EXPOSED: What The Broker Does Not Want You To Know - Part 3
So here we are guys, the finale to the trilogy, enjoy and comment below what you would like us to expose next.
I want to educate you; and bring to light that at the end of the day, brokers are a business and they protect their own best interest. The bottom line with any business is that, if you do not make money you simply can not survive. So why are there thousands of brokers out there, publishing consistent results year on year? Yet traders are still not educated and continue to lose money on a regular basis.
Now we know how brokers operate and the shadiness they try to cover up, I want to dig a little deeper into how the regulators try to stop Brokers from getting away with too much. You read about it in the news nearly every week, fines for companies, bans for certain individuals, licenses revoked and complaints from retail traders on nearly every trade.
Let's start with the Financial Conduct Authority (FCA) right here in London. Arguably the most prestigious license to have if you are a financial services company in the UK. To obtain an FCA license is around £700,000 to £1,200,000 and will take 6-12 months to complete the process.
The European Union is a little bit different, Governed by the European Securities and Markets Authority (ESMA). This governing body safeguards and stabilises the EU financial system by protecting investors and the financial markets. ESMA controls all countries within the European Union, Yes including the UK as well. Now, within ESMA each individual country has its own regulations which firms based there will adhere to. For example, Cyprus has the Cyprus Securities and Exchange Commission (CYSEC), Ireland has the Central Bank of Ireland etc.
Across the pond over in America, The Securities and Exchange Commission (SEC) is responsible for overseeing the U.S. securities market, enforcing laws and monitoring exchanges. Created in 1934 by Congress, it is also responsible for overseeing corporate takeovers, Its main priorities are, transparency in securities markets and protection of investors from fraud or corporate manipulation. Firms are required to file out quarterly and annual reports that are reported to the SEC. if charges are brought to any corporation or individual this is reported to the Justice Department.
Changes in regulations affect everyone, from big corporations right the way down to your average retail trader. It is a domino effect, once the big players of the field get hit with a regulation or regulatory change, this is passed down and onto the smaller players in the field.
A simple way of understanding this is, if trading conditions have become stricter and more rigid for big corporations, you can guarantee, those conditions will get passed on down the line. When sellers of retail items get charged more for importing and exporting goods, who foots the bill…
What Does This Really Mean For You?
I see financial conditions for retail brokers becoming even stricter in the years to come. For far too long, brokers have been getting away with daylight robbery in some cases, this is about to change. ESMA and MIFID is the start of the crackdown. Tighter regulations may not necessarily be intuitive for retail traders, but it will mean brokers won't be able to get away with what they normally do.
When new regulations come in for brokers in the years to come, trading will become more expensive for retail traders. Brokers will have to make up the money somewhere, so where will that be?
The first two factors that come to me are spreads and swaps. The majority of brokers like to “entice” traders by giving them 0 pip spreads or ridiculously low spreads. This could change in the years to come if brokers are offering 0 pip spreads or 0.1 spreads, they are essentially letting you trade for free, this means that they will “get” you somewhere else? This ties nicely back into part 2, where we discussed the percentages and majorities of traders who lose and win. Brokers will do a hell of a lot to get you in trading as they know the majority lose.
Swaps, a high percentage of retail traders do not understand the concept of swaps and how this effects them holding positions overnight. As the majority of traders like to trade intraday, they do not encounter swap charges but it is important to know. Holding positions sometimes for days/weeks does have its advantages.
Swaps are calculated by a variety of factors, you may be charged swaps of credited dependant on, the market you trade and the direction of the trade you took, i.e. long or short. Swaps are essentially the cost of rolling the transaction (trade) from one day to the next. This is calculated automatically on your broker platform, and will either be deducted or credited into your account at the end of every day, typically 10 pm. Brokers could look to increase the holding costs overnight and charge you more for this, something to keep an eye on going forward, as this is not a subject discussed in the retail land.
Slippage, from part 1 you should know that slippage occurs, this happens on market execution, when you exited the trade the market moved so you did not get that price but you got a price a few pips away, TYPICALLY within a 5-10 pip range. I highlight typically and use that word very loosely. Executions on trades are done automatically, and this is all algorithm driven so I highly doubt they will look to adjust this, but it is certainly something to keep an eye on at all times.
How Do The Changes Effect Brokers?
The image below is IG Group Holdings share price, arguably the biggest retail broker here in London. In the image above, I have highlighted the month that ESMA implemented the restrictions to retail traders. As you can see from the chart below, the month of August approached all-time highs. September however, recorded a 31% drop in share price. As IG is a publicly listed company and floats on the LSE, investors were not happy and were worried about the future of the company with the new regulations....