Important Things you need to consider when choosing the Best Forex Broker

Important Things you need to consider when choosing the Best Forex Broker

Sep 19 • Forex Broker, Forex Trading Articles • 1498 Views • Comments Off on Important Things you need to consider when choosing the Best Forex Broker

Retail forex can only be done through online forex brokers and the internet is teeming with an overwhelming number of them, so much so that choosing the best forex broker from among them can be a very difficult choice to make.  Making it doubly hard is the fact that your choice of the broker to work with can sometimes spell the difference between profiting and losing from your trading experience.

Very few retail forex investors are aware of the fact that there are two types of online forex brokers – the market makers and the ECN brokers. There is a load of difference between these two types of online brokers which are rather important for every retail forex trader to know the best forex broker for him.

ECN stands for Electronic Communications Nework and the ECN brokers are so-called because they make use of these electronic networks to pass on all orders placed with them to the global forex market for the matching counter trades. They don’t have an interest on what kind of trade you make (whether you are a buyer or seller of a currency) and don’t earn from the spread between the bid and ask prices. What they normally do is get the best bid and ask price for you from various quotes coming from banks and other dealers in the network and match your trades accordingly. They earn their keep from a small fee they charge their customers on a round turn basis meaning only when a trade is settled. In short, they just pass on your order to whoever has the best quote in the network and has nothing to do with the quoted prices.

The market makers, on the other hand, are brokers who will always have a ready match for every forex order placed with them. They are called market makers because they dictate the price and the quotes they give represent the price they are willing to make the match up. Market makers have the option to pass on any orders sent to them straight through the foreign currency network like ECN brokers or match the orders themselves with a counter trade. And more often than not, market makers will match any and all others passed to them if they feel they stand to gain from the orders. Likewise, if they will readily pass on to the market any orders that may put them at a disadvantage. In other words, market makers have an inherent bias to protect their own interests and as a result their clients end up as their milking cows.

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While market makers may not charge a commission like the ECN brokers do, they earn their keep from the bid-ask spreads. That is why, as you may have probably observed, the bid-ask spreads quoted by market makers often widen during highly volatile markets. Noticeable too is the fact that requotes occur more frequently with trades made through market makers who would often not fill an order if they feel they will be disadvantaged by previous quotes. There is a natural conflict of interest that exists between a market maker and their clients.

While it can be argued that market makers stand the same chance and take the same risk as any forex broker and therefore technically there should be nothing wrong with their matching up any order they may wish too, the fact remains that to a certain degree they can manipulate prices. They are known to trigger trading stops especially in thin volume markets and prevent orders from being filled up by making a re-quote during volatile markets. Ultimately, the choice of the best forex broker to work with, lies in the hands of the client himself.

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