Forex brokers are a ‘necessary evil’ in forex trading. While it wouldn’t be impossible to trade forex, we’d face more challenges and limitations without brokers. 

These enterprises act as the middlemen between liquidity providers and clients by providing an intuitive and accessible trading platform. 

Brokers operate in impressive economies of scale, making transaction costs for traders quite cheap compared to buying and selling real currencies. Overall, these groups have tremendously lowered the barrier to entry for your average retail client, a stark contrast to how things operated a few decades ago.

As expected, clients desire any financial services provider to act ethically and in their best interest at all times. Unfortunately, this isn’t always the case. 

So, how does one separate the wheat from the chaff? This article will explore how to identify some of the popular broker-related scams and how to avoid them.

‘Fake’ or copycat brokers

Believe it or not, several so-called brokers on the internet aren’t really brokers. Executing this scam requires the scammers, whether a group or individual, to create seemingly legitimate websites with convincing landing pages.

With some web developing experience or hiring a web developer, it’s possible to essentially ‘clone’ an existing site and fill in the blanks. However, it’s not difficult to tell the broker is a scam as the site would probably have grammatical errors, look unprofessional, use heavy stock photography, etc. 

One common way the bad actors can make a broker look legit is to use the name of an existing broker and change it slightly or add a location identifier. 

For instance, FXPro might become ProFX or IC Markets to IC Markets Bahamas. Alpari experienced the same issue several years ago where there were several websites with the URLs ‘alparimalaysia.com’, ‘alparicn.com,’ etc. 

At face value, these sites appeared to be associated with the real Alpari but from different locations. 

Ultimately, a fake broker would offer some type of investment program through a PAMM account or similar structure. The aim is to attract unsuspecting people to deposit their money through them. 

Of course, with large deposits, it’s not long before the clients don’t hear from the broker ever again, leaving them poorer than they were before. Here are some tips below to avoid this scam:

  • Checking regulation: While these brokers can claim to be regulated, it’s relatively simple to verify a broker’s license online by going to the regulatory agency in question and searching using the broker’s name.
  • Verifying physical location: Nowadays, any legit forex broker should have a physical office with a verifiable address instead of being remotely-based. Again, a simple Google search or even using an application like Google Maps can provide you with the answers you need.
  • Paying attention to the SSL: A website’s URL beginning with ‘HTTPS rather than ‘HTTP is more secure as it uses an encrypted connection. The SSL (Secure Sockets Layer) certificate is vital for authenticating a website’s identity.

High-return investment programs

This scam extends from the previous section and applies to other forex-related fraudulent activities. Fortunately, the key point to remember is a broker is not a money manager. 

Although brokers offer services like PAMM accounts (which should be accompanied by verified results), any brokerage providing their own ‘investment program’ of sorts with fixed or unusually high returns is undoubtedly illegitimate.

Bucket shops

The idea of ‘bucket shops’ continues to be one of the most controversial in the forex broker industry. A bucket shop is any brokerage engaging in dubious practices to profit from a client’s trading.

It’s important to note ‘market maker brokers,’ and bucket shops are not the same. The former have a mostly unfavorable perception, although they are more common than most people think. There’s a consensus these brokers trade against their clients. 

Technically, being a market maker or dealing desk broker means taking the other side of a trader’s position. Yet, we should remember this business model means the broker acts as an internal liquidity provider rather than sending orders directly to the external interbank market.

So, this business model is perfectly legal in a decentralized market like forex, provided the broker is appropriately regulated and constantly ensures fluid execution.

Unfortunately, it’s difficult to detect whether a broker is some form of bucket shop beforehand until you’re trading with them. However, here are a few telltale signs:

  • The broker calls or messages you regularly with aggressive marketing about new securities you should invest in.
  • Slippage and re-quotes happen more frequently than they should. This particularly occurs if the broker cannot execute your orders instantly.
  • Executed orders are canceled for no reason.
  • The prices in the markets provided are vastly different from the likes of Reuters, TradingView, or other mainstream brokers due to large spreads or manipulation.
  • Delayed withdrawals
  • The broker uses an unfamiliar trading terminal, i.e., not platforms like cTrader, MT4/MT5, NinjaTrader, or other recognized software.

As with the previous scam, proper regulation is your best line of defense. It also helps to understand which brokerage model (whether straight-through processing or dealing desk) is likely used, so one knows what type of execution to expect.

Qualities of a reputable forex broker

Fortunately, several online resources have regularly-updated lists of potentially unscrupulous brokers in the industry. These sites even show you which brokers have recently had warnings from particular regulatory agencies.

So, whenever you’re going to interact with a brokerage, you can visit one of these websites. Nonetheless, below are the main qualities to expect from a reputable forex broker:

  • The company has transparent licensing from a top-tier, well-known regulator. Generally, inexperienced traders will want to avoid brokers regulated from offshore countries as their primary operating license (the Bahamas, Cayman Islands, Mauritius, etc.) or, worse, unregulated.
  • The broker has verifiable office locations.
  • The broker provides excellent customer service with a functioning live chat, email, telephone, and expansive social media presence.
  • The broker has mostly positive reviews from trusted sources.
  • The website is regularly-updated, content-rich, intuitive, and provides various risk disclaimers.
  • There are no frequent reports from other clients of delayed withdrawals – these should be processed within one working day at the most.

Final word

Sadly, while forex is the largest market globally, it’s technically a semi-regulated industry full of broker scams; some brokers do make traders ‘broker’ (no pun intended). Trading fraud comes in various forms, many of which have been outlined in this article.

Therefore, as a potential client of any broker, it’s wise to be fully informed of their services and reputation in the industry. Hopefully, this article has provided adequate tips in identifying and avoiding broker-related scams in forex for your benefit.