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NFA Regulations and broker vid

Discussion in 'General Forex Talk' started by fxhalo, Oct 2, 2007.

  1. fxhalo

    fxhalo Recruit

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    Does anyone still have the video were felix explained the structure of brokers?
     
  2. freddyfxfingers

    freddyfxfingers Recruit

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    forex, nfa video

    I think this is what you are looking for:



    This was also part of the email, it has to be read in order to make sense of the video:
    ________________________________________________________________
    So in the video, I have clearly layed out to you how different forex brokers are structured. There were no opinions involved in that video, and I took no sides between bucket shop business structure and ECN business structure. But I hope it gave you a lot more clarity on both issues. As you saw the customer funds checking accounts in the video, you probably understood that because your orders in a bucket shop never get passed into the real market, it\\\'s very easy for a bucket shop broker to mismanage your customer funds, and spend them ahead of time on the assumption that the funds will eventually be lost by you as a trader. That\\\'s exactly what happened with Refco. They spent the money from their customer funds account, before traders lost it, and when traders asked for withdrawals, there was no money to pay them :(

    As you probably saw, ECN broker also has customer funds checking account, but in order for them to execute your trades through the banks, most of your money will have to be deposited from the customer funds checking account into various trading accounts of banks. The minute they spend any of this money, the banks cut off their liquidity to them, so it would be very difficult for an ECN broker to just spend the customer funds money. In fact, I think it\\\'s nearly impossible, because the effect of that would immediately collapse their business structure.

    A lot of forex traders place a lot of hope on the fact that their broker is NFA regulated. I hate to tell you this, but though NFA regulation is very good, that doesn\\\'t mean as much as most people think it does. Before I start talking about this, I want to tell you that what I express below is a matter of my own opinion and research, and I may be wrong about my opinions and research.

    As far as I know, NFA stands for National Futures Association, and it\\\'s a private company that collects fees from its members, and in exchange for the fees, they provide certain services to the members, like audits. The way NFA works is very similar to a Condominimum Association. Remember, it\\\'s an association, not an organization. That means that members of that association can change their own rules. Like a board of members in a condo association consists of members that are usually tenants, they can vote on things, and decide how much every member of the association should pay, and what kind of duties the association will perform.

    If you live in a Condo association, you have to abide by their rules, but nothing prohibits you from selling your condo, and buying a condo in another association. Similar with NFA, the membership is voluntary, and if somebody doesn\\\'t like the rules, they can leave, end of story. Of course if the NFA thinks that one of their members is doing something illegal, they report them to a government agency, and that government agency may take action, and shut down a company, but as far as I know, NFA has no power of doing it themselves. Similar to your condo association, if you do something illegal, they call the police and report you, and you pay the consequences. This distinction, is extremely crucial to understand.

    People think that when a forex broker is NFA regulated, it conducts honest business, but one has nothing to do with another. Legal business and honest business are two completely different things. If a forex broker manipulates the prices and takes out stop/losses of their traders, that\\\'s dishonest, but legal. If a forex broker changes your entry prices and decides to null your profits, that\\\'s dishonest, but it\\\'s legal.

    Most rules in the NFA are set around how broker manages its customer funds account, and make sure there is no money laundering happening. NFA has rules, but those rules have nothing to do with what\\\'s legal or illegal. If your condo association has a rule not to dry your clothes on the balcony, but you still do it, you are breaking their rules, but you are not doing anything illegal. What they can do against you is keep warning you not to do it, and eventually try to force you to leave the association by selling your property. According to what I know, despite of the mostly non-important rules, set by the NFA, brokers break those rules all the time, and the NFA has to decide whether to kick them out of the association or not. No matter how much they may want this, but they can\\\'t shut someone down for just breaking their rules. Their rules have very little to do with the law.

    There are now talks about the NFA raising minimum net capital requirement for the brokers. At first this seems like an action to protect traders from dishonest brokers, but nothing can be further from the truth. I think everybody knows that most forex brokers are bucketshops, so it should be obvious that most members in the NFA are probably people from big influential bucketshops. What is the biggest business threat for the big bucketshops? The biggest threat is the small bucketshops and ECN brokers, because small bucketshops and ECNs, take some of their clients, and create a lot of competition. How can this problem be resolved? Well, it\\\'s very simple, raise the net capital requirement, which is nothing else but stale funds sitting in the customer funds checking account of a broker. Now, if a broker has a lot of net capital sitting in their checking account, that means one thing, and one thing only. It means that the orders are not being executed in the real market. Because if you watch the video, if a broker was to execute the orders at the big banks, the money wouldn\\\'t be sitting in the useless customer funds account, instead the money would be trading at the big banks\\\' trading accounts.

    So what will this new rule will do? Some people think that it would drive a lot of brokers out of business, and I used to think that too, before I did more research. This has nothing to do with brokers going out of business, NFA has no such power. This would simply mean that small bucketshop brokers with not enough net capital requirement will simply be kicked out of the NFA, and wouldn\\\'t be able to display their logo on their website. That\\\'s all. The only thing this new rule would do is monopolize the NFA, and instead of having a lot of members, it would have only several big bucketshop members. And those big bucketshop members will use their position in the NFA as marketing tools to detract traders from smaller brokers that won\\\'t be NFA regulated. The bigger ECN brokers will have to make a choice whether the NFA badge is important to them. If it is, they\\\'ll have to take 6 million out of their pocket, in order to meet that requirement, because remember, according to the video you should\\\'ve watched, with their structure, they may have tens and even hundreds of millions of dollars, but they are not sitting in their customers funds checking account, instead the funds are sitting at trading accounts of major banks.

    So if the minimum net cap requirement is initiated by the NFA, here is what would happen. A lot of smaller bucketshop brokers and possibly some ECN-type brokers will be kicked out of the NFA. They will still keep operating, and will probably not go anywhere. What this will do is the big brokers will be able to tell traders that they are NFA regulated, and traders should not trust the other brokers that are not NFA regulated. That will probably attract more clients to them, because the clients of smaller brokers will not be fully educated and will be scared by their broker being kicked out of the NFA.

    So what benefits does this large minimum funds requirement do to the traders? Well...I think there is no benefits, but only harm. A lot of the smaller bucket shop brokers that will be kicked out of the NFA will probalby be able to operate more loosely, because they wouldn\\\'t be audited by the NFA. Some honest brokers that actually pass their orders into the real market will probably leave the NFA, and confused traders will change their accounts to the big bucket shops that are the biggest manipulators in forex. And because NFA will consist of only few bucketshop members, a lot of new traders will choose them over all the other brokers, and will simply be victims of the same dishonest manipulations that every bucketshop customer has experienced.

    So I think this whole thing with minimum cap requirement is nothing else but a political move from the large bucketshop operations, and they are already starting to use this rumor for their marketing purposes of attracting more clients.
     
    #2 freddyfxfingers, Oct 2, 2007
    Lasted edited by : Jan 15, 2016

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