The world’s financial markets have evolved markedly in the digital age, particularly in terms of how they’re accessed and the total volume of trading activity.
Interestingly, banks’ bond trading desks are the latest to go electronic and embrace digitisation, as one of the final bastions of old-school banking ultimately makes way.
If you regularly trade forex or commodities, however, you’ll know that online brokerage sites now drive the overwhelming majority of daily trades. But how can you distinguish regulated from unregulated brokers, and why should you care as a trader?
What are the Differences Between Regulated and Unregulated Brokers?
In simple terms, traders are afforded one of two choices when accessing the lucrative foreign exchange.
More specifically, you can choose between regulated and unregulated brokerage sites, the former of which comply with the latest regulatory standards and are fully licensed by the Financial Conduct Authority (FCA).
Conversely, the latter provides a riskier but more accessible route to trading profitability, by offering far greater flexibility and reduced regulatory oversight. However, this type of broker provides minimal protection against the threat of fraud or exaggerated losses.
For the most part, regulated brokers offer superior balance and peace of mind to traders, thanks largely to the credibility that they offer and their willingness to safeguard clients through the use of 128-bit SSL encryption and similar technological innovations.
How to Choose Between These Two Types of Broker
While regulated brokerage sites tend to offer superior value to traders, the ultimate choice that you make will depend on factors such as your expectations, risk profile and the precise markets that you want to enter.
For example, unregulated brokers will offer direct access to relatively restricted markets and products such as credit default swaps (CFDs), which get traded with incredible frequency and are often shrouded in uncertainty.
Despite being unregulated ever since contributing to the financial crisis of 2008, this type of asset class offers genuine diversity to traders while lenders can use them to protect themselves against credit risk.
Accessing this type of product may also prove cheaper, largely because an unregulated broker will have minimal operational costs and limited tax burdens. However, this also means that they can struggle to offer the requisite liquidity to cover the type of larger trading positions synonymous with forex.
In contrast, reputable brokers such as Tickmill actively thrive on the relationships that they have with their liquidity and bridging partners, creating a structured and balanced marketplace in which they can pursue optimal profit while simultaneously safeguarding themselves against risk.
So, while there are clear circumstances in which you may benefit from liaising with an unregulated broker, a regulated alternative often offers the best bet in terms of security, accessibility and securing liquidity.