Choosing a forex broker can be a very daunting task because the number of available options is overwhelming. With so many brokers advertising themselves as being the best, people go to specialized websites to read reviews and see broker rankings hoping they will find which broker is their best choice. But the more they read, the harder the choice becomes. If you are serious about investing in the forex market and are looking for a reliable broker, I am certain that you’should forex traders battle the banks already seen plenty of lists filled with brokers, and you’ve probably read a lot of both positive and negative reviews about many of them.
If you check the forex forums where people discuss about brokers you will notice that opinions range from “My broker is awesome! Technically speaking, a broker that has a license to provide trading services to its clients is a legitimate broker. The license must be issued by a government institution that regulates financial services providers. Most brokers get their license in their home country and then register with the regulatory bodies in other countries where they have large operations. As for the brokers that do not have a license, they are to be avoided. I will talk more about market makers later in this article.
Since this article is about finding a good forex broker for large accounts, it is important to note that not all brokers are suited for people willing to invest more and trade big, and many of the regulated and legitimate brokers are not recommended when it comes to bigger investments. What is considered a large forex account? There is no definition of what represents a “large account” but I would say that any account with 10,000 USD or more should be considered large because it allows the owner to place very large trades with the use of leverage. I believe that anyone wishing to invest a large amount in forex trading should read further because the next part of this article will explain why it is very important to have the right broker when it comes to large accounts. Market makers and why you should avoid them if you plan to trade with a large account What many people disregard when it comes to forex trading is what actually happens with the trades they execute.
Who takes the opposite position of the trade? In the forex market, just as in any other financial market, in order to execute a trade you need a counterparty. In order to win money someone has to lose it. Your trade will not be executed anywhere except on the platform provided by your broker, which will be your liquidity provider. You buy from your broker, you sell to your broker. Think about your broker as the foreign exchange shop you find in an airport where you exchange currencies. You give them one currency in exchange for another at the prices decided by them.
When it comes to forex brokers that act as market makers the situation is a bit different, because each trade you open will also be closed at a later time. Market makers act just like bookmakers. They give you the possibility to bet against them on the evolution of currency pairs. This is why in the United Kingdom market makers were forced by the regulators to call their services “Spread Betting” instead of “Forex Trading” in order to reduce any possible confusion. But why are market makers so happy to take the opposite trade against any client? Remember when earlier in this article I said that not all legitimate brokers are suited for big investors? I was talking about the market makers.
Big investors usually know much better than casual traders how to trade and have a much higher rate of profitability. This makes them dangerous for market makers as they may end up losing money against such traders. While they are suitable for small accounts because small winnings are not an issue for such large international brokers, they are not recommended for large accounts because of the conflict of interest. Because of the way they operate, market makers will usually advertise themselves in a way that attracts amateur traders and is not attractive for professionals. Casual traders are the most profitable for market makers as they have a very small rate of profitability. STP brokers when it comes to large amounts ECN stands for Electronic Communication Network and is an electronic system that connects retail traders, brokers and liquidity providers in an exchange-like environment.
An ECN broker is a forex broker that processes all orders electronically directly to its liquidity providers without a dealing desk. When using a STP broker your final counterparty will be a third party, which is one of the broker’s liquidity providers. This means the broker is not having a conflict of interest with you because it will not make money from your losses. By giving you direct access to the network of liquidity providers to which the broker is connected to, you trade on behalf of the broker directly against the liquidity providers offering the best quotes. Ok, so if a STP broker allows you to trade directly against its liquidity providers, how does the broker make its money? The broker can add a so-called “markup” to the spread displayed in the platform.
Let’s say the broker adds a 1 pip markup. If the liquidity provider has a spread of 1 pip, the platform will display a spread of 2 pips. The broker may decide to charge a commission for your trading and let you trade directly on the liquidity providers’ spreads. In both situations, the broker is not your final counterparty and it is not losing money when you make a profit.
An ECN broker will always prefer for its traders to win, because this will ensure you trade more volume and for a longer period of time. The broker makes money only from the volumes you trade, so it will be happy to have a winning trader. This is why it is highly recommended to open an account with such broker when you intend to deposit large amounts of money and trade high volumes. It is important to understand that most retail forex brokers are market makers. While the ECN model is profitable for the broker on both winning and losing traders, it also carries additional costs and generates less profits from losing traders.