Brokers and bankruptcy
The brokerage industry is very dynamic and as such is a very risky one, in which some of the companies eventually disappear.
Remember the episode of the Swiss Franc Black Swan of 15th of January in which some brokers like Alpari UK or Excel Markets went belly up.
Other brokers like FXCM were close to end badly but were rescued in the last minute.
In Spain we had Interdin case, one of the best and most known Spanish futures brokers.
A few days after the bankruptcy, more than 6.000 clients had their accounts blocked, waiting for some solution.
Unfortunately those kinds of solutions always take a long time, quite often many years.
Curiously, just after the case it was announced that the funds in custody were 22 million Euros, which is an average of 3.666 per account. Certainly, not a very big amount for trading futures although I suppose that many of the accounts there were trading CFDs or Forex.
Actually there were only 14 accounts with a balance over 100.000 Euros. Those, in fact, are the ones that had more trouble getting their money back, at least the amount over those 100.000 units. Remember that the Spanish government supposedly insure up to 100.000 Euros in case of bankruptcy.
The rest of people are very likely to get their money back and be able to trade futures with some other broker some year in the future.
In this case, different to others, we are talking a proper broker regulated by the Spanish CNMV and registered in the Spanish futures markets. If it was a CFDs or Forex broker from a far away jurisdiction things would be different.
In the worst case the traders will have to wait years to get most of their money back.
Broker going bust
This is not the same as Worldspreads, Refco or any Virgin Islands broker that disappeared without trace. In those cases most customers lost all their money. I am not sure if they got compensated at the end.
We have to understand that the world of brokers is very risky, not only when we trade but even when we are sleeping.
We are not talking about civil servants with a guaranteed salary and a life time job.
If you want some sort of stable income perhaps you should consider buying treasuries, but the trading and investing industry are not for you.
The stock market world is one of life or death, bankruptcies and scandals that affect most of its participants.
In fact the rate of death in the brokerage industry is very big, especially that of customers.
The brokers, as any enterprise endeavour is open to bankruptcies.
Hence we will never have the certainty that our broker is not going to go bust. In fact, there are several brokers that disappear, but not as many as we could think.
When my broker went bust
During many years of trading, I managed to open 30 or 40 accounts with different brokers, I mean real accounts.
In all this years, two of the brokers I had account with, Alpari UK and Worldspreads had to close.
Fortunately, in my case when that happened my accounts were already closed.
However, in both cases they kept sending me emails about their bankruptcy procedures, which took many years.
Particularly I kept receiving some emails from the lawyers in charge of the Worldspreads case.
They had a big email list for sure.
In any case, we can see how in my case there was a rate of “death” of approximately 5%.
From 40 brokers, 2 of them eventually collapsed.
Nonetheless, as I mentioned, the fact is that I did not have real accounts by the time it happened.
The risk is there anyway.
I think that we should take for granted that some of the brokers we used eventually are going to go bankrupt or being absorbed by bigger entities.
What can we do to protect ourselves from this?
In first instance, we should try to open accounts in the safest brokers. That includes banks (those are the most expensive but normally quite secure), national brokers, stock brokers or brokers with brances in UK, USA or Europe.
Secondly, try to diversify your capital.
In the last case it is very unlikely that all our brokers are going to go bankrupt. However, it has some trick because it also means that the likelihood of being affected is bigger.
If we have four accounts, the risk of one of those brokers going bankrupt is quite high, at least 4 times more risky.
The stock market, trading and stocks is one of the most risky sectors in the world.
No wonder, therefore, that many of the companies eventually have to close.
Broker scam or bankruptcy?
Another risky case is the one involving scams, of which the World is full of.
There are cases like Refco, PFG, Madoff, or Afinsa (in spain).
Although, how do we know we are being scammed?
Even Refco was one of the most important brokers in the World and its Director was doing very strange things.
It is impossible to avoid scams, whether in the real life or in internet.
As I said before, if we open accounts with UK, EEUU, Spain, etcetera, we will reduce the probability of that fateful scam happening.
What are the next brokers that will go bankrupt?
Hopefully not the ones we use.
Although, who knows, there could be a year in which a lot of people just go bankrupt, not only brokers.
Regards and good trading