Most Forex traders would vouch for the statement that trading successfully in the currency market is relatively easier than finding an honest broker. However, experienced and successful traders, who trade in the Forex market for a living, always deny such accusations and ask for a careful study of a Forex broker’s background, before opening a trading account. There are complaints surrounding almost all the online brokers. Even some of the major regulated brokers had been found to have involved in fraudulent activities (FXCM, for example, was fined and banned permanently by the US CFTC for misleading clients). Therefore, a genuine doubt exists among traders about the integrity of FX brokers.
To arrive at a conclusion, we shall first look at the most common reasons for stamping a Forex broker as a fraud. We shall then dissect each of the reasons and finally decide whether online trading brokers are reliable.
A Forex broker’s trading platform is expected to remain stable even during major news announcements. Brokers know that trading platform is the backbone of their business, and regular issues with the platform would divert the clients to other companies. So, they make sure that robust servers are in place to manage a surge in orders during critical news announcements. Still, during a year, there may be one or two instances of platform freeze or disconnection with the server, following the release of a high impact news. Disappointed beginner traders usually jump to the conclusion that the broker they are dealing with is a fraudster. If the platform becomes unstable several times a month during important news announcements, then a trader would be indeed right to doubt the motives of such a broker.
Liquidity generally dries up during major news events. That is one of the reasons for requotes. In a fast moving market, a millisecond delay in placing an order may result in losing the targeted entry price. An order will not get executed until a Forex broker can pass on the risk to its tier 1 liquidity provider. Requotes is a natural outcome of the manner in which different layers of brokers and liquidity providers are interconnected in the foreign exchange market. It cannot be avoided, but can be reduced with powerful servers and the use of multiple liquidity providers. Consistent requotes, forcing the trader to increase the bid rate or lower the ask rate, indicate something wrong with the broker's reliability.
Traders who do not want to lose an opportunity due to requotes may place market orders and this might lead to slippage in a volatile market. Slippage can be either positive (favorable) or negative (unfavorable). However, a trader should not experience frequent negative slippage. A mix of positive and negative slippage affirms the reliability of a Forex broker.
During periods of low volatility, orders should get executed without any difficulties. Frequent delays in order execution, or order executions at extreme prices, is a characteristic of an unreliable Forex broker.
Last November, the Polish regulatory authorities found out that the Forex broker XTB was involved in asymmetric slippage practices that could have cost customers between $2 million and $6 million. An expert brought in by the regulator estimated the fraud at three times the originally mentioned range. Asymmetric slippage is a fraudulent strategy involving execution of a client’s order when the slippage is favoring the broker, but issuing a requote when the slippage is favoring the client.
It is impossible for an STP broker to maintain a fixed spread on a 24×5 basis. A Forex broker should widen the spread to mitigate risk, when the market turns volatile. However, if the spread widens to 25 pips or higher every time a major news announcement is released, then a trader has every right to doubt the reliability of such a broker.
Zamansky LLC, a New York-based law firm specializing in securities fraud, announced last July that it is investigating OANDA’s spreads and pricing practices. In its marketing materials, OANDA has claimed that it offers “low spreads,” “competitive spreads,” and “transparent” pricing with no hidden charges. However, Zamansky believed that it was not the case and an investigation was conducted. On October 31, 2017, Zamansky filed a class action suit against the company, alleging “excessive and undisclosed spread, fee and interest overcharges and related trading losses on online foreign currency exchange transactions.” As of February 2018, the lawsuit is pending in New York Supreme Court.
A trader who carries a long or short position overnight will either receive or pay rollover interest charges, known as swap or rollover fee. Normally, it is calculated using the formula:
Swap = (value of the contract × (difference between interest rates – Forex broker commission for transferring your position) / 100) * Current Price / number of days in the year.
Depending on the commission charged by a Forex broker, the swap charges vary considerably. A quick look at the swap rates charged by various brokers reveals that InstaForex charges a negative swap of -8 pips for a long position in the EUR/USD pair, while IG offers a positive swap of 1 pip for the same long position. In case of the AUD/CAD pair, for a long position, InstaForex offers a positive swap of 1.69 pip, while IG charges a negative swap of 0.01 pip. A trader should study the swap rates offered or charged by a Forex broker for the most liquid pairs. If a broker charges a consistently high swap rate (or offers the lowest swap rate) for all the major currency pairs, then such a brokerage can be considered as unreliable.
It is one of the crucial factors that determine the reliability of a Forex broker. A prolonged delay in processing payments makes a broker untrustworthy. Genuine companies will send out payments in a maximum of 4-5 days. That is why professional traders ask beginners to start trading with a small capital and make a few withdrawals to understand the reliability of an FX broker.
The Cyprus Securities and Exchange Commission (CySEC) suspended the license of Forex broker ACFX after its clients started complaining of exorbitant rollover rates for oil contracts. A large number of Chinese clients also faced withdrawal issues.
The reliability of a Forex broker can also be understood from the efficiency of the customer support facility. A broker who bends over backwards to resolve all issues related to its trading platform, withdrawals, deposits, and document verification deserves trust and recognition from its customers. The most reliable brokers excel at providing top-notch customer service.
The factors discussed above determines whether a Forex broker is reliable or not. Many companies consistently strive to meet the standards discussed above. Even the best FX broker may face issues once in a while, as retail currency trading is heavily dependent on electronic networks and financial infrastructure. However, that does not mean the broker is unreliable. A consistent failure in providing a decent service should be the reason to brand a Forex company as unreliable.
A close look at the complaints made by traders in most of the forums would reveal their inexperience in trading. The self-serving bias within every human results in a blame game, and Forex trading is not different. Traders who are willing to accept their mistakes and perform a thorough introspection will not have any issues in finding a reliable Forex broker. Yes, there are brokers who are outright frauds. However, it is not an intrinsic characteristic of the online Forex market. The entire sector should not be sealed as untrustworthy because of a few scams.