The selection of the right broker is the key role before starting to trade. This is not a simple task and usually the correct or incorrect choice will be obvious only after opening the account, sending the money and trying to communicate any issues with the broker, incorrect position placement or the so called stop loss hunting.
Types of brokers
In order to understand this topic, we will use the basic comparison between the individual broker types with a few examples. The brokers may be divided according to their types into:
1) Market Maker
The name of the broker type itself tells us that it is the one who makes the market. His obligation is to quote the price and ensure sufficient liquidity in the market in order to execute orders. He is obliged to sell and buy for the current market price. It means that if a Forex trader wants to sell, this broker must buy the position from him for the current market price. It is then purely his choice if he keeps the asset or sells it to somebody else. These brokers usually have profit from the spread. In extreme situations, there might be problems with order executions, especially during the news announcements (especially very important macro-economic data).
ECN – Electronic Communications Network. This in fact a place where liquidity is ensured by the presence of large institutions just like the above mentioned market makers, bank or non-bank institutions, private investment companies, etc. These brokers usually live from the trade fees, but they also have very tight spreads.
STP – Straight Through Processing. This is a system where all the transactions are filled from outside, especially by the banks or any other market makers. The bank is then the liquidity provider. Some STP brokers have several such banks, some of them represent a bank. STP broker earns money via spread which may be variable which is seen especially at the important Forex news announcements when the spread extends. The principle is very simple – if one trader wants to sell a lot of a given currency pair, another one wants to buy this lot, the trade is realised not directly between them, but via an intermediate bank.
How to choose the right broker?
As a classic would say, there is no black, there is no white, there are just shades of grey. The priority should be to choose a broker that is regulated so that it cannot make manipulations and tricks. These regulation authorities in the USA include FCM, NFA, CFTC etc. In Europe, it is for example FSE and FSA. It is definitely appropriate to avoid the so called off-shore brokers.
It is important to find out if you are able to trade minilots or even microlots so what is the minimum account size to start with.
Try to contact your broker and you will see how quickly they are able to react and how they will communicate with you. The services of the individual brokers are very different and each traders has its own priorities and expectations.
Last, but not least, it would be reasonable to contact a friend or a colleague who has a real account at the chosen broker and ask him how is satisfied with his services and if ha ever had any problems and yes, what these problems were like.
It is very probable that you will not pick up the appropriate broker for the first time. This broker may be changed anytime, just search and find out as many info as possible.