Broker Vetting: How to check your potential FX Broker or Liquidity Provider

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The following article was exclusively prepared for LeapRate by Anya Aratovskaya, VP of Institutional Sales at Advanced Markets.

I book travel and shop online often, who doesn’t today? Like many others, I compare dates, rates and amenities of flights and hotels and make a point of checking guest and product reviews as I rarely trust the bright, photoshopped images from marketing campaigns. I would rather check the unedited photos and comments sent in by real people which often serve as the best source of real information.

Unfortunately, you can’t do the same when shopping for a new liquidity provider or a retail FX broker. The FX Industry is still very secretive and lacks much-needed transparency. That being said, it is still within your power to minimize that “perfect image” impact by spending ten minutes on the web.

A-book vs B-book

Check the license number! Go to the registry and search for it (or the company name).

If you see the company name – great! The registry will also have various warnings: Labuan, for example, issued a warning against companies that didn’t fulfill the 50k margin requirement. Some other jurisdictions push notifications about clone firms or suspended individuals.

After that, look to see what type of license your company has, either a Market-Making or Matched Principal (or STP). If the broker is a Market Maker then they run a “B-book” model where they manage risk because they are legally entitled to do so. If your broker is a Matched Principal broker, you should be able to ask them for information as to who their liquidity providers are.

Working with an FCA-licensed broker definitely helps the process as you can perform some further background checks, thanks to MIFID2. RTS27/28 reports should be posted on the website of ANY FX brokers that falls under MIFID2 jurisdictions (Malta, UK, and so on). Spend a few minutes checking that report, as that is where you will find the information about how much of the broker’s flow is sent to the market for execution and where your broker is sending that flow. RTS27/28 is not a report that many FCA-Licensed Brokers want clients to easily see, so it is often hidden on their website. Look through the sections: Legal Documents, Disclosures, Licenses, About us, and Trading Conditions. You will be surprised by some reports, especially where a full STP Broker would actually STP flow to themselves offshore or to some unknown entity.

Also, make sure to check if your FXbroker, or liquidity provider, has an LEI number. Here is a link to one of the registries. An LEI number is required in order to open an account with a liquidity provider, a prime of prime, or a prime broker. A financial company cannot operate without an LEI (unless that company is offshore and working with unregulated financial providers)

Company Background

Some registries (CYSEC, FCA, FSP NZ, ASIC, Vanuatu, Labuan) will provide the owner’s name. Google these names. There are numerous cases where the same people have been involved in several FX bankruptcies and scams. That should serve as a red flag. Also check if the same individuals are on the boards of other entities.

Web presence

Don’t just settle for a Google company name search. Spend extra minutes using some alternative search engines (duckduckgo, Yippy and etc.), as they have different filters (the same can be applied virtually to any search you make). A company with a clean record should be worried about its online reputation. If you are directed to some forum with an angry thread, check how the company representatives responded to the accusations. If Google displayed a regulator warning – make sure to ask your sales representatives about it. Any serious company would train its employees to explain such things.

Proper Risk disclosures on the website are a must and should be visible.

Ideally, a simple company Google name check will pull an official site, PR notifications, and partnership announcements.

There are many other things you need to check ahead of time, like actual trading conditions and what is being offered to you. Excessive Inducements should be concerning. A few good examples are provided by ASIC Consultation Paper 322 page 18.

My advice – be your own compliance and always fact-check your potential FX Broker or Liquidity Provider. Any mismatch between marketing messages and actual legal documents should be taken seriously. Don’t marry the wrong broker!

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