As per the UK Financial Conduct Authority’s (FCA) 2023 enforcement report, 63% of blacklisted brokers throughout the year were involved in client fund misappropriation, with an average case amount of 4.2 million pounds. Typical among them was Trade360’s commingling of operating and client margin accounts throughout 2022, leading to the loss of 47% of the principal by 2,400 investors. Regulatory penetration examination indicates that out of CySEC regulated brokers within Cyprus, 18% are below the minimum capital requirements – for instance, when UFX Markets’ license was revoked in 2021, its effective capital was only 32% of what was required, and there was a shortfall of 2.9 million euros. According to FINRA statistics in the US, the brokers penalized for order flow payment (PFOF) offenses in 2022 increased by 127% year on year. Robinhood was fined a record $65 million by the SEC for failure to report the $480 million revenue from rebates from market makers.
Fraudulent manipulation of quotations is the leading cause of the blacklist. The 2023 EU ESMA survey revealed that 12% of the CFD brokers had engaged in systematic slippage manipulation. Under such times of higher market volatility (greater than 30%), their quotations were 1.8 to 4.2 points apart from the inter-bank market price (normally 0.6 to 1.2 points). During the 2020 negative price incident of crude oil, the licenses of six brokers were revoked permanently for tampering with past K-line historical data. It was among the platforms to change the settlement price from -37.63 US dollars per barrel to 0.01 US dollars, resulting in the client’s losses rising by 230%. Liquidity monitoring shows that among the blacklisted brokers, 89% of their order execution rates are over three standard deviations greater than the industry average. For instance, TradersWay’s order for gold was delayed by 3.7 seconds during 14:30 Eastern Time (the mean for compliant platforms was 0.4 seconds).
Weaknesses in anti-money laundering protocols trigger systemic dangers. According to the FATF’s 2023 Global assessment, 28% of sanctioned brokers failed to perform secondary verification of customer identity verification (KYC), which led to an illicit fund penetration rate of 0.7% of the trading volume. For instance, in 2022, the Swiss Dugossby Bank was fined 43 million Swiss francs by FINMA for failing to monitor 12,000 suspect transactions from Iran (with an average value of 98,000 US dollars per transaction), which was equal to 19% of its net income during that year. Chainalysis, a blockchain analytics firm, has found that among the cryptocurrency broker blacklisted between the period of 2021 to 2023, 45% were dealing with money laundering through coin mixers, while on average, $230 million worth of criminal assets per platform were laundered. Among these, the BTC-e platform had handled 96,000 Bitcoins that were purchased using ransomware before it was shut down.
Failure in technical risk control led to gigantic accidents. Japan FSA penetration tested Brokers in 2023, where 31% of these firms’ top-of-the-line trading platforms reported having risky vulnerabilities with a high-risk pattern having an average 58-day fix cycle (industry standard is 7 days). Forex Club of Russia, a top Russian foreign exchange broker, overlooked the SQL injection bug in 2021 that exposed customer details of 120,000 people. Its Recovery Time Target (RTO) was over 48 times the regulatory requirement. Insufficient order processing capacity is equally lethal – in the 2022 pound flash crash, among the brokers who had their licenses cancelled by the UK FCA, 78% could not process stop-loss orders with a client account margin call ratio of up to 63% and an average account loss of $12,000.
Geopolitical compliance failure has triggered a cascade. Of the 17 new brokers on the OFAC sanctions list of 2023, 94% were connected with providing alternative avenues of payments to Russian entities to circumvent the SWIFT ban. Turkey’s ABank, among them, was confirmed to have facilitated bypass payments worth 470 million US dollars. Eu MiFID II cross-border regulation statistics have shown that 41% of the blacklisted brokers were found to be at fault for non-compliance with best execution obligations. For instance, Seychelles licensed FXTM reroutes EU client orders to offshore markets with liquidity offering 0.3% of the industry in 2022, and client trading expenses increase by 2.8 times. With respect to capital control, all seven SEBI-prohibited brokers in India in 2023 were involved in assisting clients to convert rupees to US dollars using fake invoices amounting to 1.8 billion rupees (approximately 22 million US dollars).