A stockbroker, in general, is an agent with the authorization to trade stocks and commodities on behalf of the shareholders on a stock market. To safeguard investors from unethical behaviour, regulatory authorities around the world oversee brokers and financial markets. These regulatory authorities are in charge of enforcing the norms and regulations that brokers must follow. We will look at which ones these are and how they are regulated.
It is worth noting that the regulating authority only oversees brokers within their jurisdiction. For example, ASIC (Australian Securities and Investments Commission) is an autonomous oversight body that oversees Australia’s international financial services markets and securities transactions. Read the FX-List’s CMTrading review about online brokers to know more about the regulations.
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Types of Stockbrokers
Stockbrokers are classified into two types, depending on the services they provide:
Stockbrokers who provide a full range of services: Stockbrokers who give a comprehensive range of services to their clients fall into this group; they offer trading as well as consulting services. They are well-established in their professions, with offices across India to serve their customers. As a result, these brokers charge a large commission for their services.
Discount Stockbrokers: These stockbrokers generally operate through an internet platform, providing trading services rather than comprehensive services such as advice or research, and charging a lower commission percentage.
What does it mean that a Broker is Regulated?
There are numerous advantages to trading with a well-regulated broker.
Transparency: Brokers are required to produce frequent statements and be audited. Choosing a regulated broker is an excellent approach to avoid falling victim to a scam.
Risk: Before traders sign up for a trading account, authorized trading platforms must post risk warnings. This guarantees that you are aware of the overall estimate of accounts that lose money.
Leverage: Traders can only employ a certain amount of leverage regulated by the regulatory organizations. This provides an additional layer of protection for traders’ funds. You borrow money from your broker when you trade with leverage, and you risk losing more than your original investment.
Anti-money laundering: You must pass ID verification and provide evidence of address when registering with a regulated broker. This contributes to the prevention of money laundering.
Financial Compensation: In the event that your broker goes bankrupt, you will be compensated financially. CySec-regulated brokers, for example, must use the Investor Compensation Fund. If something goes wrong, you will get some, if not all, of your money back.
Segregated Funds: Your funds are safe and protected with segregated funds. If you withdraw money, your broker will always be able to pay you.
Brokers profit from regulation as well. The fact that their operations are overseen by a tier-1 regulatory adds a lot of credibility and confidence. Another advantage is that all brokers must follow the same set of laws and regulations, ensuring that they do not compete with one another.
What happens if a Broker breaches regulations?
A regulatory agency has a variety of options. One alternative is to revoke the broker’s license, which would have a significant negative impact on the broker’s image. Regulatory agencies can seek criminal and regulatory actions in extreme instances. These regulators issue local and international warnings and alerts to warn traders and prospective customers.
List of Regulatory Bodies
Not all regulatory agencies are created equal. They provide a different level of protection and follow a distinct set of rules.
Regulatory Bodies in the United States:
- The Financial Industry Regulatory Authority (FINRA) oversees the regulation of exchange markets and brokerage businesses.
- The Commodity Futures Trading Commission (CFTC) was founded in 1974 and oversees derivatives markets in the United States, including swaps, options, futures, and others.
- The National Futures Association (NFA) is a regulatory organization based in Chicago. It regulates exchange-traded futures, and the foreign currency traded off-exchange, and over-the-counter options.
Regulatory Organizations at the International Level
- The Monetary Authority of Singapore (MAS) oversees a number of markets in Singapore.
- The Securities and Futures Commission (SFC) is situated in Hong Kong and is in charge of overseeing internet trading.
- Australian Securities and Investments Commission (ASIC)
- The Financial Conduct Authority (formerly the Financial Services Authority) is Europe’s principal regulatory authority.
- Germany’s regulator is BaFin or the Federal Financial Supervisory Authority.
- The Markets in Financial Instruments Directive (MiFID) is a European regulation that regulates the financial system of the European Union. MiFID imposes stringent regulatory disclosure requirements for brokerage firms operating in the EU.
- The Cyprus Securities and Exchange Commission (CySEC) is in compliance with MiFID. Several brokers hold the CySEC license since it is less strict than other European regulators.
Forex Trading Regulation
By daily trade volume, the foreign exchange market is one of the largest. The daily transaction volume tops $5.3 trillion. Regulations for the vast FX market are being developed and updated in countries all over the world. Japan is one of the most active retail Forex markets. Japan’s financial markets, including forex, are regulated by the FSA. The maximum leverage permissible is one of the adjustments.
According to the SEC, all forex brokers in the United States must register with the Retail Foreign Exchange Dealers (RFEDs). Standard norms and rules also protect clients.
Copy Trading Regulation
Some regulatory organizations are regulating copy trading brokers. When traders electronically copy the buy and sell orders of other traders, copy trading is known as copy trading. Some regulators have enacted regulations requiring copy trading services to qualify as fund managers.
Alternative Trading Systems
Alternative Trading is a simple method that is not regulated in the same way that a traditional exchange is. As an ECN, these systems match buy and sell orders (electronic communication network). These brokers must register as broker-dealers rather than exchanges in most jurisdictions. These systems solely match orders electronically, and there are no consumer protection restrictions in existence. They are crucial in terms of supplying liquidity.
Conclusion
Choosing a regulated broker is usually a smart idea because you are protected by a variety of rules and laws that brokers must follow. Before setting up an account and making payments, double-check the broker’s licenses, regulations, and terms and conditions.
