BarroMetrics Views: It’s Your Money, Husband It!
This blog focuses on highlighting the risks traders face when choosing brokers.
A little context: I view brokers as being in a fiduciary relationship and as owing a fiduciary duty to their clients. Ray, what in heavens name do you mean? It sounds like legal-eagle double talk!
Think of it in the same terms as the client-lawyer relationship. Clients place their funds in a solicitor’s trust account. The amount is security for payment of fees and disbursements. Because the funds are held in trust pending completion of a matter, they are kept in a separate bank account called a ‘trust account’. The trust account is not available to creditors of the legal firm should the firm become bankrupt. If a lawyer does the wrong thing and mixes the trust fund with his own or absconds with the trust monies, a Law Fidelity Fund will reimburse the client.
I see the trader in exactly the same position as a lawyer’s client. But in many parts of the world, while some protection is given to stock traders and futures traders, there is no protection given to FX traders. It is your job as a FX trader to make the necessary enquiries that will protect your capital.
Recently, this was brought home to me.
Currently I am using one broker for both FX and Futures. By funding my FX account from the futures account, I obtain the protection of the futures legislation. The country in question provides for segregation of client funds for all accounts but does not provide for compensation for FX funds where the broker breaches the act. By funding FX from the Futures account, I protect most of my funds.
Unfortunately the Futures arm of the current broker is having problems:
- their platform is not working
- to execute trades we need to call in the orders;
- in addition, the dealing desk refuses to work any orders for exchanges that won’t take ‘stop’ orders.
- Now, imagine the situation where your levels are hit and you want to exit; imagine the time it takes and what the market can do in the time you call in, wait for the phone to be answered etc …. ! I’ll leave the slippage to your imagination.
Needless to say, I have opened a new Futures account for trading purposes with a broker whose trading platform is operational. I should begin with it later this week- as soon as the funds are deposited in my account.
While I was in the process of change, I received an offer for trading with a FX broker who was offering less than 2 pip spread with the majors: EURUSD, GBPUSD etc and 3 – 5 pip spreads for the others. The spreads are fabulous and I was impressed with the salesperson; so while I had not contemplated changing FX brokers, I was now tempted. But later enquiries decided me against trading with this broker…….
Interested why? More tomorrow………