Are you searching for your next trading partner? Discover in this complete article how to find the best Forex broker and what are the 7 key factors to consider. One sure-fire way to cut through the extensive brokerage choices and options is to undertake the process of elimination.
Table of Contents
While in the cereal aisle at the local grocery store, it can be quite daunting to choose the right cereal. However, if you select based on the following three criteria (“Nothing too sugary”, “Nothing that looks like rabbit food” and “Something that has a reasonable amount of fibre”); you realize quickly that you are down to three choices out of a possible fifty.
The same is true for brokers. Once you select on the correct criteria, you end up mass-eliminating, knocking out the volume so you can get back to making a more enjoyable choice, the choice between a few. The criteria for brokers can be put in a few simple questions:
Is the broker registered with a respected authority (UK, EU, US, Australia or South Africa)?
Does the broker have the safety of funds mechanisms in place to safeguard your capital?
Is the broker’s spread or transaction cost low enough or can the spread be further reduced by rebates from CashBackForex.com?
What types of execution technologies does it employ (MM, STP, ECN or hybrid)? How honest and reliable are they?
What type of accounts and assets does the broker offer?
What kind of tools and educational materials does the broker provide?
What type of customer support does it provide?
Let’s now look in detail at each of these key factors and analyse how important they are to help you make the right decision on choosing your next Forex broker.
Licensing & Regulations
Any financial company taking private investor’s funds, or engaged in providing financial products trading, needs to be licensed and regulated by a supervisory body. When online trading became available to the retail sector, several brokers took advantage of the lack of regulations to safeguard investors. Soon after authority bodies were created to license brokers, to impose an effective regulation and to oversee these trading activities. An effective regulation means that brokers are commercially viable and the client’s risk is minimised while the protective systems are maximized.
Currently, the “Gold Standard” regarding Forex brokers regulations is the FCA (Financial Conduct Authority), formerly the FSA (Financial Services Authority) in the UK. The FCA offers the maximum protection to investors, including a compensation scheme of up to £50.000 in case the broker fails with its obligations (including bankruptcy). Government regulators provide important protection mechanisms to clients of the brokers they regulate. The key features among these are:
Fit and proper requirements - Requires company officers to meet certain obligations, including criminal background checks and appropriate experience and education for their position.
Fairtrade practices - An effectively regulated broker must be fair and truthful when dealing with customers or they will face consequences. Brokers cannot manipulate quoted prices in a way that would be unfair to clients, for example 'stop-loss hunting', by giving different customers different price quotes.
Accounting standards - An effectively regulated company must meet account standards and submit to regular external audits.
Dispute resolution - Provides a route for customers to file complaints.
Transparent regulatory history - Provides a public record of regulatory actions taken against the company, potentially providing valuable insight into the culture and integrity of the broker.
Leverage restrictions - Restricts the number and size of trades a trader can open concerning their account equity. These types of restrictions are not very effective in protecting clients. Still, in some cases, it could prevent a trader from losing money as quickly as they could otherwise.
Capital adequacy - A regulated broker must meet initial capital adequacy requirements to become licensed and regulated and then typically maintain a percentage above the client’s deposits.
Legal disclosures – This could include, for example, a requirement for a broker to display in a highly visible area a notice about what percentage of traders incur a net loss while trading with them. This can be valuable information for certain potential traders who may not realize the odds could be against them.
With so many financial authorities around the world, we can categorise the several regulatory bodies by their importance and how effective their regulations are. When choosing your next Forex broker make sure it is one licensed and regulated by at least one of these Authorities:
Tier-1 Regulators: FCA UK, CySEC Cyprus
The UK FCA is an independent public body given statutory powers by the Financial Services and Markets Act 2000, regulating the conduct of both retail and wholesale financial services firms in the UK. The regulator’s mission is to make financial markets work well intending to protect consumers, enhance market integrity and promote competition.
The Cyprus CySEC is the financial regulator of the Republic of Cyprus, established according to section 5 of the Securities and Exchange Commission (Establishment and Responsibilities) Law of 2001. The purpose of CySEC is to safeguard investor protection and facilitate the sound development of the securities market through the exercise of efficient supervision.
Tier-2 Regulators: ASIC Australia, NFA USA
The Australian ASIC is an independent Commonwealth Government body established under the Australian Securities and Investments Commission Act (ASIC Act), carrying out most of its work under the Corporations Act. ASIC has in place capital adequacy requirements and requires license holders to have in place internal risk management and staff training procedure.
The USA NFA is the industrywide, self-regulatory organization for the U.S. derivatives industry. Designated by the CFTC as a registered futures association, the NFA strives every day to safeguard the integrity of the derivatives markets, protect investors and ensure Members meet their regulatory responsibilities. The NFA offers an affordable and efficient arbitration program to help customers and Members resolve futures and Forex related disputes. The NFA also provides regulatory services to designated contract markets (DCM) and swap execution facilities (SEF)—each of which has self-regulatory responsibilities to monitor trading on its platform.
Tier-3 Regulators: South Africa FSCA (Financial Services Conduct Authority). The FSCA is South Africa’s market conduct regulator and supervisor of financial institutions providing financial products and financial services, financial institutions that are licensed in terms of a financial sector law, including banks, insurers, retirement funds and market infrastructures.
Tier-4 Regulators: FSA Seychelles, IFSC Belize
The Seychelles FSA is established under the Financial Services Authority Act 2013. The regulator’s key responsibilities include the licensing, supervision and development of non-bank financial services in Seychelles through a solid regulatory regime.
The Belize IFSC, as a financial market regulator, carries out certification of and control over the market members, as well as guarantees efficiency, honesty and transparency of the work of its grantees.
Safety of Client’s Funds
A very important factor to consider when choosing an FX broker. As important as licensing and regulations; the safety of client’s funds, or, your money. All the tier-1 regulators have in place and enforce strict safety mechanisms to licensed brokers regarding the safety of their client’s funds. The most important mechanisms employed to protect investors funds are:
Deposit insurance - An insurance scheme designed to compensate investors for their deposits in the event the broker becomes insolvent.
Money segregation - A much lesser protection than the above, yet still pertinent, this requires brokers to keep client deposits in a separate bank account than the company's operating capital. A broker must typically track and report on client deposit values daily. The broker is not supposed to use client deposits for any other activities.
Negative balance protection - Protects traders against incurring a negative balance and owing to the broker money.
Make sure that some of these mechanisms (if not all) are enabled by the broker, as an extra layer of security for your trading account.
Transaction Costs
The spread cost may seem too small compared to the profits one expects, but spreads can add up very quickly. The more trades you conduct, the more the transaction costs mount up, and in the end, the difference in spread between brokers can make or break a system. A scalping system, for example, can be particularly sensitive to the spread, being only profitable if the spread is extremely low.
Nevertheless, any system can be vulnerable to the spread over time; 200+ trades later in the system’s life, the difference in the spread can make the difference between a profitable system and one that struggles for life.
The spread should be a major consideration for every trader. Together with any commissions added to it (in the case of an ECN broker), represent the transaction cost of making a trade, or the cost of doing business as a trader.
Transaction Cost for Non-ECN Brokers
Transaction Cost = Spread (Bid – Ask)
It is important to note that ECN brokers often offer better spreads than all other broker types, but be careful: they may have lower spreads but at the same time also charge a commission and this fee must be added to the spread to discover the true transaction cost.
Transaction Cost for ECN Brokers
Transaction Cost = Spread + Commission
Five years ago the spread expectation would be 1-2 pips higher for each of the pairs. Any broker who is not currently moving their spreads lower, is either not taking advantage of the newer technologies and/or remaining greedy. Either way, they are removing themselves from the competition.
What is the difference between “as low as” and “typical” spread pricing?
The “as low as” spreads advertised on some broker websites are virtually irrelevant and misleading, for you generally can’t even get in or out at these levels. GBP/USD spread may be “as low as” 1 pip, but only for a few seconds per day. Not as misleading, but not quite so accurate either is the publication of “typical spreads”. Different brokers define the “typical spread” differently, and each one should be investigated.
You can check and track relevant, popular Forex brokers spread with our handy Forex Broker Spreads Comparison Tool.
A secondary consideration: Look for brokers having a fair and competitive overnight interest rate (or none at all!)
The broker spread (and/or commission) is the largest part of the transaction cost in Forex, and so it trumps most other considerations.
However, there is a secondary transaction cost in Forex and that is overnight interest (also called swap or rollover). If you don't know what this secondary cost is, please read our article What is Swap Rate in Forex where we also talk about the three different strategies that you can trade to avoid paying any swap rates.
To find out how competitive your broker is concerning the overnight swap rates check out our Forex Broker Swaps Comparison Tool page. We list an always updated swap rate for several brokers.
Execution Technologies & Reliability
What makes a reliable broker? In one sentence: Fast execution time in opening and closing trades with minimal slippage.
An unreliable broker will have inexcusable delays in the opening and closing of positions, which often leads to negative slippage. An unreliable broker will also have, inexcusable, lost connections that prevent trades that should have opened or orphan trades that should have closed.
What are the key features of an honest broker?
Low spreads and low commission rates
True and competitive swap rates
No price re-quotes or very few
No slippage, or very little, when closing trades
Low spread spikes during news events
In contrast, a dishonest broker will fatten the spread and commissions beyond tolerable levels, present costly swap rates and can also deploy “dirty” tactics to create spread spikes, execution delays, requoting and negative slippage on client accounts. No broker needs to do any of this, for there is plenty of money on the table in a modest spread mark-up alone, but greed and dishonesty motivates too many brokers to engage in the above cheating tactics.
Newbies mistakenly liken their broker to a supermarket where you pay the price you see rather than a free market where the broker needs to find someone to take your order. Market makers brokers will themselves be the counterparty to your order, but STP/ECN brokers will need to find the best available prices from their liquidity partners (or in the case of an ECN broker, the anonymous liquidity pools).
Electronic routing technologies have made this price matching process incredibly quick, but it can never be as fast as instant and seamless auto-execution of the prices as seen with a demo. S/D (Supply/Demand) type delays and resulting slippage are most readily seen during high demand periods (such as after a news event when thousands of orders compete at the same time for the same price, causing most trades to enter or exit too late), or during low supply periods (such as the Sydney session when most banks are closed and most traders are not trading, causing your order to wait for a bit as the broker looks for a match).
Broker execution technology in retail Forex can be broadly divided into two types: the majority market maker brokers (MM-Brokers) who ARE the liquidity providers, and the minority STP/ECN brokers who route your orders to a pool of liquidity providers (banks). We will be discussing each type separately only concerning execution speed.
What is a Market Maker Forex broker
Theoretically, the Market Maker Broker (MM-Broker) can be the fastest form of execution, because the broker takes the other side of the trade in-house, instead of routing it out (or streaming prices in) from liquidity providers as would STP/ECN brokers. By definition, a Market Maker is a counterparty to all its client’s positions, and as such he offers a two-sided quote (two rates: BUY and SELL) that mirrors the bank rate.
While the MM-Broker can offset between client’s opposite positions (or hedge via their LP) in the back office, they are usually the first to take the other side of client’s trade (note: this can be very lucrative for them as the odds are that most traders are going to lose 95% of the time).
Increasingly MM-brokers (like the MM-banks themselves) have been moving to executable streaming rates instead of a request for quote transaction models; this enables clients to click on live rates which are updated in real-time, rather than requesting to deal on a rate which was made “good” for some time and maybe old. MM-Brokers with executable streaming rates can process trades in milliseconds.
Larger orders greater than 5 standard lots might experience more delay as the MM-broker decides how to offset this greater risk, internally deciding if it can be offset against other client positions, hedged via a partner LP, or hedged against the broker’s capital. Generally, however, most small-time traders trading micro lots might find that they can be filled faster with an honest MM-Broker than with an STP-ECN Broker (though bridge technology out there is quickly closing the gap).
What is an ECN/STP Forex broker
With an STP/ECN broker, they negotiate the best available bid and ask price from the liquidity provider(s), instead of acting as one themselves and this can be a plus and a negative.
On the plus side, their business model is to act as a mediator to your order, trying to find and deliver the best prices from the pool of liquidity providers, and for this, they charge spread markup and/or commission. As they don’t take the other side of your trade, they are less interested in seeing you lose so they can win.
On the negative side, because the STP/ECN broker is not the direct counterparty to prices they create for you (as with the MM-Broker model), but instead act as a mediator of prices delivered from the liquidity providers, it can be subject to more real-world delay conditions.
At times a market can move very fast and in these fast times, your market order can suffer from millisecond delays and fractal slippage as it struggles to keep up with the rapidly changing prices streamed in from the liquidity providers. It cannot just fill you at the price you see as with an MM-Broker who makes the artificial market (albeit a market that is mirrored from the bank rates).
Important considerations:
The quality and speed of execution can vary between STP/ECN brokers depending on two factors: 1) the depth of the liquidity pool, and 2) the sophistication of the bridge technology. The greater the number and diversity of liquidity providers (whether in the form of contracted LPs or anonymous LPs forming an ECN pool) the easier it is for the bridge technology to stream in, at any given moment, the best bid from one provider and the best ask from another.
But not all software bridge technologies are created equal. Some are far more sophisticated than others in hunting for (and streaming in) the best bid from one LP and the best ask from another LP.
Working with a near-zero Raw spreads STP/ECN broker with deep liquidity pools and sophisticated bridging software can make plenty of money on any spread they choose to deliver to us, and so are more likely to try to lower spreads down to beat their competitors and win more clients.
Account Types & Tradable Assets
Diversity is a must. If one market isn’t attractive enough, or if the asset’s price is stuck in a range trade, it’s always good to have more choices, more tradable instruments. Or simply, as not all markets behave equally, to have a choice of asset’s available to trade that you feel more comfortable with. Together with the traditional foreign exchange currency pairs, brokers are now offering the possibility of trading instruments that seemed impossible five years ago.
With any modern Forex broker nowadays, you can trade not just the FX market, but also a great variety of CFDs in the commodities market, including soft and energy, precious metals, indices and stocks and also cryptocurrencies crosses.
Still, with the more traditional markets, brokers offer a more classic account type with higher leverage and smaller lot sizes. With CFDs contracts in commodities, indices and the shares markets, for example, the minimum lot size can be substantially bigger compared to the FX market, requiring stronger account equity and leverage can also be restricted and limited.
Account types for beginners
You should also consider your initial fund's availability. If you do not have sufficient capital to start your trading career or you have a limited budget, check whether the Forex broker offers a mini, or better yet, a micro account that requires low start-up funds. It’s a good way to practise in a real trading environment, allowing you to gain the experience to tackle and master the market, without incurring great risks (losing all your funds). To better understand why this key factor is so important, check out our complete article What are the Benefits of Micro and Nano Lot Brokers for further reading.
Tools and Forex Educational Materials
Another important factor to consider on how to find the best Forex broker is the broker’s availability of trading tools and educational materials. Nowadays top brokers offer an array of complimentary and extra materials, from charting tools to professionally designed Metatrader indicators.
Commonly as well, you can find several brokers offering daily technical analysis reports, podcasts and even trading signals. If you are new (even if you are a seasoned trader) to this market it’s important to keep up-to-date with trends, market sentiment, geo-political events that can develop at any time and change a trend direction.
Try to select a broker that publishes daily technical analysis, together with trading signals. Although they cannot take the blame if anything goes wrong with your trading decisions, it’s always a rich font of information that can help you on the long road ahead and help you to understand how the markets move. The way to access all this educational material is by simply opening a trading account with one broker that offers it.
Customer Services
When choosing a broker, you should also consider their customer services support. At some point you might have issues with your trading account, being it a delayed deposit, a withdrawal problem or when submitting documents and so on.
It’s important that the broker “speaks” your language. Also, important, the speed and the availability of the customer support and how you can contact them. Several brokers are already offering multi-lingual support via direct phone call, email and live chat.
Still, quite a few ones are only available through phone call and email. Consider also the operating times of the customer support. More than ever brokers are focusing on attracting new client’s and have implemented more flexible working hours for their support services. The majority of the brokers are now offering 24/5 customer support and you can get your questions answered faster than ever.
You can also compare brokers by the quality of their customer support with the FXverify.com website, an independent portal where real traders leave their reviews and comments to help the trading community. FXverify.com publishes only user reviews by verified customers with a real trading account. You can read what other traders say about a certain broker and how they rate their customer support in terms of efficiency, precision and availability.
