Free FX EA Explained: Risks of Overseas IB Inducement & Safe Alternatives

Many traders and investors wonder why FX auto-trading EAs (Expert Advisors) are distributed for free. This is because, generally, high-quality products often come with a price tag. This article will explain the reasons and background behind free EA distribution, and specifically clarify why free EA distribution for the purpose of inducing overseas IB (Introducing Broker) is considered problematic.

First, there are many purposes behind free EA distribution. Among them, particularly noteworthy is the case where overseas FX brokers offer free EAs as a means to attract Japanese traders to their company. While such methods may superficially appear advantageous to traders, they actually hide several risks and problems.

Below, we will explain in detail the background of overseas IB inducement and its risks, revealing what goes on behind the scenes of free EA distribution.

Free EA Distribution for Overseas IB Inducement

What is Overseas IB Inducement?

Overseas IB (Introducing Broker) inducement is a method used by overseas FX brokers to attract Japanese traders to their services. One such method involves offering free FX auto-trading EAs (Expert Advisors). IB stands for Introducing Broker, and it’s a system where the broker earns a commission (known as “pips back”) every time a trader executes a trade. This means that the more trades a trader makes, the more commission the IB receives.

Pips Back Affiliate (so-called illegal overseas FX IB) explained on this site

Legal Risks

Such free EA distribution may violate Japan’s Financial Instruments and Exchange Act (Kinshoho). Japanese law prohibits unregistered overseas FX brokers from conducting business activities within Japan. However, if traders use these services without being aware of this risk, they may unknowingly become involved in legal trouble.

For example, if you start trading with a free EA and it causes problems, it may be difficult to receive protection under Japanese law. Additionally, there’s a risk of not receiving adequate support if a dispute arises with an overseas FX broker.

Thus, it’s crucial to understand that while free EA distribution may seem attractive at first glance, it can conceal legal risks and other issues. Next, let’s look more closely at what goes on behind the scenes of free EA distribution.

“AMMA” (Anma): A Legitimate Free Auto-Trading Service in Japan

Understanding the risks associated with free EA distribution, it’s crucial to use trustworthy services. “AMMA” (Anma), a free auto-trading service legitimately offered in Japan, is one such option. “AMMA” complies with Japanese legal regulations, making it a safe and secure service to use.

👉 Learn more about “AMMA” (Anma), a legitimate free auto-trading service in Japan, here.

Using Overseas FX is a Personal Choice

Scope of Regulation

Using overseas FX as an individual is not specifically regulated by Japanese law. This means individual traders are free to use overseas FX brokers based on their own judgment. For instance, many traders choose overseas FX brokers because of lower spreads (transaction fees) or higher leverage (trading with borrowed funds).

Points to Note

However, caution is advised when being introduced through an overseas IB (Introducing Broker). As mentioned earlier, overseas IBs operate on a commission system (pips back) where they earn every time a trader makes a trade. This becomes an issue because Japan’s Financial Instruments and Exchange Act prohibits unregistered overseas FX brokers from conducting business activities within Japan.

Specifically, if a free EA is offered through an overseas IB and you start trading using that EA, you, the trader, bear the legal risks. For example, if an overseas FX broker causes problems, you may not be protected by Japanese law. Furthermore, adequate support is often unavailable.

While using overseas FX itself is a personal choice and many traders enjoy its benefits, it’s crucial to understand that using it through an IB may involve hidden legal risks and support issues, requiring careful consideration.

The Hidden Side of Free EA Distribution

The IB Commission Structure

Behind the distribution of free EAs (Expert Advisors) lies a strategy to earn IB (Introducing Broker) commissions. IB commissions are fees paid to the introducing broker every time a trader makes a trade. This is also known as “pips back.”

Specifically, EA developers offer EAs for free, and by increasing the number of traders who use these EAs, the developers receive IB commissions. When free EAs are distributed, traders can try new tools, and developers can earn continuous commissions. This is why many EA developers are cooperative with free EA distribution.

The Reality of Competition

However, this system also has problems. Domestic securities companies are often at a disadvantage in this kind of competition due to free EA distribution. Domestic securities companies often find it difficult to offer free EAs in the same way as overseas FX brokers due to legal regulations and high operating costs. As a result, domestic traders may flow to overseas FX brokers.

In this competitive environment, domestic securities companies try to compete on reliability and quality of support, but many traders are attracted by the appeal of free EAs.

The background of free EA distribution includes a strategy to earn IB commissions, and this system creates an environment where EA developers are willing to cooperate. However, domestic securities companies are at a disadvantage in this competition, and traders themselves may be affected. When using free EAs, it is important to understand the underlying mechanism and make careful judgments.

Problems with Free EAs

Performance Manipulation and Over-optimization

Among freely distributed EAs, many cases start with noble intentions but fall into performance manipulation and over-optimization due to the influence of malicious operators. **Performance manipulation** refers to manipulating data to make an EA’s performance appear better than it actually is. On the other hand, **over-optimization** means that an EA has been excessively optimized for past data, leading to a failure to achieve expected results in future market conditions.

Internal Dynamics of Development Groups

Within EA development groups, individuals who cannot program sometimes get involved. Even experienced discretionary traders may attempt to incorporate inappropriate rules into automated trading systems because programs lack the flexibility of humans. This increases the risk that the developed EA becomes over-optimized, leading to higher chances of failure. Over-optimized EAs can show very high performance based on historical data, but it’s difficult for them to maintain that performance in actual market environments.

From Personal Experience

From my own experience, I’ve found that over-optimized EAs often lead to trouble. For instance, EAs created with unique, robust rules maintain stability even with market fluctuations, whereas over-optimized EAs show good results temporarily but become problematic in the long run. This is because the EA is not adapting to the actual market conditions.

Some Well-Intentioned Developers

Of course, there are a certain number of developers who strive to provide proper EAs. However, the efforts of these well-intentioned developers are often overwhelmed by the sheer volume and pressure from malicious operators. Malicious operators often prioritize obtaining more pips back over EA safety and frequently demand over-optimization from developers. Furthermore, there are cases where parameters are adjusted after the EA leaves the developer’s hands, which promotes over-optimization. As a result, unreliable EAs circulate in the market, increasing the risk of traders incurring losses.

While we hope well-intentioned developers continue their efforts, they are generally losing out. Moreover, if this situation persists, it becomes difficult to judge individual cases due to the sheer number, often leading to a collective sweep.

The distribution of free EAs conceals various problems. It’s crucial to understand the risks of performance manipulation and over-optimization, the internal dynamics of development groups, and the reality where the efforts of well-intentioned developers are undermined by malicious operators. When using free EAs, it’s essential to fully recognize the underlying risks and make careful judgments.

Conclusion

Advice for Traders

While free EAs offer many attractions, they also come with several hidden risks. There are numerous points to be aware of, including issues of performance manipulation and over-optimization, as well as susceptibility to the influence of malicious operators. Therefore, when considering using a free EA, it is crucial to thoroughly understand the information behind it and to engage in safe trading practices independently. Specifically, you should thoroughly research not only the EA’s past performance but also the reliability of its developer and provider, as well as reviews and reputation.

Legal Considerations

Additionally, to avoid legal risks, it is essential to utilize reliable information sources. Using free EAs provided by entities that violate Japan’s Financial Instruments and Exchange Act could lead to legal trouble. Therefore, it is crucial to verify that the EA you intend to use is legally sound. Referring to trusted FX information sites and the Financial Services Agency’s official website can be effective for this purpose.

Summary

The appeal of free EAs is significant, but it’s essential to understand their risks. Gather information diligently, choose a reliable EA, and trade safely. Furthermore, to avoid legal risks, consistently check for the latest information and make cautious decisions.

References