New Online Brokers Keep Springing Up, Investors Should Understand the Implications


An online broker is a financial service provider that helps you buy and sell stocks, currencies, and other assets, through a digital trading platform. It is becoming easy for individuals to obtain a brokerage license especially because of white label brokerage firms- brokers who use the platform of an existing and established broker to start.

With so many brokers in the market, competition can take an unhealthy turn as they begin to employ manipulation and black hat tactics to outdo each other.

Also, due to the surge in the number of brokers globally, online traders are also exposed to poorly regulated brokers operating out of offshore countries.

Here are some of the implications of a large number of brokers in the market and you need to separate the chaff from the grain.

Unregulated Scam Brokers

An unregulated broker is not regulated with any market regulator.Some can dupe you by using addresses and Firm Registration Numbers (FRN) of legitimate brokers who are licensed by FCA. This is called clone fraud.

For instance, on 14 May 2019, the FCA won a case against unauthorized forex firm Xcore Capital and a UK High Court ordered them to repay £917,231 it defrauded its customers of, following an application from the FCA.

Also in 2014, a website of an online investment platform known asSecure Investment disappeared overnight after defrauding customers in 11 countries on five continents of one billion dollars.

Poorly Regulated Forex & CFD Brokerages from Offshore Countries

Forex & CFD broker regulatory policies in some Island Countries like ST Vincent & Grenadine (SVG), Belize, Vanuatu and so on are not as stringent as those in developed nations. The process for registering a forex brokerage and minimum capital requirements are cheaper on these island nations.

For example on ST Vincents & the Grenadines Island, an International Business Company is authorized by the government to carry out any business activity without approval except Banking, Insurance and mutual funds. This means that forex brokers there fall under the ‘any business activity’ category and are not supervised.

This kind of open-ended regulation is also carried out in many island nations thus many fraudulent forex brokers open shops there. To guard against becoming another statistic or victim, always ensure you are dealing with an FCA regulated forex broker.

Lots of brokers hold dual licenses so even though a broker has a license from another jurisdiction, they should also hold one from the FCA. This list of best forex brokers operating in the UK mentions in their research that there are over 100 forex brokers that accept retail clients in the UK, but many of them hold a license. Only the regulated brokers are legal & have been assigned Reference numbers.

With these registration numbers, you can head to the FCA website and input the number to search the Financial Services Register to see if the broker is legitimate.

With this information, it is advisable that you should treadcautiously with brokers regulated by island countries. To be on a safer side, you could patronize well-regulated brokers fromdeveloped nations.

Financial Service Providers Operating Outside Their License Mandate

The Financial Services and Markets Act (FSMA) 2000 of UK stipulates that all firms, whether sole proprietor, corporate businesses or nonprofit organization must  be registered and regulated by FCA, unless being exempted.

This shows that there are some financial service providers in the UK who are licensed by FCA, but not with the mandate to render forex brokerage services for example.

With so many new brokers in the market, some could be operating outside their license mandate. For instance someone with a portfolio manager license isn’t supposed to start a forex brokerage business.

So, before entering any brokerage deal with any service provider, ensure that it is not just a registered financial firm, but also with the specific mandate to be a broker.

FCA portal gives you general list of financial service providers but if you want to check the list of brokers only, you can go to the London Stock Exchange portal link.

Brokers Offering Excessive Leverage

Leverage can be defined as a loan facility from your broker which gives you the opportunity to get a larger exposure in the retail market than the amount you deposited to open the trade. It is expressed as a ratio.

Example a leverage of 1:10 means for every order you want to open, you will provide one tenth of the cost while your broker borrows you the remainder.  

Many new brokers especially CFD and forex brokers operating from offshore locations with weak regulation will lure you with leverage as high as 1:1000

Using very high leverage is dangerous as a little market change can see you lose your entire capital and even owe your broker. This is possible because most offshore brokers don’t offer Negative balance protection.

Due to this excessive risk, the FCA came out with a rule restricting leverage to between 30:1 and 2:1 for brokers that offer Contract for Difference CFDs and other similar options to UK based retail traders. So, don’t choose any broker who offers leverage above the maximum set by the FCA, as they are likely unregulated.

Beware of the Dark Pool

Dark pool is a privately organized financial exchange where trading of financial securities takes place. As the name implies, it is a sharp contrast to conventional exchange market because it makes you do your trading without any public exposure or attention until the trade is executed.

Some brokers, in a desperate move to make profits could route your trading orders through the dark pool instead of going straight through the conventional stock exchange.

Going through dark pool could be hazardous for you because your orders may be executed at inferior prices to what is obtainable on the stock exchange.

Popular US brokerage RobinHood was involved in payment for order flow scandal in the past. Robin Hood got paid by third parties (dark pools) so they could be counterparties to customers’ orders and this caused a conflict of interest.  

The interest of the dark pool was placed before the interest of customers. Robin Hood was later fined by the SEC for this.

If your broker keeps re-quoting you every time, be watchful as they may be routing your orders to a dark pool.

Pyramid Schemes

A pyramid scheme is a scam where fraudsters make money by recruiting an ever-increasing number of new ’traders.’ The initial promoters recruit traders, who in turn lure in more investors, and so on. They call such a system a ‘pyramid’ because in every stage, the number of investors increases.

This scheme is designed in a way that people at the top of the pyramid make money from the fees of people at the bottom rather than investing in the capital market.

Pyramid schemes are illegal in the UK under Consumer Protection from Unfair Trading Regulations 2008. If you come across any service provider offering money as an incentive to bring other traders in, tread carefully.

Gamification of Trading

The gamification of trading is the inclusion of certain features to investment apps which make the experience resemble playing a video game. The gamification of trading which was pioneered by Robin Hood has been generating concerns from stakeholders and regulators.

Many have criticized gamification as an instrument purposely meant to deceive new traders to view trading as a game instead of a serious activity that involves serious financial decision.

Today we have forex brokers deploying investing game Apps where once you reach a certain ‘winning score’ you are told to download the forex App and start trading

European Securities and Market Authority ESMA for instance wants to curb gamification in online trading to protect investors from risks and vulnerabilities associated with gamification.

Unrealistic Offers & Bonuses

With so many brokers in the market, you will start coming across bonuses and promotional offers. If you come across any broker offering bonuses, you need to engage with caution. These bonuses may be red herrings meant to distract you from carrying out checks.

Any broker telling you that  “make $ 100 a day from a $500 investment” or “make 80% returns on your trade” or “98% success rate.”  Just know that these claims are scam. There is no automatic profit in any form of online trading. 

The FCA issued a warning on its website that UK traders are now being targeted by illegal brokerage firms offering them high returns to trade in Forex and CFDs.

“They promise very high returns and guaranteed profits, either through a managed account where the firm makes trades on the investor’s behalf or by trading using the firm’s trading platform,” FCA warned in their update.

Be Vigilant

Everybody wants to take advantage of the bustling capital market and there’s need for caution. Not everyone likes to follow rules and some will place their selfish interest ahead of the clients own.

Stick to brokers authorized by FCA and avoid seeking greener pasture in the form of higher leverage, higher rewards etc.

Ensure you visit the FCA page for regular updates to keep abreast of happenings. Also stick to investing in only things you understand.