Basics and warranty of work for private investors with brokers in the United States (part 1)

инвестиции в биржевую торговлю

The principles of Russian brokers are fundamentally different from the multi-level system brokers in the United States. Because of absolute confidence in the American market investing in stock trading in USA attract much more than work on the Moscow stock exchange through brokers, 80% of which are registered offshore, where the money of  the private investors is located.

The law on regulation of Forex brokers that came into force in Russia on 1st January 2016, nearly paralyzed the entire stock trading. A lot of nuances regarding the mandatory registration of representative offices in Russia, the rules of advertising its activities, opening of customer accounts in Russian banks — all government efforts to take this sector under control, but not to reduce risk for its clients.

The main causes of distrust in the Forex:

  • opacity of most brokers. The Internet is full of information about how to “hang out” terminals at the most inopportune moment, as brokers manipulate price trends, seeing that the client begins to receive the income — that is, try to select the deposit by any means (signs of “Forex-kitchens”);
  • distrust of the broker and the banks. There is no single scheme for the withdrawal of the deposit, confirmed the reliability of banks, which will open a client account, offshore registration of brokers says that company is hiding from taxes and control;
  • the lack of guarantees of investment in stock trading by independent regulators that would monitor the work of brokers every month.

And we are talking only about the currency exchange market! What can we say about stock and commodity markets then, where private investors are rather an exception among investment companies and private pension funds.

brokers of stock trading

Investments in stock trading in USA

Exchange system in the United States consists of two levels, brokers which are distinguished by their functionality and working principles.

  1. First level — FCM (Futures Commission Merchant). This type of brokers carries out all operations with the client’s money on the stock exchanges of the United States. It is also called a clearing. FCM accepts orders for the purchase or sale of futures exchange contracts, working directly with the client, a private investor is not obliged to know what is the deal.

Recently, the Bank of Russia reported about the new scheme of manipulation of securities and address transactions carried out under market. If the U.S. investor pays the broker the order to buy or sell the asset, where the asset is purchased, it meets the FCM-broker. On the Russian stock exchange the conclusion of the address of transactions implies that the seller and the buyer know each other, and the participation of a broker rather fictitious to bypass legislation. By the way, another reason why individuals don’t trust exchange — an incorrect manipulation by more powerful corporate players.

Brokers FCM are mandatory recorded in regulatory organization of CFTC and NFA (we will describe in the second part of the article) and have the membership on major exchanges.

  1. Brokers of the second level:
  • IB — Introducing Broker. Introducing broker, which has far fewer powers than the FCM. His task is to direct search and attract the potential customer who is ready to make investments in stock trading. IB is a kind of representative of the FCM, the executing organ. The broker also provides customers with advisory services regarding the work with the trading platform, explanation and conclusion of agreements on provision of brokerage services. Broker has no rights to take money and advice on shopping deals. Mandatory registration of brokers of this type in the CFTC and NFA. Every broker IB has the right to work with only one FCM.
  • FIB — Foreign Introducing Broker. May not be registered in CFTC and NFA, working with foreign customers.

The first protective mechanism for the client is the Contract concluded with the FCM. It is on the basis of open client segregated account, invests in the stock trading. The contract is the subject of discussion in the proceedings, if any, will take place.

About how to regulate the stock markets how to become a private investor in the US and how the risks are insured of working with unscrupulous broker, you may read in the second part.

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  • Rileigh 01.04.2017 at 10:39

    Thknas for taking the time to post. It’s lifted the level of debate