Who are Your Forex Broker

Choosing a Forex Broker

The Best Forex Broker for You

The best brokers are those that offer the tightest variable spreads possible with no discrimination.

• Every client should get exactly the same spread regardless of account size or trade size or type of customer.
  
• The broker should not engage in the practice of providing hidden kickbacks to introducing brokers or white-label partners.
  
• As a client, you should also have access to real-time spreads that are clearly displayed next to quotes, and published spread data from the last seven days.

Brokers that offer fully automated trading, end-to-end, with no direct human involvement and no dealer intervention are able offer the tightest spreads.

Switching Brokers

If you're already trading in the forex market, switching to a broker with a better spread policy can result in a big payoff in terms of your profits. And the cost of switching is low -- essentially the cost of a wire transfer.

Before making the switch, a proper competitive analysis is well worth it. But it takes time and effort, and possibly an investment. At the very least be sure to:

1. Understand what spreads are really costing you and how lower spreads would improve your return. For details, see Forex Spreads.
   
2. Understand the spread policies of various brokers. In detail. For help, see Spread Questions for Forex Brokers below.
3. Understand different brokers' quality of execution, given your trading style:
   
• Open an account with more than one broker and try them out. It will be money well spent.
  
• See what their existing clients have to say by asking for references, or consulting the broker's or market maker's (uncensored) bulletin board.
  
• Finally, try various brokers' demo platforms. But beware: demo platforms often execute much better than the real ones.

Spread Questions for Forex Brokers

Transparency with respect to spreads enables you to understand not only what you're paying, but under what circumstances and why. It will quickly reveal the presence--or absence--of value.

The following is a list of questions to help you evaluate forex brokers with respect to spreads:

• What are the typical spreads?

Not just for one or two of the more popular currency pairs, but for all of them. You don't want to be constrained from trading new pairs later on. "Loss-leader" pricing has no place in forex markets.

• Are the spreads fixed or variable?

The interbank forex market has variable spreads. If you are trading with fixed spreads you are, in effect, paying for an insurance premium (unless you trade only around news announcements when markets tend to be more volatile) since fixed spreads are traditionally higher than variable spreads. Is it worth it? That depends on your trading pattern.

• If fixed, are there any exceptions to the fixed-spread policy?

If you read the fine print, there may be. And, if so, you are paying for insurance without getting full coverage. Make sure the exceptions are clearly spelled out. And find out when the policy on exceptions last changed to gauge how frequently the rules change.

• Are there any restrictions on trading or entering orders around news announcements?

Again, if there are, then what are you paying insurance for? Make sure any restrictions or conditions are spelled out.

• Do the spreads differ depending on ticket size?

In the interbank market, spreads are wider for larger ticket sizes. When you review typical spreads it is important to understand the ticket sizes that they apply to. And if spreads differ depending on ticket size, find out what the typical spreads are for different ticket sizes. All too often, brokers offering matching platforms display very tight spreads, but these spreads apply only to very small ticket sizes.

• Do all clients on the platform get the same spreads, all the time?

Or does the spread depend on who you are, how large your account is, or who introduced you to the broker?

• Are there clients who get rebates or volume discounts?

If so, guess who's paying for the rebates? If different clients get different spreads, then find out what you have to do to join that privileged group that gets a better spread.

• Does a portion of the spread for any client go to anyone other than the firm?

Forex brokers frequently agree to pay third parties, such as introducing brokers and sales agents, a portion of the spread on your trading activity. While some firms argue that introducing brokers are not really getting a portion of the spread, don't be fooled. Ask if the introducing broker is being paid in direct proportion to your trading activity. There is nothing inherently wrong with this practice, but it is a fact worth knowing. Only then can you decide if the introducing broker is providing enough added value for the amount you are (indirectly) paying him/her. And you should also ask if you could get better spreads by cutting out this middleman and trading directly.

• Or more generally: does anyone other than the firm itself get paid as a result of your trading activity?

You'd be surprised, but some firms pay their traders and sales agents in proportion to the firm's profit on your trades: a nice conflict of interest that raises inevitable questions about quality of execution.

• Does the firm have an open, uncensored forum where their clients can post trading experiences?

Open, uncensored forums are a good place to get an initial understanding of what existing clients think of the broker's platform and quality of execution. It is important to have access to all posts for at least the last 12 months. If this sort of information is not available, ask why not. And note that "chat rooms" are something different, typically because their purpose is not to warehouse the historical information you need. But beware: since the Internet allows for anonymity, it is often very difficult to determine who is really behind a post. How do you separate real concerns, real problems, and real compliments from, say, posts by agents working on behalf of a particular broker? There are some generally recognized guidelines. Note the total number of posts made by any individual, and read some of their previous posts to judge their credibility. Discount extreme comments by traders who are new members or who have posted only a few messages. These individuals are most likely guerrilla marketers who blitz forums--sometimes overtly, at other times covertly.

• How does the demo platform differ from the real platform in terms of execution and spreads?

A demo platform can be useful to observe how prices and spreads vary under different market conditions. And it can give you an idea of how good the quality of execution is, but only if the demo platform behaves exactly the same as the real one. Beware: rejected trades, delayed execution, price-skewing and stop-hunting often happen only on the real platform. And sometimes, even spreads may be different. Also ask if there's a time limit or "trial period" for using the demo platform. One of the best uses of a demo platform is to test new trading strategies over time.

• What is the minimum to open an account, and what is the minimum trade size?

Unfortunately, the only way to truly test quality of execution is to try the real thing. Some brokers will impose a minimum account opening balance or require a minimum trade size, which can make testing a platform prohibitively expensive.

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