From the April 2013 issue of Futures Magazine • Subscribe!

7 steps for test-driving forex brokers

Kick the tires.

Assuming you still are interested in a broker after doing this background research, it’s time to start considering some of the specific disclosures and services the firm offers.

Wuertz recommends that traders pay particular attention to the risk disclosure that brokers are required to provide every customer. In addition to spelling out the specific risks traders face when trading off-exchange, it also must disclose the broker’s total number of accounts over the last four quarters, as well as the percentage of those accounts that were profitable and the percentage that lost money over those quarters, she says. “Over the last four quarters, if 50% or more of customers have lost money, that’s an important piece of data.”

Additionally, you need to learn how the firm makes its money at this point. Because the spot forex market is off-exchange, that means your trading partner often times is your broker, which is a direct conflict, according to Wuertz. “The terms of the trading system are regulated by the dealer, and it’s not a regulated exchange,” she says.

This directly ties into how a broker handles the bid-ask spread. Because you are trading off-exchange, there is no standard spread that will be offered from all brokers. This means the spread you see for a currency pair may be different from the spread the next trader sees at a different broker. 

According to Rockefeller, there are a couple of ways firms generally handle the spread. “Some do matching, meaning that if you want to sell yen, you can only get a price for it if they have a customer on the other side willing to buy it for that price. Then there are true brokers who will go out into the rest of the brokerage universe to find somebody for the other side of your trade,” she says. “[And] there are the market makers who take the other side of the trade themselves.”

At this point in evaluating a potential broker, Rockefeller also recommends that you look for third-party reviews and opinions to see how other traders have fared. “A good practice is to go to Google and just type in ‘critique or review of’ the broker you are looking at, and see what pops up. Then you have to use judgment whether a person has a grievance that is legitimate,” she says.

Popplewell agrees that user reviews can give you a greater insight into a brokerage. “Read what the actual users’ experiences are. Some people undervalue this, but you certainly get honest feedback,” he says.

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