Many countries lack any legislative jurisdiction governing dealer-customer relationships regarding the FOREX market, or government control over dealer and broker companies involved in speculative currency trading. That is the main cause of abuse of clients, especially when the client’s money is used for market speculation and when unlawful extortion is charged.
The Majority of Broker Companies— Especially Small Ones—are Bucket Shops
Bucket shops are companies that do not have direct relations with the FOREX market, and do not execute real transactions on the real market. What they do is create an illusion of trading operations whereas, in reality, they only make mutual bets around rate changes between a client-trader and themselves. These bets are based on real current market quotas, but actually have nothing to do with the real market. If the client wins, the client gets paid from the broker company’s own funds. If the client loses, the money remains in the broker’s pocket.
In General, Operations of Bucket Shops Are
Legal and Are Not Controlled by a Government
Many experienced traders know about practices of bucket shops but do not pay adequate attention to them. They think that the sources of gain or loss
coverage are of no great importance. However, in reality, this belief leads to serious mistakes. When brokers try to maximize clients’ losses, it aggravates contradictions between a client-trader and a company offering brokerage service. This can have very grave consequences for the client. Usually, such brokers do everything possible to make a client’s operations on the money market difficult. They have at their disposal a wide variety of tools, ranging from various commission charges and other fees that the client is required to pay for the supposedly offered services, to quota manipulations that offer the client prices that are different from current market prices. There are some cases in which such companies have been liquidated, and their owners have disappeared with the clients’ money. On the Internet, you can find nu- merous reports of clients deceived by such companies.
How to Determine If a Broker Company
Is a Bucket Shop
You can determine with great accuracy if a broker company is a bucket shop by conducting these basic features of the company:
• The minimum necessary trading account size is less than $10,000.
• The initial margin is less than 2 to 4 percent or is not fixed at all.
• Positions are transferred to the next day not in accordance with the generally accepted rules based on the corresponding current LIBOR rates but with some other plan, and a trader is required to pay the in- terest charge at some fixed or floating rates.
• There are some extra charges in the form of commissions for each transaction and/or storage fees.
• Both opposite positions can be kept indefinitely (the so-called lock or hedge) for the same currency rate that is reflected in the client’s statement.
• The setting of automatic stop and limit orders is governed by certain unreasonable restrictions, preventing order setting too close to the current market price if the fixed existing limit is exceeded, or by some other simulated restrictions on using automatically executed orders.