Doing Brokers Due DiligenceDue 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.
For example, if your trading performance depends on guaranteed liquidity but you can account for variable spreads, this may be what you should look for. On the other hand, you might prefer a fixed pip spread if you know you are getting instant executions despite of market conditions, if this is essential for your trading.
With so many Forex broker-dealers out there, it may be a little confusing finding the one that fits your needs and financial capabilities.
Support
One of the first 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.
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.
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.
As an auxiliary data you could try to find out if the broker has big clients such as hedge funds or corporations. Some of these data are public as regulated and audited hedge funds have to mention their access gates to the market. A broker chosen by a large hedge fund is normally indicative that the broker is reliable, complies with all regulations and has enough liquidity.
Regulation
Not all countries supervise the Forex brokers and dealers 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 trader to choose a 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 offshore country, as the latter can be more liberal with registration requirements.
You want to be aware of the 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 its business.
The authority of a regulated Forex broker is located in the country where the broker is registered in. For example, Forex brokers in the US should be registered as a futures commission merchant with the Commodity Futures Trading Commission. The CFTC ensures that the broker meets strict financial standards. The broker should also be a member of the National Futures Association (NFA).
US companies supervised by these three organizations are more likely to be legitimate than those that are not. In addition, there is a lot of information that can be found with these organizations that can help you further your broker research.
Usually, you can spot the registered status of the broker and other financial information on its own website. A regulated Forex broker will not hide the fact of being regulated and who is the authority in charge.
Dealing with a Forex broker-dealer that is registered with the CFTC and the NFA is one way to minimize your vulnerability, but this isn't to say that you should dismiss firms that are based outside the United States or subject to non-US regulators. The Financial Services Authority (FSA) in the United Kingdom and the Investment Dealers Association of Canada are also strident in their defense of the rights of retail Forex traders.
The point is to do your due diligence on a regular basis verifying that the firm is registered and in good standing with the regulator in place. Also, make certain that you understand your rights and the enforcement mechanisms available to you should you have difficulty with the broker-dealer. fxstreet.com
One of the first 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.
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.
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.
As an auxiliary data you could try to find out if the broker has big clients such as hedge funds or corporations. Some of these data are public as regulated and audited hedge funds have to mention their access gates to the market. A broker chosen by a large hedge fund is normally indicative that the broker is reliable, complies with all regulations and has enough liquidity.
Regulation
Not all countries supervise the Forex brokers and dealers 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 trader to choose a 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 offshore country, as the latter can be more liberal with registration requirements.
You want to be aware of the 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 its business.
The authority of a regulated Forex broker is located in the country where the broker is registered in. For example, Forex brokers in the US should be registered as a futures commission merchant with the Commodity Futures Trading Commission. The CFTC ensures that the broker meets strict financial standards. The broker should also be a member of the National Futures Association (NFA).
US companies supervised by these three organizations are more likely to be legitimate than those that are not. In addition, there is a lot of information that can be found with these organizations that can help you further your broker research.
Usually, you can spot the registered status of the broker and other financial information on its own website. A regulated Forex broker will not hide the fact of being regulated and who is the authority in charge.
Dealing with a Forex broker-dealer that is registered with the CFTC and the NFA is one way to minimize your vulnerability, but this isn't to say that you should dismiss firms that are based outside the United States or subject to non-US regulators. The Financial Services Authority (FSA) in the United Kingdom and the Investment Dealers Association of Canada are also strident in their defense of the rights of retail Forex traders.
The point is to do your due diligence on a regular basis verifying that the firm is registered and in good standing with the regulator in place. Also, make certain that you understand your rights and the enforcement mechanisms available to you should you have difficulty with the broker-dealer. fxstreet.com
On the Commodity Futures Trading Commission (CFTC) website you can find out the capitalization level of your broker-dealer versus other dealers in the market and compare if they comply with the net capitalization requirements. Compare the firm's Net Capital Requirement with its Excess Net Capital as well. Clearly, the more there is the better signal is.