Due to enormous competition between Forex broker-dealers, they offer different features and advantages. However, choosing a broker is not an easy task for any new or experienced trader.

There are some key aspects like regulation and capitalization which speak for the reliability and competence of the organization and which can be measured following certain objective criteria.

But the real challenge in choosing a broker comes when you have to determine what attributes you are looking for. Along with the outstanding features, you might find a potential weakness, depending on what you need for your trading style.

Here is the list of the questions you may ask yourself before choosing the broker for you:

Topics covered

  1. Is the broker or dealer regulated? If so, in which country is it regulated?
  2. How reliable is the broker's trading platform?
  3. Capitalization
  4. Is the company a broker or a dealer?
  5. Customer support
  6. Costs: Fee And Commission Structures
  7. Account Types
  8. Is the broker offering any added-value services?
  9. Leverage and margin call policies


What you should know...

1. 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 include:

  • USA
  • 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 business.


List of Regulatory Organizations List of Brokers by Country and Regulation

2. 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 feel.

An 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 flexible.

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.



3. Capitalization

As you already know, the better capitalized the market makers are, the more credit relationships they can establish with their liquidity providers and the more competitive pricing they can get for themselves as well as for their clients.

The OTC nature of the market makes extremely difficult for a broker to get competitive pricing without a margin deposited in a lending institution or bank. As a result, it is extremely important for individual investors to do extensive due diligence on the Forex broker with which they choose to trade.

If a broker-dealer states that they are safe to work with because they trade in the interbank market, you know what this means. To date, the interbank market is an unregulated and loose conglomerate usually traded by central banks, investment banks and extremely large corporations.

As a member of a regulatory authority, a broker must comply with a minimum capitalization level. This fact has a direct relationship with its ability to stay solvent and is also indicative of the size of the company.

The minimum capitalization required in the US is currently (Jan 09) at $ 10,000,000, and the trend is to gradually raise up to $ 20,000,000 over the next months. If the broker does not publish this information, it's a warning sign that could mean a lack of solvency.



4. Is the company a broker or a dealer?

Understanding 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).

Dealing with a broker.

A broker acts as a conduit between a customer and a market maker/dealer. This is performed by allowing customer's orders to be processed by computer systems without manual intervention by a dealing desk (hence the label "Non Dealing Desk"). The technology by which the broker sends the orders to another party to be executed by the dealing desk of a market maker, is called Straight Through Processing (STP). The spreads that the customer receives are dependent 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's dealing desk.

Dealing with a market maker AKA "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.

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 ECN.

It 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 customers.

List of Brokers by Business Nature

5. Customer support

One of the most imporant thing you should check in a broker is the support service. Forex is a 24-hour market, so ideally, the broker you choose should offer support at anytime. Does it has support in your language?

Which medium is used to contact the help desk: email, chat, or can you speak by phone to a live person? Do the representatives seem knowledgeable? How they respond to your questions can be key in gouging how they will respond to your needs in a real situation.

While trading you can run into technical problems. Therefore try to anticipate those critical situations and simulate those questions and requests to your broker. You can do this while experimenting on a demo account.

The website should already explain things clearly, but be sure to check the quality and efficiency of their support before opening an account.



6. Costs: Fee And Commission Structures

The Forex market, unlike other exchange driven markets, has a unique feature that many market makers use to entice traders to trade: they promise no exchange fees or regulatory fees, no data fees and, best of all, no commissions. In the previous chapter we have already mentioned that this advantage has to be well understood, because when it comes to evaluating costs, it much depends on your trading numbers such as frequency, ratios and other performance related statistics.

Basically, there are three commission structures used by Forex brokers:
  1. fixed spread
  2. variable spread
  3. commission charge based on a percentage of the spread

Just a quick reminder: spread, usually calculated in pips, is the difference between buying and selling price.

So, which is the best choice?

On the one hand, you may think that the fixed spread is the right choice, because then you know exactly what to expect. On the other hand, you might think you are getting a good deal paying a variable but smaller spread.

First of all, consider that the best deal you can get is choosing a reputable broker who is well capitalized, has strong relationships with the large foreign exchange banks and can provide the liquidity you need to trade well. Second, you need to calculate the impact of all possible fee structures on your trading model to know which one is more favorable to you.

Some Forex brokers don't charge a commission, so the spread is how they make money. The lower the number of pips required per trade by the broker is, the greater the hypothetical profit that the trader makes is. Comparing pip spreads of half dozen brokers will reveal different transaction costs.

In the case of a broker who offers a variable spread, you can expect a spread that will, at times, be as low as 1 pip or as high as 7 pips on the most major pairs, depending on the level of market volatility. While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

While market makers provide two-way pricing to customers throughout the day, these prices can be quoted on a fixed basis, meaning that they do not move throughout the day. But they can also use a dynamic spread system, which means the prices change as the liquidity in certain pairs change.

A lack of liquidity in the markets or very volatile market conditions can force the broker to apply a slippage on the pricing. Slippage, also called "requote", occurs when your trade is executed away from the price you were offered, when you end up paying more pips than the average spread. This is perhaps a cost that you don't want to bear if you are trading very short term or if you trade the news.

Asking your broker how they handle news times and if they have any devise to protect you from experimenting slippage is probably a good idea. You can decide to trade with fixed spreads, even if they are a little higher in average but receive, in exchange, an instant fill of your trades at the desired prices.

Some brokers even offer you the choice of either a fixed spread or a variable one.

Other brokers, like ECN brokers, may also charge a small commission, usually in the order of two-tenths of one pip. Whether you should pay a small commission depends on what else the broker is offering. For example, the broker may pass your orders on to a large market makers conglomerate. You might choose a broker with such an arrangement, if you look for very tight spreads only larger investors can otherwise get.

List of Brokers by Cost

7. Account Types

Many brokers offer two or more types of accounts. These can be very small mini-accounts and even smaller micro-accounts, or standard accounts, depending on the lots traded. A lot consisting of 100,000 units is called a standard lot; a lot consisting of 10,000 units is called a mini lot; and a lot consisting of 1,000 units is called a micro lot. Some brokers even offer fractional unit sizes which allow you to establish your own position size.

The micro and mini-accounts allow you to trade with a very low minimum of capital, while the standard accounts often require a higher minimum initial capital, varying from broker to broker.

As you see, the account types differ from each other according to the minimum trading size requirements. Choosing a specific account type should be relative to your amount of capital. This concept may seem a bit nebulous if you are just starting out, but rest assured it will be made clear once you start learning about leverage and money management.

List of Brokers by Account Type

8. 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.



9. 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 weekend.

Traders 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 account.

Leverage 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.