What Are The Factors In Choosing A Foreign Exchange Broker?

With foreign exchange brokers located all around the globe (especially concentrated in America, Europe and Asia), the complexity of choosing the right FX broker for you may feel daunting—or may not be given adequate thought. However, rather than procrastinating the decision or rushing to make a choice without enough information, you may find yourself instead making one of the best decisions of your life by choosing your FX broker carefully, with the right intentions and awareness.

As a professional who lives, sleeps, eats, and breathes foreign exchange and dynamic financial markets (a huge passion and joy for me), I am writing this article to help you know what to look for when choosing an FX broker that is right for you.

What’s at stake in your choice? Certainly your trading environment and the stability of your funds and winnings. Equally importantly: your peace of mind and security.

So what are the key factors that can guide you in choosing the best FX broker?

In this article, I enumerate and describe these factors in order of importance. (For additional perspective, please also see my article on “white label” solutions.

Factor 1: Regulation and stability of the country where the broker is regulated

Today, it’s a MUST to choose a regulated broker, but the fact that the broker is regulated doesn’t mean enough by itself. The key question is: where is this broker regulated? And what is the stability of the country in which he is regulated?

Since you will open a trading account with the intent to secure your principal and valuable returns, your initial funds plus your winnings will technically accrue within that country, so it’s very important to understand the economic and financial situation of the country itself. You want to limit foreseeable risk factors and limit the probability that you’ll wake up one morning soon and read in the news that the government has interfered and taken control of your funds.

Some countries apply stricter regulation of brokers than others. Regulations in New Zealand are different than regulations in the United Kingdom or Switzerland, for example. It’s worth your time to learn more about regulations in countries associated with the FX broker(s) you are considering. Regulations exist for the benefit of you, the client.

As a trader, you can count on the following rule: Stricter national regulations on brokers tend to equal more control for you and better protection for you as a client.

Why? If something goes wrong—e.g., a broker mistreats you as a client for any reason—your major (and sometimes only) remedy is to apply your rights under the regulations and laws guiding the jurisdiction of your FX broker. For jurisdictions with stricter regulations and more regulatory resources, you are much more likely to find a financial regulator who will serve you, look into your complaint, investigate your broker’s practice, hold each stakeholder in the incident accountable to the relevant regulations, and promote a remedy if you have been treated in an unfair way. In countries with “softer” or fewer regulations, this remedy may not be available to you. In the event of malpractice by a broker, it may be more difficult for you, in many countries, to clarify what happened and to determine and hold accountable who is responsible for what happened.

What else? Understanding differences in financial regulations across countries can give you information that helps you assess more about your broker’s financial strength or vulnerability. For example, for an entity to offer foreign exchange (FX) from Switzerland, the entity must be a bank—which in practice required to have capital of around 20 mio CHF (23 mio USD). An entity based in Turkey wishing to offer full FX is required to have capital of around 25 mio TRY (12 mio USD), and in other countries, the capital requirement might be less. Is there a 1-to-1 correlation between how much capital a broker is required to have and how good the broker is? No, not necessarily. A related point to consider (also within the context of the country) is the business model of the prospective broker. Does the broker have a license to manage his own risk or does the broker have an agent license only (“A book”-only). “A book”-only might not be required to have as much capital as a broker licensed to manage his own risk.

In summary, it’s very important to look at the regulation and stability of the country of the broker(s) you are considering and the business model of the broker. If you understand and/or sense a strong degree of protection and a minimal degree of vulnerability (capital & political), then you are more likely to make a good choice.

Factor #2: Cost of trading transactions

FX brokers typically charge clients in different ways:

a) Spread plus commission

b) Spread only (all included)

These are the two common ways that the client pays for the privilege/service of using the broker’s environment to trade.

Which fee structure is better? Answer: there is no inherently better or worse answer. However, it is important for you to fully understand the structure, so that your decisions are based on logic, facts, and maximum relevant cost-input information.

To further specify, some brokers prefer to enact a “spread plus commission” model in which their fee-structures show a very low spread (let’s say starting from 0.1 pips and up), plus a certain commission per million traded (or per ‘lot’, in which 1 lot = 100,000 units). In this formula, a pip is the smallest price change that a given exchange rate can make.

Other brokers prefer to include the commission within their spread and will show a higher spread. Brokers will typically choose the model they use based on several factors. One factor can be cultural. For example, in some cultures, the broker’s clients (traders) don’t like the word “commission”, and they just want to see a spread with no extra commission. It is ultimately up to each broker to decide what structure he will offer to his clients. Some brokers, in an effort to demonstrate flexibility and variety for their clients, offer different account types, spanning both type of fee-structures.

But here is the important thing for you, as a trader, to keep top of mind: it does not matter if you as a client pay “spread plus commission” or “spread only”. What matters in your decision-making is: “How much money will I be paying or saving at the end of the day by choosing one of these models over the other?”

Let’s look at a concrete example:

Let’s say that I open two accounts, using two different brokers from the same jurisdiction. (So, as far as regulation and Factor #1 goes, these are equal.)

Now, I entrust to both brokers. Broker ‘A’ offers me spread plus commission: let’s say he offers me a fee structure that has me pay an average on EUR/USD of 0.2 pips plus a commission per one million of 35 USD. This means I will pay a total of 70 USD (around 1 pip) to open and close a position. Now we add this 1 pip plus the spread of 0.2 pips, we have a overall cost of approx. 1.2 pips.

On the other hand, Broker ‘B’ charges me an average spread of 1.8 pips  (a standard commission of the market) with no commission. This means that, all costs included, Broker ‘B’ is charging me 0.6 pips more than what Broker ‘A’ is charging me (1.8 pips minus 1.2 pips). This 0.6 pips (or 43 USD) equals an average of 21.5 USD more in total commission (one way trading) that I would be paying to Broker ‘B’, on the same transaction.

Now, lets say I open only two trades of one (1) lot only, meaning I open two lots and close two lots, having a total trade of four lots. By undertaking these hypothetical trades I am trading a yearly volume of aprox 100 millions USD. And, because I do daily trading (only 2 trades of 1 lot), I am paying 17.2 USD daily, or 86 USD per week, or 344 USD per month, or 4,128 USD per year. Option 2: If I take the spread-only option (Broker ‘B’ ), I am paying approximately 26 USD daily, 130 USD per week, 520 USD per month, and 6,240 SD a year.

So as you can see, by choosing Broker ‘A’ (Option 1), I am saving around 30% of my trading costs annually (or over any measurable increment of time) for the same execution service.

By creating mathematical examples like this for yourself, as you research fee structures, you can gain high visibility into how much more or less you might pay by choosing one fee-structure over another. I encourage you to perform these calculations with any real-time examples you will face, BUT VERY IMPORTANT…

One note to consider: In addition to considering and comparing costs among options, you’ll want to be mindful of any other factors that may be important to you when dealing with a broker. For instance, you may ask yourself: “What else is Broker ‘B’ providing me ( other services) that might justify an extra cost that I’m willing to pay?” We turn now exactly to that point.

Factor #3: Other services provided by your selected broker

This is an important factor to consider. To recap the other two major decision-making factors in prioritized order: (1) the broker needs to be regulated in a stable country; and (2) the cost of the fee-structure aligned with your broker needs to treat you favorably compared to other fee structures. Now, you are ready to ask the third large question:

(When) Might I be willing to pay an extra fee for additional services that I value?

When does the value of additional service(s) provided by a broker more than cover the cost I pay to secure the additional service(s)? This will depend heavily on your preferences and on the individual or combined services that your broker offers. Since there are many such services, I summarize for you below, the most important services, based on my experience (you might agree or disagree about the relative value of each specific service to you).

Personalized service and support

You can seek and receive very good, personalized service. This often derives from a “dedicated” account manager who is willing to guide you through the entire process, from prior to opening your account to the period of ongoing maintenance and growth after your account is open. This is likely to include trading facilities with access to markets 24 hours per day.

You may seek and receive a steward who will understand your needs, speak your native language, and share the same culture with you, a person upon whom you can rely, who will look out for your interest in a transparent way and help you by using his capabilities, knowledge, and ethic that drives him to go the extra mile for you. This level of service is appreciated by traders from many cultures, especially, for example by traders from Latin America and the Middle East, where sometimes a hand-shake is worth much more than the signature of a contract.

Fx Community and web-based TV

Working with a regulated broker, in a stable country, with a good cost/fee structure and a personally dedicated service can often be very good, but not enough. You must be sure that your broker is continually adapting the most modern approaches and is able to provide you tools and venues that will cover your personal and human-side needs, including value that you derive from social interaction with others with similar interests, rhythms, and ambitions as you. Your broker can be a highly valued source of providing you with an interactive, social FX Trading Platform and FX community.

Why is this important?...

Because traders don’t have the same live as many “mainstream” individuals; they don’t work from 9am to 6pm in an office where they can interact with colleagues and clients. Traders pass most of their time in front of a computer, reviewing charts, monitoring markets news, creating strategies, and executing trades. Much of this can be done at 3am or at 2 pm. The human-side need for interaction is real, and my experience in the industry indicates that traders feel these needs as much as anyone else. Having access to an FX community can make your life as a trader more simple, normal, and fulfilling.

As part of an FX community, you are able to meet people, have video face time with them, exchange emails, chat online, share markets news, collaborate on trading strategies, and even share photos. Certain FX community elements have already accumulated 50,000 users from all nationalities, countries, and cultures.

FX community platforms and venues also provide stimulating opportunities that include demo contests for traders, trading strategy contests, love letter contests, or best-article contests. Not all off the contests and features of the FX community are related to trading. For example, maybe I’m not especially good at trading (yet!), but I might be pretty excellent right this moment at expressing my love in a letter, so I can enter into a love-letter contest and be able to win. (Maybe I’ll meet someone fun too ;-) On the other hand, the web-based TV feed features daily videos of market news, analysis, products, reports, interviews that provide up-to-date information for your clients to consider and use.

You can read more about the combination of features that merge to create value within an FX community by visiting this particular previous article.

Tutorial Videos

As an included, value-added service, video tutorials can save your time, meet your need for flexibility, and educate you about features and benefits associated with many platforms, service attributes, and industry topics. You can choose to watch any video many times, at any time, and from anywhere. You may watch in your local language or with subtitles.

Participating in tutorials enables you to better understand trading skills, strategies, and reports. Even though all brokers don’t offer such tutorials, studies show that some videos can be 100 times more effective than reading materials in delivering education with impact and efficacy.

Some brokers may provide a wiki page so that you as a trader can surf on it and find needed content, but wiki links often to lead to reading material, rather than video. If your current broker does not provide you with tutorial videos or wiki request them, and start implementing your learning. (Make sure they are available on mobile devices too.)

Custodian solution – Private Banks

Some clients have special needs or requests, and a broker should be able to tailor-design the service to meet nuances of demand. One very common situation is when a client asks a broker: “Are my funds segregated?” What does this mean? A client asking this usually wants to have the funds sent to his own personal account under his name (not to a corporate name, including that of the broker).

He would like to be able to trade from an account in his own name directly from the trading platform. The name for this solution is called a “custodian” solution, and here is how it works:

A client opens a private bank account (with the bank that the broker uses); then he opens a trading account with the broker. He seeds his private account with an initial amount of funds. For example, imagine he deposits 100,000 USD. The broker then provides the client with a trading account linked with the 100,000 USD. The client trades daily, and each day there is a reconciliation of his P/L (profit or loss) from his trades. So, if for any reason something happens to the broker at any point, the client’s funds and his winnings are not affected, as they are in a private account under the client’s name. This custodian solution is a vehicle that is increasingly emerging, and it will gain prevalence in the future.

Different platforms and trading instruments

Finally you need to consider what products each broker can offer you: FX only, CFD, Binary, stocks? Maybe you only want to trade FX, and you don’t care if the broker has other instruments, or maybe you need these other instruments so that you can trade all of them with the same broker. Also what platforms does the broker offer me? Only MT4? ECN platforms? Others? Does the broker offer Currenex? Jforex? Unitrader? Etc.

What limitations of trading technology may I experience if I open an account with this broker? Only you can determinate the importance of this, based on your needs. In the future, more and more brokers will offer multiple platforms. One example of this is the Online Trading services provider FXDD. This provider offers MT4, Jforex, Currenex, Swordfish, Viking trader, ZuluTrade, and other platforms. Today more FX brokers are following this path like BMFN, Tradenext, Commexfx, Falcon Brokers, Tier 1, Divisa Capital, NSFX as examples.

Invitation to comment

So once again, my readers, I hope you find this article helpful as you decide which broker to choose. I am curious, what one point shared here stands out most meaningfully to you?