Banks, more often in the form of specialised FX brokers, have been offering private client access to the forex market for several years. The number of international forex brokers is increasing steadily, while German banks rather refrain from this market and offer products only within the scope of their wealth management offering due to strict legal regulations. The introduction of the trading platform MetaTrader 4 in 2005 has accelerated this process. In addition to their own trading platform, almost all FX brokers will offer a branded version of MetaTrader with pre-configured currency pairs, IP addresses and other parameters.
Apart from general selection criteria like the business conditions, a number of other boxes should be ticked when choosing a broker.
The fact if and by which authority a broker is regulated can be a material selection criterion when selecting a broker, however, sometimes this point is just overrated.
Basically regulation is supposed to ensure that providers of financial services comply with a certain set of minimum standards and therefore, the applicable rules are rather generic and not necessarily adjusted to fit to retail forex brokers. Also, those rules mostly focus on processes within the companies, like compliance with accounting standards, anti-money laundering laws or segregation of duties - trading conditions and handling of customers play a minor part. Given the high number of companies working in the financial sector a continuous supervision is hardly possible, anyway.
To evaluate the added value provided by regulation the regulation authority has to be taken into account. While the American NFA fined forex brokers for discriminating customers and also ordered compensation payments this strict line of action can hardly be expected by regulation authorities of e.g. Mauritius. The British FCA and the Australian ASIC on the other hand have a good reputation as well.
Regulation can be crucial when a broker becomes insolvent - at least if a compensation scheme is in place - because in most cases the compensation scheme can only act if the responsible regulation authority had been supervising the respective broker and declares an event of default. Without a compensation scheme regulation can only provide a limited protection if the broker ends up insolvent.
Some countries have less strict regulatory requirements than demanded by American or European authorities, thus making the opening of a forex broker in those countries much easier. The large number of these brokers are rather financial service providers than banks, for this reason political rescue operations - as usually well-covered by the media for banks - should not be expected if things go wrong. If the broker goes bust, you will lose all your money.
But the location is also important for other reasons. If for example German speaking customer support is required, only FX brokers having at least a German branch office with adequate assistance should be selected.
A FX broker earns money primarily through spreads, the difference between purchase price (bid) and selling price (ask). Usually the spread is quoted in pips and relates to the 4th decimal place of the exchange rate. A price quotation of EUR/USD bid 1.2762 ask 1.2765 means that the broker is prepared to sell 1 EUR at price of USD 1.2765, but he would pay for 1 EUR only for USD 1.2762 . In this case the spread amounts to 3 pips.
Most FX brokers work with variable spreads which sometimes change within seconds depending on the trading activity so that prices can be adapted according to the market situation. Some brokers offer very low variable spreads, but will in return charge a fixed commission on each traded position. Other types of brokers use fixed spreads which means that the spread will remain unchanged irrespective of the market situation, however, you may risk that these brokers do not quote a price during extremely volatile market periods.
Myfxbook provides a good summary of the live spreads offered by a number of different FX brokers. Please note that the spreads listed in the ranking are usually the best available spreads offered by the FX broker, but these spreads may be limited to certain types of accounts. Also any commissions if applicable are not included.
FX brokers can be grouped into three categories: Market makers, ECN (Electronic Communication Networks), and STP (Straight Through Processing).
Market makers keep their own dealing desk and quote prices at their discretion, strong competition usually leads to very narrow spreads. Upon completing the transaction with the client they will attempt to close this position towards the market, smaller positions may be accumulated or kept open. As long as a market maker has not closed a position with a client, a conflict of interest will persist, since the client's profit will cause a loss to the broker. There is a clear risk that the market maker may abuse his position and quote inferior rates on purpose so that take profit limits will not be reached or that stop loss limits will be triggered. It is safe to assume that a market maker will move the rate for approx 10-15 pips at his own discretion. Due to the nature of their trading strategy, Scalpers are the natural enemies of market makers, sometimes dedicated members of staff will "take care" of them. Since the market maker decides about the rate quotation, he will rarely re-quote.
ECNs are rather intermediaries, they do not quote their own prices, but just display the rates of other market participants in their network. Typically, these market participants are major banks or, or possibly also market makers. The functioning of an ECN is to guarantee the offer of the best rate available, their spreads will be considerably narrower than with other brokers. No conflict of interest will occur, as the ECN never trades against a client and passes on the transaction to another market participant simultaneously. However, ECNs will charge a commission for each traded position as compensation for their services as intermediary, they often demand minimum deposits and also may require minimum contract sizes.
Originally STPs were mainly market makers providing their own rates. But other than market makers, before accepting an order they will decide whether to take an order in their own books or to forward it to the market. This is to pass the risk of "winning trades"(from a customer's point of view) on to the market and to take the opposite position in case of "loosing trades" (equally from a customer's point of view). Frequently rates quoted by market makers at their discretion do not reflect the market situation. If it is decided to relay the order to the market, rates will be requoted on a regular basis due to the small exchange rate deviations. Recently many STP brokers have reduced their dealing desks, thus moving in their nature closer to ECN brokers.
Most brokers will offer online account opening. A proof of identity, a copy of a recent account statement or a bill has to be uploaded to the broker's website or needs to be forwarded by email to the account management for the account activation. The Post-Ident-procedure is popular in Germany, a postal worker will register the personal data of the client and confirm his identity to the broker. The account opening is usually completed with 24-48 hours depending on the broker's location.
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