... choose a Forex Broker3. 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.