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Buyer Beware: Why Retail Traders Should Carefully Consider Their Broker

Buyer Beware: Why Retail Traders Should Carefully Consider Their Broker

Peter Hanks, Strategist

The rise in retail trading amid the coronavirus pandemic has seen brokerages fall under increased pressure with some struggling to cope. While stock brokerages like Robinhood have seen their public perceptions shift, a major player in the US retail foreign exchange market may face more palpable charges from regulators. On March 8, the second largest retail foreign exchange broker in the United States, Oanda, was issued a complaint from the National Futures Association (NFA), alleging five violations in various areas of its operations.

The violations range from inadequate regulatory filings and failure to supervise its forex business and employees, to incorrect customer complaint procedures and failure to abide by the firm’s anti money laundering procedures. Many of these violations were in areas the NFA had previously identified as inadequate to the firm.

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Further still, Oanda received an undercapitalization order issued from the CFTC in August 2020. The order finds that, Oanda failed at times to meet certain capital requirements applicable to the firm’s designation. Oanda also made dividend payments during periods of undercapitalization, in violation of the equity withdrawal restriction.

As a result, the firm is alleged to have had less capital on hand than a registered foreign exchange dealer or futures commission merchant is required to have and thus failed to diligently supervise matters related to its business as a CFTC registrant. Oanda’s potential failure to meet regulatory requirements may have left its clients vulnerable to systemic risk that otherwise would not have been present and the firm may be subject to punitive action from regulators.

The last major action from the NFA and CFTC toward a registered foreign exchange dealer occurred in 2017 when FXCM was levied a $7 million fine and forced to exit the US market. The effort settled charges with the foreign exchange brokerage as recompense for engaging in false and misleading solicitations. If Oanda cannot deny the violations alleged by the NFA it could face a maximum fine of $2.5 million or a possible ban from the US market entirely.

Clearly the rise in retail trading has seen brokerages fall under increased pressure and some are struggling to keep up and an expected US stimulus package could see yet another wave of new traders enter the market. That said, individual investors should conduct the same due diligence on the brokers they choose to do business with as they do with products they intend to trade as not all firms are as advertised, or even above board. How safe is your broker?

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