General criteria to choose a Forex Broker to trade withBefore you decide to trade forex, you will have to choose which broker or dealer is the most compatible with your trading style and requirements. You should ask a few questions before opening an account with a forex broker to determine which company best meets your needs1. Is the broker or dealer regulated? If so, in which country is it regulated
Not all countries regulate the same way, nor do they have the same regulatory environment and requirements when it comes to financial registration. Therefore, it is important for any investor/trader to choose a foreign exchange broker that is based in a country where their activities are monitored by a regulatory agency. It is also important to know if the broker or dealer is regulated in an on- or off-shore country, as the latter can be more liberal with registration requirements
Countries with dedicated regulatory agencies includeUSA
UK
Eurozone
Japan
Australia
Switzerland
All types of traders need to be aware of their broker or dealer’s regulatory status and have a clear understanding of the regulatory body that governs forex activity where the selected broker or dealer does business2. Is the company a broker or a dealerUnderstanding the nature of a broker versus a dealer is always an important task, as there are currently a few different types of companies to work with for over-the-counter forex trading (OTC FX)
(a) Dealing directly with a market maker or “dealer.” Each market maker has a “dealing desk,” which is the traditional method that most banks and financial institutions use. Market makers provide two-way pricing to customers throughout the day. These prices sometimes are quoted on a “fixed” basis, meaning that they do not move throughout the day, while other firms use a dynamic spread system, which means the prices change as the liquidity in certain pairs change. The market maker interacts with other market makers banks to manage their global FX positions/risk. Each market maker offers a slightly different price in a particular currency pair based on their global FX book. Banks, investments banks, broker/dealers, and FCMs make up the majority of this category. Market makers are compensated by their ability to manage their global FX risk. This may include spread revenue, netting revenue, and revenue on swaps and conversions of residual profits or losses(b) Dealing with a broker. A broker acts as a conduit between a customer and a market maker/dealer. The broker sends the customer’s order to another party to be executed by the dealing desk of the market maker. The spreads that the customer receives are dependant on the market maker or dealer that the broker routes the customer’s transactions through, and either a fixed or dynamic system can be used. Brokers generally charge fees for this service and/or are compensated by the market maker for the transactions that they route to the market maker/dealing desk(c) ECN brokerage model. In OTC forex, there is currently a modified broker method labeled “ECN.” This is not to be confused with the ECN term used in equities; they are different models altogether. The concept in OTC FX is very similar to point b above, except for the fact that the ECN acts as a broker to a variety of market makers or dealing desks. Each dealer sends a price to the ECN as well as a particular amount of volume that a quote is “good” for, and then the ECN distributes that price to the customer. The ECN is not responsible for execution, only the transmission of the order to the dealing desk from which the price was taken. In this system, spreads are determined by the difference between the best bid and the best offer at a particular point in time on the ECN. In this model, the ECN is compensated by fees charged to the customer plus a “kick-back” or “rebate” from the dealing desk based on the amount of volume or order flow that it is given from the ECNIt is important to point out that an ECN usually shows the volume available for trading each bid and offer, so the trader knows what maximum trade can be placed. ECN volume is only a reflection of what is available on any one ECN, not in the overall market. The market maker still sets its volume based on its comfort with its liquidity at any one point in time. The market maker’s responsibility is to provide liquidity under all conditions to its customers3. How reliable is the broker’s trading platform
Depending on an individual’s hardware and software characteristics, one might prefer a desktop application or a web-based (java) application. Understanding which type of platform suits you best is critical for trading
It is also important to make sure that the trading platform does not crash or freeze often, especially during times of global economic news or events, when traders needs stability. The reliability of a platform should be more of a concern than its look and feelAn aggressive trader, or one who likes to make large, frequent trades, will always have to look for a stable platform that never or very rarely crashes. On the other hand, a passive and conservative trader who does not watch the market round-the-clock could be more flexible4. What are the costs of trading
One must be aware of all the costs associated with trading with a certain broker and how the costs compare to those of other brokersCosts include the pip spread (the difference between the bid and ask prices), overnight interest and any other applicable transaction feesFor example, a broker offering a two-pip spread with a $12.50 commission per trade is more expensive than a three-pip spread broker, though the smaller spread may appear more attractive at first glance."Flashy" tight spreads in one or two majors can be deceiving, as they don’t call attention to inconsistent or wider spreads throughout the majors and crosses spread, so traders don’t get an accurate overall view of the broker’s procedures. Furthermore, brokers offering tight spreads may re-quote (offer a new quote, different from the original one) a price, increasing the costs per transaction and thus widening the spread "invisiblyAnother important factor is to know the broker’s stop-loss and limit policy. Depending on the policy, a trader may end up with closing prices that are worse than expected, as if the trade had higher execution costsAn important point traders should be aware of is how much volume they can trade at a single point in time without having to face a re-quote or even the lack of ability to place a trade. The trader is responsible for asking the broker about the liquidity it has for its clients and what happens if liquidity dries up\5. What are the real dealing size boundaries\Traders who place large orders will want to know the answer to this question. Traders whose buying power could exceed $10 million at any one time will need to look for a firm that has enough liquidity to guarantee a fill for their orders in most trading situations\6. Is the trading platform truly "user-friendly"\In trading terms, user-friendly means that placing an order or closing a trade can be done immediately. One-click trading and management of stop-loss, limit and other order types are advantages that a trader may want to take into account\In addition, it is helpful for the overall navigation of a platform to be user-friendly. If a platform offers additional charts and tools, they should be fairly simple to access and apply\This is a critical point for an aggressive trader (intraday/scalp) whose dependence on the trading platform is far greater than a moderate or conservative trader\7. Is the broker offering any added-value services\Easy access to real-time charts, news and economic data is a must for any trader. However, a trader must think of these and any other added-value service as part of the broker’s package rather than as the most important feature on which to base a decision.\This is a point a trader of any nature should address correctly to make sure the firm complies with the basic standards of providing real-time charts, news and economic events
Not all countries regulate the same way, nor do they have the same regulatory environment and requirements when it comes to financial registration. Therefore, it is important for any investor/trader to choose a foreign exchange broker that is based in a country where their activities are monitored by a regulatory agency. It is also important to know if the broker or dealer is regulated in an on- or off-shore country, as the latter can be more liberal with registration requirements
Countries with dedicated regulatory agencies includeUSA
UK
Eurozone
Japan
Australia
Switzerland
All types of traders need to be aware of their broker or dealer’s regulatory status and have a clear understanding of the regulatory body that governs forex activity where the selected broker or dealer does business2. Is the company a broker or a dealerUnderstanding the nature of a broker versus a dealer is always an important task, as there are currently a few different types of companies to work with for over-the-counter forex trading (OTC FX)
(a) Dealing directly with a market maker or “dealer.” Each market maker has a “dealing desk,” which is the traditional method that most banks and financial institutions use. Market makers provide two-way pricing to customers throughout the day. These prices sometimes are quoted on a “fixed” basis, meaning that they do not move throughout the day, while other firms use a dynamic spread system, which means the prices change as the liquidity in certain pairs change. The market maker interacts with other market makers banks to manage their global FX positions/risk. Each market maker offers a slightly different price in a particular currency pair based on their global FX book. Banks, investments banks, broker/dealers, and FCMs make up the majority of this category. Market makers are compensated by their ability to manage their global FX risk. This may include spread revenue, netting revenue, and revenue on swaps and conversions of residual profits or losses(b) Dealing with a broker. A broker acts as a conduit between a customer and a market maker/dealer. The broker sends the customer’s order to another party to be executed by the dealing desk of the market maker. The spreads that the customer receives are dependant on the market maker or dealer that the broker routes the customer’s transactions through, and either a fixed or dynamic system can be used. Brokers generally charge fees for this service and/or are compensated by the market maker for the transactions that they route to the market maker/dealing desk(c) ECN brokerage model. In OTC forex, there is currently a modified broker method labeled “ECN.” This is not to be confused with the ECN term used in equities; they are different models altogether. The concept in OTC FX is very similar to point b above, except for the fact that the ECN acts as a broker to a variety of market makers or dealing desks. Each dealer sends a price to the ECN as well as a particular amount of volume that a quote is “good” for, and then the ECN distributes that price to the customer. The ECN is not responsible for execution, only the transmission of the order to the dealing desk from which the price was taken. In this system, spreads are determined by the difference between the best bid and the best offer at a particular point in time on the ECN. In this model, the ECN is compensated by fees charged to the customer plus a “kick-back” or “rebate” from the dealing desk based on the amount of volume or order flow that it is given from the ECNIt is important to point out that an ECN usually shows the volume available for trading each bid and offer, so the trader knows what maximum trade can be placed. ECN volume is only a reflection of what is available on any one ECN, not in the overall market. The market maker still sets its volume based on its comfort with its liquidity at any one point in time. The market maker’s responsibility is to provide liquidity under all conditions to its customers3. How reliable is the broker’s trading platform
Depending on an individual’s hardware and software characteristics, one might prefer a desktop application or a web-based (java) application. Understanding which type of platform suits you best is critical for trading
It is also important to make sure that the trading platform does not crash or freeze often, especially during times of global economic news or events, when traders needs stability. The reliability of a platform should be more of a concern than its look and feelAn aggressive trader, or one who likes to make large, frequent trades, will always have to look for a stable platform that never or very rarely crashes. On the other hand, a passive and conservative trader who does not watch the market round-the-clock could be more flexible4. What are the costs of trading
One must be aware of all the costs associated with trading with a certain broker and how the costs compare to those of other brokersCosts include the pip spread (the difference between the bid and ask prices), overnight interest and any other applicable transaction feesFor example, a broker offering a two-pip spread with a $12.50 commission per trade is more expensive than a three-pip spread broker, though the smaller spread may appear more attractive at first glance."Flashy" tight spreads in one or two majors can be deceiving, as they don’t call attention to inconsistent or wider spreads throughout the majors and crosses spread, so traders don’t get an accurate overall view of the broker’s procedures. Furthermore, brokers offering tight spreads may re-quote (offer a new quote, different from the original one) a price, increasing the costs per transaction and thus widening the spread "invisiblyAnother important factor is to know the broker’s stop-loss and limit policy. Depending on the policy, a trader may end up with closing prices that are worse than expected, as if the trade had higher execution costsAn important point traders should be aware of is how much volume they can trade at a single point in time without having to face a re-quote or even the lack of ability to place a trade. The trader is responsible for asking the broker about the liquidity it has for its clients and what happens if liquidity dries up\5. What are the real dealing size boundaries\Traders who place large orders will want to know the answer to this question. Traders whose buying power could exceed $10 million at any one time will need to look for a firm that has enough liquidity to guarantee a fill for their orders in most trading situations\6. Is the trading platform truly "user-friendly"\In trading terms, user-friendly means that placing an order or closing a trade can be done immediately. One-click trading and management of stop-loss, limit and other order types are advantages that a trader may want to take into account\In addition, it is helpful for the overall navigation of a platform to be user-friendly. If a platform offers additional charts and tools, they should be fairly simple to access and apply\This is a critical point for an aggressive trader (intraday/scalp) whose dependence on the trading platform is far greater than a moderate or conservative trader\7. Is the broker offering any added-value services\Easy access to real-time charts, news and economic data is a must for any trader. However, a trader must think of these and any other added-value service as part of the broker’s package rather than as the most important feature on which to base a decision.\This is a point a trader of any nature should address correctly to make sure the firm complies with the basic standards of providing real-time charts, news and economic events
Having someone always available to help answer questions and fix problems quickly are points a trader should look for when deciding which broker to open an account with. Customer service should not only be able to fix a trader’s occasional problem, but also be able to help prevent problemsThis point makes no distinction between the different types of traders, as all traders should view this as an important point9. Leverage and margin call policies
Foreign exchange traders tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Also, take into account that there are brokers that offer fixed leverage levels, but some others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekendTraders should also take into account their broker’s margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one’s preferences, this is an issue that should be clearly identified before opening an accountLeverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels
Foreign exchange traders tend to like higher leverages and sometimes choose a broker based only on this feature. However, traders should remember that although higher leverage can lead to higher profits, it also increases the level of risk. Also, take into account that there are brokers that offer fixed leverage levels, but some others adjust their leverage based on the currency that is being traded and may also have special policies for carrying a trade over the weekendTraders should also take into account their broker’s margin call policy. Some companies follow the FIFO (first in first out) method to close trades when margin requirements are not met by current equity, others follow the LIFO (last in first out) procedure, and some simply close all the trades. Depending on one’s preferences, this is an issue that should be clearly identified before opening an accountLeverage levels are more of a concern for aggressive traders who like to use the highest possible leverage, whereas a moderate or conservative trader would be happy with the average leverage levels
