Like Niche Players, Early Risers are relatively new to the Forex game. Typically these are companies that also rank lower on the maturity scale, but which tend to provide a greater range of services than Niche Players. They may not have a significant customer base yet however, they are positioned for long-term success through the depth of service they provide.

These companies are generally very well funded and, in a lot of cases, may be subsidiaries of larger, more substantial financial institutions. For example, national banks, which historically have had foreign currency exchange departments serving institutional customers, are beginning to dip their toes in retail Forex waters. Since national banks are not brokers or CTAs however, they are not subject to Commodity Futures Trading Commission (CFTC) regulations.  They are governed by the regulations of the Office of the Comptroller of the Currency (OCC).

CitiFX Pro is an example of a national bank launching a retail Forex business. CitiPro's retail Forex business is a part of Citi Foreign Exchange, which is housed by the Fixed Income Division of Citi Markets & Banking. The legal entity for CitiPro's business is Citibank, NA.   The bank servicesa very broad range of institutional clients, including real moneymanagers, hedge funds, corporations and other banks.  The CitiFX Proplatform now gives Citibank the ability to service the retail Forex space as well. They are rolling CitiFX Pro out globally as a retail Forex business.  A cursory review of their website reveals that CitiFX Pro is a potential Niche Player (or Maven, which I'll talk about tomorrow) offering trading, but little in the way of ancillary services.

An example of a more traditional Early Riser, providing trading, training, analysis, and other services to a retail client-base, might be TradeView FX. The company, founded in 2007 as a division of the Rosenthal Collins Group, is now a division of IKON Global Markets.  They are experiencing a meteoric rise in the Forex world due to smart marketing, excellent partner programs, and an experienced staff.  Still, TradeView is lower on the Level of Maturity scale, even though it is high on the Range of Services scale; placing it perfectly in the Early Riser sector of our DataInsight Market Profile.

Tomorrow, what is a Maven?

If you have been following along, remember that we're trying to illustrate that asking the question "Who is the best broker?" should be revised to "Who is the best broker for me?"   Read my previous post, DataInsight Broker Evaluation.

Within the DataInsight Market Profile, Niche Players are companies which rank lower on both the Level of Maturity and Range of Services scale. Typically, these companies are relatively new in the market serve a smaller customer base.

Instead of the next big company, there are a myriad of small companies with simple ideas that fill the Forex landscape. They don't try to be all things to all people but rather, they strive to do one thing extremely well.  Niche players aren't bad choices because they are young or small.  Sometimes these companies make a strategic decision to be a niche player to serve a different type of client - fill a different need.  Niche players may just be the right fit for you.

Think about this. Do you really need a company that provides trading, training, market and technical analysis, trading systems, trading signals, and managed accounts?It doesn't make a lot of sense to declare that Company A is a better broker than Company B simply because it is bigger, older, or more popular. Yet, there are dozens of Top Ten broker rankings that only consider the size of a company or the number of website visits they receive daily.

Let's say, for example, that Broker A is a niche player serving 1,000 clients with an average account size of $100,000. Broker B, on the other hand, is a full service company with 20,000 customers with an average account size of $5,000. You can see how these companies fill a different need and might appeal to a different type of trader.

Again, what we illustrate with our Market Profile Sectors is that Forex companies fit an identifiable profile and, once you determine which type of broker profile suits your needs, then you are more likely to find a broker that meets your personal requirements.  Bigger is not necessarily better.

Tomorrow, Early Risers.

Most novice Forex traders are unaware that the price for a currency pair can differ from broker to broker. The price, in fact, is set at the discretion of each individual broker. Although retail forex is regulated by the Commodity Futures Trading Commission (CFTC), it is still a market without a central exchange, controlled by brokers who designate the Bid and Ask price. The buyer pays the Ask price and the seller pays the Bid price and each individual broker determines what the Bid and Ask will be. The currency pair's spread is the result of an algorithm that averages the Bid and Ask prices of different liquidity providers and is then widened by the broker based on how much of the spread he wants to keep. So the price for a currency pair that you see on a trading platform is the price that the broker wants you to see.  Careful study of Figure 1 - Broker's Price Feed Window can illustrate how the broker is able to modify the Bid and Ask prices from the incoming price feeds.



Why Do You Care?

Brokers manipulate prices to different degrees and for different reasons.  Inexperienced traders generally seek out brokers with the narrowest spreads.  But do broker offer smaller spreads for profitability or marketability? It makes sense that a company that processes multiple thousands of trades a day can afford to offer their customers a smaller spread than a company that processes fewer trades per day.  So, should you always select the broker with the smaller spreads?  This is really only one part of the dynamic that differentiates one broker from another and its a direct reflection of their Level of Maturity (LOM) as we define it.  This is why, when evaluating brokers, a trader must take more than just a cursory look at their website to determine a broker's suitability and LOM. To quote America's own homegrown financial genius Flavor Flav, "Don't believe the hype."  (marketing hype, that is...)  What does a novice trader, opening their first live account, need to know about a brokers LOM?  How about their financial stability?

CFTC To The Rescue

The CFTC requires all trading firms, including forex firms, to report their net capital every month.  Any trader can access this information and peer into the financial stability of a brokerage firm. CFTC's Financial Data for Futures Commission Merchants report can be downloaded from CFTC's website monthly in either PDF or Excel format. It details the actual amount of capital a forex firm has and how much excess capital there is above the CFTC-imposed minimum of $1 million. The FCM report can also be used to determine which firms operate on the margins and which firms are relatively stable. Firms having less than $1 million in excess capital could be on the hairy edge.  Would you want to be a customer of a marginal firm if a regulatory issue arose or a CFTC fine was imposed?  Brokers which experience regulatory difficulties usually also experience mass client flight, putting them in danger of insolvency.

What About The LOM?

To help me get that warm and fuzzy feeling about a firm’s LOM, I always ask my candidate firms:

• - How many retail forex customers do you have?
• - What is the average size of your retail accounts?

Most of them don't want to answer those questions and, in that case, I just move on.  I won't place my money with a broker who won't answer those questions because, armed with the FCM report, number of retail customers, and average account size, I can begin to paint a picture of the type of broker with which I'm dealing.  Brokers with an equal amount of capital but different size accounts can present a very different picture.  Take a look, for example, at Brokers #1 and #4 in the following three graphs.

When it's time to open a trading account, novice traders always cruise the online forums asking the same question, "Who's the best broker?" Well, the fact is, there is no way to answer that question in a manner that is optimal for all traders. Brokers come in all shapes and sizes and sometimes it takes a little while to find the "right" one for you.

I have accounts with several brokers and the only thing that they have in common is that they alluse MetaTrader 4 as a platform. I have a self-imposed ceiling that limits the amount of money I entrust to any broker so, when an account reaches my predefined limit, I open an additional account with another broker. I am always interviewing potential brokers so I have developed criteria that my candidate brokers must meet before I give them my hard-earned money. Nobody expects the Spanish Inquisition -- expecially brokers -- but if they don't want to answer any tough questions then I look elsewhere for a broker who will. Believe me, there are tons of them out there.

I don't believe in rankings to find the right broker. Visit any number of websites that rank online brokers and you will find that none of them agree on the top ten. Forget about the top 150. So, over the years, I have developed my own system to help me identify the right broker for the style of trading that I plan to use. I trade my self-directed IRA, for example, with a broker who allows me to tax their mini-account server with hundreds of auto-trades a day. Most brokers wouldn't trade-off precious bandwidth for the pennies they're making on the spread from those trades, but this one doesn't mind. I also place longer-term EUR/USD position trades with another broker, and I day trade the 1-minute chart during the London session with yet another firm. I selected each of these brokers based on the trading style I wanted to use. No broker rankings that I can think of would have been helpful in making those selections.

In general, I look at two major areas when evaluating a broker: (1) Level of Maturity (LOM) and (2) Range of Services (ROS). In determining a company's LOM I collect a range of data (some quantitative, some qualitative) from a number of sources that identify and/or define attributes like age, trustworthiness, customer service, consumer confidence, and financial viability. Determining ROS is a little easier because I have a pretty exhaustive list of easily measurable services, features, and offerings that a broker should provide if they are going to get my business. Within these two categories (LOM & ROS) I have defined 62 data points that make rating a broker an objective, statistical analysis exercise. It's a time consuming process, but my money is at stake so I take the time. It's called due diligence.

Over the course of the next few weeks I'll be explaining pieces of my broker selection methodology here on Turtle Soup. We're working very hard at ForexTurtle to automate the process and incorporate it into our DATAINSIGHT facility.  Our goal is to provide a more accurate, objective, and efficient web-based broker comparison tool. We think that ranking brokers from 1 to 10 will soon become obsolete. So stay tuned...