If you have looked into trading you will have no doubt seen the large number of brokers out there. It is a fiercely competitive business and they all want your money. Competition is often a good thing as it often results in lower costs and better service. This is all good, but how can we be sure we pick the right broker? Let’s take a look.
Regulation and profitability
It is very important to choose a broker that is profitable. This is very important because the more profitable the broker is the less likely they are to go bankrupt and they will be in a position to offer better customer support. To find out the capitalization for a broker, you can visit www.cftc.gov and go to the “financial reports for FCNs” section. This link will tell you how well capitalized your broker is. Generally, the better capitalization the better as it suggests they have more clients. It is also extremely important to chose a broker that is licensed and regulated by one of the major regulating authorities in the world such as the United States, United Kingdom, Australia, etc. Unregulated offshore brokers may seem appealing from a privacy point of view, but your position could be precarious if the broker was to act fraudulently or go bankrupt. Another point to look at is the length of time a firm has been in business. I would suggest opting for one that has been around at least five years, the longer the better.
Spreads
The spreads you pay when trading will inevitably affect your overall performance to an extent. Some trading strategies require lower spreads much more so than others, a good example of this would be scalping.
Execution
The speed of execution of your trades varies between brokers. It’s certainly a point worth considering because if a company A offers a 4 pip spread on GBP/USD with no slippage and company B offers a 3 pip spread but on average slips 2 pips against each trade, you will end up paying less with company A. Another thing to consider is that demo trading accounts and live trading accounts are often very different in terms of execution, especially during times of high volatility (e.g. 10 seconds after the non-farm payroll is released).
Retail Brokers
These firms trade against their clients. What this means is, if Fred wanted to buy, the retail firm would sell the position. Conversely if Fred wanted to sell the firm would buy. The retail firm will then cover the position with their liquidity provider or may even just hold the position in-house knowing that most traders lose. If they were to opt for the second option, the retail firm would end up profiting from your losses. I have heard many comments from successful traders who have actually been asked to take their business else ware as they were costing the firm too much!
ECN Brokers
These brokers work differently to retail brokers. They do not trade against their clients like retail brokers. When you place a buy market order with one of these firms, they will process the order by matching it with a seller. The spreads are often lower with ECN brokers, but they usually charge commissions for matching your order.
