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Regulated Brokers vs Unregulated Exchanges

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To operate as a broker/exchange, it is not mandatory to register yourself with the regulatory body for the region. And, not all exchanges functioning in the global financial markets are regulated. However, the fact is that every region has its own regulatory body that constantly works to ensure best practices and customer protection. For instance, the Financial Conduct Authority (FCA) oversees the functioning of financial services providers in the UK, while the European Union is regulated by the Markets in Financial Instruments Directive (MiFID) and the United States has the Financial Industry Regulatory Authority, among others.

Regulations are Meant to Protect the Consumer

Regulatory bodies are entrusted with the responsibility of drawing up guidelines for the functioning of organisations offering financial services within specific geographic regions of the world. The key aim of these regulations is to safeguard the interests of the consumer and ensure that financial firms are following fair and legal means to provide services. If a regulated broker violates any regulation for its specific region, it is liable to face an investigation and possible penalties and fines from the regulatory body. In the worst cases, even the license to operate in the region could be revoked. The regulatory body also provides consumers with an avenue to have their grievances heard and seek justice.

Risks Associated with Unregulated Exchanges

The primary reason for recommending a regulated broker is that your hard-earned money stays safe and you remain protected against fraudulent practices and scams. Even if the unregulated exchange is well-meaning, if for some reason it goes out of business, you are unlikely to either get your hands on the money invested through them or any financial compensation for the termination of the brokerage. Being regulated gives you peace of mind knowing that you have legal recourse under any event.

Advantages of Regulated Brokers

The most basic advantages of choosing a regulated firm is that you know that they are liable to comply with the rules and regulations set out by the regulatory body responsible for the region. A regulated broker needs to register with the body and receive a license that authorises the firm to provide its services in the particular region.

Once registered, the broker needs to ensure specific quality standards with regards to their products and services, while ensuring complete compliance with the rules. This quality control proves invaluable for the retail trader or client because it assures them of best practices and world class services.

Some of the other major advantages of using regulated exchanges include:

  • Transparency: A regulated broker is required to provide its clients with the highest levels of transparency regarding its operations, services and processes, including trading via their online platform. This gives huge peace of mind to traders, since the processes become predictable and unfortunate surprises are minimised.
  • Segregated Funds: Another key advantage is the security of the trader’s funds. Regulated brokers are held accountable for the way they manage their client funds and the measures they take to keep these funds separate from their own funds. This ensures that even in the event of the firm filing for bankruptcy, it need not translate into bankruptcy for its clientele. By segregating client funds, the brokerage ensures that these funds are never in jeopardy.
  • No False, Misleading Advertising: In order to comply with the regulations, financial services providers also need to ensure that all their marketing activities are also compliant. This means that they cannot use misleading information or make false claims regarding what clients stand to gain from joining their trading platform. In fact, MiFID II has revised the rules for the fine print too.
  • Negative Balance Protection: This ensures that even if some trading decisions do not go as planned, the balance in a trader’s account will never go into a negative figure. A compliant brokerage will help traders through margin calls and other measures to ensure that their clients do not go into debt.
  • Setting Leverage Limits: High leverage can seem very exciting till the point that the trade fails to go in your favour and you end up with a huge debt. By setting limits to the leverage, compliant brokers ensure that the risk of losing large sums is minimised. In fact, revised regulations by the US NFA and ESMA set limits to the leverage forex brokers can offer.

With these measures and counter-measures in place to protect investor’s funds, the toss-up between choosing a regulated broker versus an unregulated exchange becomes a bit of a no-brainer. If you’re in the process of choosing a brokerage to start your trading journey, do a bit of due diligence and check whether they are registered with the UK FCA, CySEC, MiFID or any other such body, based in the country in which they offer their services. This information is often available on the company’s website, along with their registration or license number which is easy to verify online concerned authority.


If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.