Choosing a new forex broker to trade with can be challenging for anyone. There is so much (mis)information available online, and it can be hard to navigate the landscape. There are also lots of stories about brokers using unethical practices and frankly scamming their clients. Therefore, it is very important that you do your own due diligence and be cautious about which broker you trust with your hard-earned money.
The dealing desk model is the dominant model among forex brokers today. When a broker has a dealing desk, it usually means that they take the other side of their clients’ trades. For the same reason, these brokers are also known as market makers. It is important to understand that trades you make with this type of broker may not even leave your brokerage firm.
The way these brokers operate can definitely create some conflict of interest with their clients. The main reason for this is because the broker will profit every time you lose on a trade. Also, being a dealing desk broker offers the broker more flexibility, and thereby opens up opportunities for the broker to employ various unethical practices that will not benefit you as a trader. For this reason, I would not recommend going with a dealing desk broker unless you have your own specific reasons for doing so.
No Dealing Desk
When a forex broker is a no dealing desk broker, it means that they don’t take the other side of the trade. The obvious benefit here is that the broker has no incentive to make you a losing trader Instead, your orders are passed on to various third parties, which can usually be categorized as:
- Straight Through Processing (STP): An STP broker essentially pass your orders on to a liquidity provider, which are usually big banks. These brokers may inflate the spread offered to you in order to keep a profit after they have turned your order over to the third party. This type of broker is sometimes referred to as a “fake” ECN broker, because you are not offered the “real” spreads from the interbank FX market. Many retail brokers who advertise themselves as “no dealing desk” fall into this category.
- Electronic Communication Network (ECN): This type of broker has become much more popular over the past few years. If it is a true ECN broker, it means that you are given direct access to the interbank market, in which case you will be charged a commission in addition to the spread. The spread in this case can often be extremely tight, especially on the most liquid currency pairs. Note that some retail brokers may advertise themselves as ECN without really being a true ECN broker, for example by marking up the spreads compared to those that exist in the interbank market.
Spread, leverage and minimum deposit
These three aspects are what most traders compare when choosing a broker to trade with. The spread is, or course, very important for all traders, as it determines how much potential profit the trader will be left with. You need to consider your total transaction cost, which includes spread, any commissions, and slippage. Whether you should choose tighter spreads + commission, or wider spreads with zero commission, depends on your trading style and how much money you are trading with. Very large traders obviously prefer to pay a fixed commission, but smaller retail traders may benefit more from paying only the spread.
Leverage is another aspect new traders often compare when choosing a forex broker. High leverage looks tempting, because it basically means that you will have more money to trade with in the market. However, it is a double-edged sword and something beginners should be very cautious with. The leverage offered usually depends on the regulation the broker is subject to. Some brokers with questionable regulation may offer up to 1:1000 leverage, whereas brokers based in the US will offer a maximum of 1:50.
When it comes to minimum deposit, the requirements vary wildly. As a general rule of thumb though, it is better to go with a broker or an account type that requires the highest minimum deposit you can afford. This is because bigger accounts are often offered far better trading conditions than smaller ones in terms of commissions and spread.
The regulatory environment your broker is operating in is a very important factor. This determines what the broker can or cannot do with your orders, and what kind of protection you are offered if the broker goes bankrupt. Remember that some countries don’t require brokers to be regulated at all. It is therefore best that you stick with brokers regulated in a jurisdiction you know and trust.
You will want to trade with a broker that is well-capitalized. Capitalization and reserve requirements depends mostly on the country where the broker is regulated. In addition, you should check if the broker has a policy to segregate client’s funds from the firm’s own funds. This is very important in order for your money to be safe if the broker is shut down. Again, well-known and trusted jurisdictions reduce the chances of the broker shutting down shop unexpectedly.
An often overlooked question is whether you can actually reach the broker and speak to a real person when you need it the most. Nothing is worse than experiencing for example a technical problem with the platform while you have an open position in the market. Make sure your broker offers reliable customer service and do some searching online about other trader’s experiences with the broker.
There are tons of websites offering forex broker reviews online, but most of these are not a reliable source of information. These websites are basically affiliate marketing sites for the brokers, and therefore have no incentive to do an honest review. Instead, refer to websites like FX Intelligence that actually provides trustworthy information on this topic.
Lastly, it is important to remember that most brokers want you to succeed because they want to continue to do business with you. As long as you are satisfied, the broker will also continue to make money from the relationship. You will also likely find that no broker is perfect, and there will always be pros and cons no matter who you choose.
Featured image from Pixabay.