According to the 2023 survey report of the UK Financial Conduct Authority (FCA), 41% of investor complaints involved brokers who were not registered with regulatory authorities, wherein licenses issued by offshore regulatory jurisdictions such as Saint Vincent were involved in 72% of fraud. A typical instance is that in 2022, Plus500 was fined 5.3 million euros by the CySEC of Cyprus for failing to adequately explain the negative balance protection clause of its CFD products, which equaled 18% of its net profit that month. Technical indicators show that when a broker quote is 1.2% off the inter-bank market average price, its market-making model is harmful to its clients’ interests. Deutsche Bank did a study in 2021 which revealed that some platforms deliberately widened the spread on euro-dollar trading to 3-5 points (normally 0.6-1 points). The consequence of this is that the client must pay an additional cost of $20-$30 for each trade.
The opaque cost structure is a useful risk signal. In 2023, a US SEC audit found that 23% of retail brokers failed to properly disclose payment for order flow (PFOF) revenue. Robinhood was fined $65 million in 2020 for such practices, and the actual transaction cost for its customers was 0.3% to 0.5% higher than the alleged “zero commission” model. Abnormal leverage ratios must be monitored more closely: Among the Malta MFSA-regulated brokers, 12% offer leverage over 1:500, yet the EU’s MiFID II specifies that the maximum retail client leverage is 1:30. According to the 2022 Australian ASIC data, the probability of an account with a 1:400 leverage going bankrupt in three months is 89%, 3.7 times the figure for customers with compliant leverage.
The quality of order execution indicates operational problems. According to BestEx Research analysis in 2023, the probability of market order slippage of certain brokers being outside the NBBO (National Best Buy and Sell Offer) is 38%, while for top brokers, this measure is maintained within 5%. During the 2021 GameStop short squeeze event, 64% of the brokers surveyed experienced order delays of more than 15 minutes, which represented a median potential customer loss of $230. Liquidity-lacking broker are typically encompassed by wide spreads – if the VIX volatility indicator exceeds 25, the spread of S&P 500 futures on decent platforms extends to 0.25 points, while on problematic platforms it reaches 2 points, and the cost of the transaction per lot rises by $50.
What dictates security is how the customers control their funds. FATF’s 2023 anti-Money laundering report reveals that 12% of offshore brokers have not fully segregated customer accounts, which has resulted in the commingled use of 2.3 billion US dollars of operating funds and customer funds. A traditional risk example was the 2015 Swiss franc black swan event. Alpari UK went under due to poor segregation of 320 million US dollars of client funds, and 108,000 investors could only recover 45% of principal. Cybersecurity metrics are also significant: The 2022 penetration test of the Hong Kong Securities and Futures Commission indicated that 17% of the trading systems of small and medium-sized brokers have high-risk vulnerabilities, with an average fix cycle of 48 days, significantly longer than the 7-day industry benchmark.
The absence of records of communication indicates potential compliance risk. According to the IOSCO 2023 compliance survey, 29% of the sanctioned brokers were unable to provide complete order execution records, wherein 14% of the stop-loss order trigger events had timestamp differences exceeding 2 seconds. In the 2022 United States cases handled by FINRA, Brokers without customer communication records were involved in 83% of the fraud allegations. Technical audits found that the chance of some platforms modifying historical quote data is as high as 0.7%. For instance, in the 2020 negative crude oil price event, six brokers were found to have deleted liquidity data for key minutes.