary brokers from opening their doors to US citizens.
In general, laws are in effect to safeguard customers. So if you’re dealing in cryptos or speculating on stocks, choosing from a list of approved brokers could well prove a sensible option. So be sure to test the credentials, account regulations, policies and credibility of a broker before you hand over any money.