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What if a broker declare bankruptcy!!! Ftx first whose next?
Managing risk of losing money is part of the trading and investment business.
but managing the risk of getting robbed by your broker is a new level of risk management that requires different skills and mindset.
The reason I'm writing this as you have seen few days ago what happened to traders and investors money at ftx. and how $16B disappeared over night and they got screwed by the law legally. Yet Noone said anything very disturbing to watch. And more disturbing to know other brokers are watching and observing.
Now If the law allow any broker or sharing company to get away with this, then it's time to have precautions as part of money management.
I will start by saying my precautions will be withdraw no less than 50% of net profit monthly.
As well diversify investment money over no less than 2 brokers for each market.
I can't think of any more precautions, but please share yours here let's see your thoughts on this.
Best wishes to everyone
The following 2 users say Thank You to trend train for this post:
Trading: Primarily Energy but also a little Equities, Fixed Income, Metals and Crypto.
Posts: 4,941 since Dec 2013
Thanks Given: 4,256
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Laws are not the same everywhere. In the US Customer Funds are required to held in a separate segregated account to protect the customer from a situation like this. Unfortunately people still violate these laws as was seen in the PFG and MF Global failures. I believe that the CFTC is now more focused on this now though, and even monitors the brokers actual segregated accounts.
FTX International was not American, they were based in the Bahamas, and they were not allowed to have America customers. If you look around you will find a lot of fx and crypto exchanges are based in countries with lax financial rules (like the Bahama's, Malta, etc) which means you specifically do not have protections like this.
* There was an FTX US entity, which is a completely separate entity to FTX International but is tiny in comparison. Just like there is a Binance US as well. As far as I know FTX US is plagued with the same issues as FTX International.
The following 6 users say Thank You to SMCJB for this post:
My thoughts on this when it happened was that a trader has to choose what he/she does and gets involved with very carefully.
FTX was not a "broker" in the same sense as a broker on a regulated exchange. It was in fact itself an "exchange", in a totally unregulated environment (unregulated trading of cryptocurrencies outside of a national regulatory environment in the Bahamas), where the owner (Sam Bankman-Fried) also owned a "hedge" fund (Alameda) that was heavily borrowing from FTX, and that got into trouble. Alameda's trouble led, as you could expect, to FTX's trouble, since Alameda's debts were not likely to get paid off, and "depositors" in FTX panicked and tried to get their money out, but couldn't because FTX didn't have it, so we had a classic bank run and failure.
I don't want to be too fussy about doing things the "proper" way, but a trader getting involved in something like this is making a serious mistake. Trading only on a regulated exchange, in a country that is serious about its regulation, is an essential if you want any safety for your money -- and it is not necessarily safe then either, just more so. Brokers do fail, and sometimes do bad things too, but there's no sense in looking for trouble in the Wild West situations where there's no regulatory oversight at all.
Also, no matter where your trades are executed, it is a good idea never to keep more money with the broker than you absolutely have to. There is no reason to add broker risk to all the other risks a trader has to work with.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
The following 6 users say Thank You to bobwest for this post:
yes sure, but brokers who welcome international traders want it Wild West game on foreign soil and mild regulations.
check the global location of TradeStation
Binance does the same as well and the list goes on and on....
the big benefit of ftx collapse that it draws attention to brokers' global locations and regulations.
Clarification (to international traders this doesn't mean I have anything against tradestation or Binance, I'm client with them for no less than a year and I have not seen any suspicious behavior on the platform or my account. In fact I thank them for their amazing platform their only weakness if bankruptcy you are on your own. but based on their financial performance that's very unlikely to happen any time soon but prepare for the worst scenarios during the current global economic uncertainty).
The following 2 users say Thank You to trend train for this post:
There is a difference between a broker that does not make the market you are trading in (for example TradeStation trading on CME) and a crypto exchange (FTX, Binance), or for that matter a spot foreign exchange broker, where you are actually trading with the "broker" on the other side of the trade.
That is the difference, and it is one.
For the trader, there is considerably more safety trading on CME, for instance, using TradeStation or any any broker that trades there, than there ever was in trading on FTX. CME is subject to US exchange regulations, FTX was only restrained by whatever the Bahamas imposed.
Which certainly does not mean that all brokers are "safe". Brokers can go under, and sometimes do. The distinction is still relevant and important.
Bob.
When one door closes, another opens.
-- Cervantes, Don Quixote
The following 7 users say Thank You to bobwest for this post:
