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Disclaimer

The contents of this blog do not constitute investment advice. Trading CFDs and Forex can be very risky and you can lose much more than your initial deposit. Seek professional advice before making any trades.

Bucket shop broker allegations

A regular source of messages on trading related forums such as Trade2Win and babypips is people complaining of being ‘scammed’ by their broker / spread betting company. I’m going to list some of the common types of complaints.

Stop chasing

One of the most common complaints is that trading companies engage in ‘stop chasing’. This means that they adjust the prices of your chosen instrument (shares, commodities, indices or whatever) deliberately in order to hit your stop loss levels. This would in theory allow them to pocket your money as profit. People often claim that the price moves, just hits their stop and then moves in the other direction.

In reality this allegation is extremely unlikely. What is more likely is that you mis-judged the level to place your stop at. You probably placed it too tightly.

If this sort of activity did go on it would be very easy to prove. Prices that your CFD, forex, or spread betting company are showing are derived from actual market prices. They may be fractionally different but they will be close enough. If they were to diverge from the actual prices then it would be spotted by anyone who was observing the prices from more than one provider.

Some people may be of the belief that the prices they are seeing are unique to them – i.e. that the prices they receive are being deliberately altered in order to hit their stops. Again if this were to occur it would be easy to prove by comparing your account prices with someone else who has an account at the same provider.

Price spikes

Sudden large spikes in the price is an occurrence that is often reported. This is something that actually does happen – in fact your trading company will probably have details about what happens if this occurs in their terms and conditions. Good companies will automatically refund any loses to you if they occur as a result of a price spike (e.g. if the spike causes your stop to be hit).

Other companies may say that you have to pro-actively complain yourself. Either way – as long as you are vigilant you should hopefully not lose any money. Of course you may still lose out if the trade ended up being closed at a much less profitable level than it should have been. If you find this happens regularly with your broker then you should consider moving elsewhere.

Preventing trades from being closed

Some people on the trading bulletin boards complain that they have trouble closing out their trades at the critical moment. The critical moment could either be when they want to take profit, or when they want to get out of the trade to reduce their loss. As you could imagine this could substantially reduce your profit and amplify your loss.

The complainers of this phenomenon tend to have large highly leveraged positions. This means that each pip or point of movement can greatly affect their balance.

If you do have a large and highly leveraged position then you can create problems for your broker. They need to be able to hedge your trades so they can profit from them. If your position is too large then they may have trouble completing their hedging orders in the real market place. This can result in your orders not being completed, completed with slippage, or even having your order rejected and being referred to a dealer.

Although your broker shouldn’t really be allowing you to keep positions open which they can’t easily close, people who get in this position have themselves to blame as well. They shouldn’t be taking on positions that are significantly larger than the broker can automatically and easily handle. When trading, doing anything out of the ordinary (especially when this involves large trades) leaves you open to getting ‘special attention’.

Not allowing you to withdraw your money

Some people who are successful and build up large account find that the broker makes it hard for them to withdraw the money. Obviously your broker has no right to prevent you from taking out your own money but that might not stop them if they are a particularly dishonest company.

This is easily preventable – make sure that it is easy to withdraw your money before you start building up a large account. And don’t let your account get too large in the first place. Keep taking money out. If you leave the money in your account then you risk doing something stupid such as taking on excessive risks.

Can you trust your broker?

In conclusion most of the problem that people face are easily preventable. Problems are often caused by people taking too many risks, or drawing attention to themselves. Always trade using position sizes that are in the normal range that most customers would trade in with your broker. And always make sure that you test their money withdrawal procedures early and regularly to ensure that you can get your money out.


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