How the stock markets are regulated in the US (part 2)

регулирование биржевой торговли

(Completion. The beginning read here)

Thanks to a two-tier system, brokers in the United States and independent Supervisory bodies (regulators) trading on US exchanges are fully protected from unscrupulous parties and fraud on their part.

Regulation of stock trading

In the US there are two most influential organizations that carry out the regulation of stock trading:

  1. NFA — industry structure (the Association), which oversees all the stock exchange market authority : currency, stock and commodity markets where the organization is implementing a conservative management policy. The Association protects the interests of brokers and investors in case of litigation with the exchange or with each other.

The second function of the regulator is the maximum collection of financial information from the participants of the exchange trade. All the data about the broker’s work posted on the website of the Association, thus providing an opportunity for the investor to know everything about the work (reliability) of the broker. For example, the level of capitalization.

  1. CFTC — the commission on urgent exchange trade. The Association is not so much the regulation of stock trading, it is more the protection of the interests of the broker and the investor in the case of illegal actions of other participants in the exchange (unfair competition, fictitious transactions with securities, etc.)

How insurance mechanism for a private investor works in the United States

Private investor wishing to start a partnership with FCM-broker (a potential customer comes to him), needs to receive maximum information from the future stock exchange broker:

  • How the work with the broker will be carried out;
  • what are the risks that shall be assumed by the investor and how these risks are allocated between him and the broker;
  • does the broker have licenses and registerations in associations that regulate stock trading.

At this stage it will be clear how honest the broker is, how transparent its activities and understand the principles of its work on the exchange.

Account of FCM-broker is open in the U.S. Bank (in contrast to the Russian offshore companies that open accounts in the countries in which it will be comfortable) with an impeccable reputation and years of experience in the financial market. And at this stage there appears another insurance mechanism for the client:

  • have a separate account for broker, which provides its activities;
  • have a segregated account for the client. From the point of view of reporting, segregated account for all clients but within financial statements of the broker, this account has its own dimension that identifies the belonging of the deposit for each individual client.

insurance in stock trading

To other insurance mechanisms of regulation of stock trading refer the following:

  • FDIC — association, which is the insurance Fund for Bank accounts of clients and brokers. As a source of financing uses fees of the banks, money is invested in government bonds. If the broker becomes bankrupt, the segregated account remains intact. However, the broker having access to it, may commit illegal acts and to use these accounts. And then it will come into effect protective mechanism – the insurance coverage of the Association will account for 250 thousand dollars for each segregated account;
  • SIPC — association that provides protection of investor in the stock market. Insurance portfolio is formed by contributions from the brokers, the money is also invested in US bonds.

Important: when opening the account, investor can operate through a broker in different markets with different tools – securities, options, futures. But in the software of the broker, these trades are separated from each other. The above insurance mechanisms covers not all of the operations. For example, if the broker argues that the insurance works for futures, it is necessary to doubt in his honesty.

Regulation of exchange activity involves constant monitoring of the balance of segregated accounts and personal broker. Information about the balances on these accounts is constantly updated on the websites of regulators for free access.

Also, the investor can monitor the statements of the broker on his website and on the NFA website:

  • daily on the website of the broker information is displayed about the segregated account of the investors;
  • every two weeks we publish the information on the categories of the capital investment of the investors.

Another interesting principle of regulation of exchange activity from the NFA: FCM-broker can not withdraw your own profits from individual operations without the permission of the regulator. The regulator should ensure that profits had taken place, and does not withdraw money from the segregated accounts.

Summary. As you can see, the regulation of stock trading in USA allows to provide investors with confidence that their capital is protected from illegal actions of the broker. In Russia everything is much more complicated: the missing regulators, “horror stories” about add-ins (such as virtual dealer plugin for MT), which allows the broker to manipulate the income of the trader — all this suggests that the stock market for the private investor is almost closed. And it would be much more promising to look at brokers in the USA and Europe. However, in this case, a starting capital of $ 1,000 will not be enough.

About the author