In this article we will try to explain the basics of how the unregulated forex industry works. Although the regulated and unregulated forex companies use in the most cases, the same platforms and have similar websites, the way they operate is very different. When we say regulated forex companies, we mean those companies that are regulated by prestigious institutions, like UK’s FCA, Australia’s ASIC, Cyprus’ CYSEC and others. We are not covering the offshore regulators in this article. So let’s dive in.
Regulated vs. Unregulated Brokers: Basic Concepts
Simply said, a regulated forex broker is a broker which is supervised by a regulatory agency. The latter supervises the whole workflow of the broker and can request data at any time in case it receives a compliant or identifies misconduct by the broker. In case there is any misconduct, it can take measures to fix the problem. If the broker doesn’t obey to the regulatory rules, the regulatory agency can take several measures from fines, to banning the broker from the industry or even to prosecution. Also the clients funds are kept in segregated accounts which mean the broker can’t use those funds for operational expenses or to finance its business.
On the other hand, unregulated forex brokers aren’t supervised by any authority. So if you give them your money you are solely depending on the broker’s moral to return your money, which in almost every case it will let you down. If they choose not to return your money or you notice misconduct by the broker, you have no one to turn to. The police can’t really do much about these cases because of the nature of these kinds of businesses. There are jurisdiction problems, there are no real names for them to investigate and the offshore banks will not give up the information of their clients that easily. That’s why is always a good idea to sign up with regulated forex brokers only.
Unregulated Forex Brokers Workflow.
From now on we will describe the workflow and the methods that unregulated forex brokers use.
The first thing that every broker need is leads. By leads, we mean potential customers that they need to call in order to convince them to join their platforms. They call them from call centers they set up usually in offshore zones because of the cheap work force. These call centers can vary in sizes from a handful of employees to hundreds of them.
Generating leads can be done in many ways but some of them include:
-Calling clients out of the blue from numbers they find on the internet
-Impersonating specific people on social networks and recommending their website(s)
-Creating fake female accounts on social media and recommending their website(s)
-Generating leads through “Automated Trading Software” schemes
-Signing up with affiliate networks, and many more.
After getting the leads, they make the call and persuade them to join their platform for an initial “investment” of, usually $250. After making this initial payment the client gets transferred to another department called the retention department. Here they will try to squeeze as much money as possible from every client before moving to next one.
Where does the money go
Some of these forex brokers do tremendous harm to people all over the world. Some of them have done harm in the hundreds of millions of dollars. So where does all this money go? Mostly in offshore banks. Also it gets distributed to a lot of beneficiaries because they do have partnerships with many IBs (Introducing Brokers). From there it gets laundered in many different ways.
The most common trading platform that both regulated and unregulated forex brokers use is MT4 and MT5. These platforms support hundreds of different assets to trade from Stocks and Indices to currency pairs and crypto currencies. However there is a key concept that every investor out there should understand and that is you don’t buy or invest anywhere by using this brokers and platform. You only trade with the asset’s price. We can illustrate that with a simple example. Let’s say you want to invest in Bitcoin. The way to do that is to buy bitcoin through a bitcoin exchange like Binance. Now you own bitcoin. If you trade in forex brands you are trading CFDs, meaning you are trading with the price of the asset, you are not buying anything. The same is true for stocks and indices.
The Pump and Dump Scheme
Like we said before, these “companies” will take as much money as possible from every client they can get their hands on. They will even trade for you, and show you profit. There is something else to take note of. All the money in the MT4 and MT5 platforms is purely virtual, it is not backed up by anything, and everything can be manipulated, from the asset’s open and close price to the open PnL and the profit you make. Trades can also be deleted and reinstated at will. That leaves room for a high manipulation and it is used against the client in the following way. They will show you profit every single day, this can be done easily by asset’s price manipulation, and convince you that if you put more money in you can double up the profit. When they think you reached your deposit limit and they can’t get more money out of you, they will make some losing trades and put your account back to zero (again by price manipulation). They will tell you that you lost everything because of bad market direction. Classic Pump and Dump!
Surely there is much more to say about the unregulated forex industry but for now we will finish this article here. Probably the authorities will seriously turn the attention toward these unregulated forex companies or even to the entire forex industry as a whole. Binary options were also a big fraud industry until recently, and almost every state took action against it and banned the industry for good.