Online trading’s increase in popularity led to the number of Forex brokers increasing exponentially. Brokers are just intermediaries – they route their clients’ orders to the market in exchange for a fee or commission. Therefore, the brokerage business is lucrative, has high margins, and is attractive. But the entry barriers in the industry are not as low as one may believe. Not all brokers are registered, but they should be. Understanding the importance of registered Forex brokers is an important step in the decision-making process of choosing the right broker to trade with. The Financial Authority Backs Traders UpA registered Forex broker brings with it a sentiment of trust. It is a partner in the trading process, and registration with a financial authority establishes that trust.Each country or region has a financial authority responsible for supervising the industry and setting a body of rules and regulations brokers must follow. In exchange for complying, brokers receive a licensing number. The license is not for life, as the broker must maintain a certain status and follow specific rules designed to protect the broker and the trader. Hence, one might say that the financial authority backs a registered broker, and the process strengthens the much-needed trust in the industry. The Broker Must Maintain Certain StandardsA Forex broker might or might not be regulated by a financial authority. But it should certainly try to be. Despite the complex and costly process of regulation, it brings standards that enable the broker to gain more customers. A new trader would likely do due diligence to find out if the broker respects the industry norms, what happens if something goes wrong with the business model, and so on. After all, running a brokerage house is a business model. Not all businesses survive the test of time and profitability, so a broker is exposed to business risks just like any other business. Maintaining certain standards imposed by the financial authority helps the business to navigate difficult times. Limited or No Downside in the Case of Broker’s BankruptcyPerhaps the most obvious way a registered broker benefits a trader is the bankruptcy risk. An unregistered broker going bankrupt results in most customers losing their funds. It is difficult and unlikely to recover funds if a financial authority does not step in. But if the broker is registered, the financial authority does step in if the broker’s business is in danger. It has protocols to follow to protect the client’s interest, and, in the end, the customers will get their funds back. It happened when the Swiss National Bank dropped the 1.20 exchange rate floor on the EUR/CHF currency pair. The move led to some brokers going under, but those registered with a financial authority had no problem returning the funds to their customers because most of the funds were segregated in designated accounts separated from the day-to-day business operations.
