Do brokers really hunt stops? Will my broker trade against me? Will my broker give me really bad fills? These are common questions that new traders have when trying to decide on which broker to open an account with. Choosing a forex broker is a big decision, and in this article we are going to discuss key items to consider when deciding on a broker.
The Dealing Desk Myth
Have you ever heard someone say something like, “Don’t deal with Broker KYZ. They are a dealing desk; they will trade against you and take all your money.” Let’s be clear. Just because a broker does have a dealing desk does not mean that it is engaging in unethical behavior.
If you buy EUR/USD, who is selling it to you? That is a question you need to understand. If your broker has a dealing desk, that means they are dealing you the price that you receive. In other words, if you buy EUR/USD, they are the one selling it to you. This means that your broker is assuming the risk of the position. If you close out the position in profit, they are losing that money, and if you close out the position at a loss, they are making that money.
However, many brokers are now closing the dealing desk and simply passing order through to a liquidity provider. For example, if you buy EUR/USD, these brokers are not selling it to you. They are simply passing your order along to a liquidity provider, usually a commonly-known large investment bank, and they are simply making money on the spread. For example, they may be getting a 0.5 pip spread on EUR/USD. They mark that spread up to 1 pip and pass it on to you. In essence, they are earning 0.5 pips when you make a round turn execution.
Understanding how your broker operates concerning liquidity and dealing operations is important. Remember, however, that just because your broker has a dealing desk, it does not mean they are engaging in unethical broker trading behavior and should be avoided.
Tight Spreads
This is what everyone cares about. How tight are the spreads!!!?? Tight spreads are important, but they are only one part of the service a broker is providing. Be wary of brokers that offer much lower spreads than the competition. If the spreads are too good to be true, then they could be just that.
Spreads have tightened considerably over the last two years, and today most brokers are comparable on spreads. There are still some brokers that offer notoriously low spreads, and much of that is due to proprietary technology. They simply have a competitive technological advantage that allows them to offer those low spreads. Always check how your broker handles spreads during news announcements. Do they widen substantially, and if so will that affect your trading strategy?
Quality of Execution
Although spreads are important, quality of execution is even more important. Some brokers will offer tight spreads, but they may continually re-quote you new prices when you are trying to get in and out of positions. This can be very difficult to deal with as a trader because, generally, when you want to get in and out of a position, you want to do it quickly, not 30 seconds from now. Poor execution can make the advantage of tight spreads completely obsolete.
Educational Services
If you are a new trader, you may want a broker that caters to new traders. Some brokers will offer ongoing educational services such as webinars and workshops to help new traders learn the basics of trading the foreign exchange market. Other brokers will have very poor customer service and expect traders to be able to learn how to use the platform and its features without much support.
Risk Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.
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