Lies, damn lies! or, Choosing a broker

So, let me tell you the number one thing about Forex - liquidity my ass!

All of the websites tout the "trillion dollar a day liquidity" of the forex market. Sure, when you're on a real exchange, or have an institutional account with a bank. However, most forex brokers play the other side of your trade. So, in order for them to win, you have to lose. Sounds like a conflict of interest, right? You see, all they do is get a quote machine and pass the numbers down to the software they give you. Things like the Metatrader servers (the server side to the client Metatrader) give the broker the ability to set things like spreads, and change prices. So, your money doesn't drift off into the ether of the "forex market" - no, it stays within the confines of their servers and bank account. This is what's known as a "market maker". Now, market makers are part of just about every market - the stock market, for example. These are the companies that buy and sell shares on the market. They create the "liquidity" by being on the other side of the trade. They make their money in the "spread" - or the difference between the bid and ask. However, the stock market makers are highly regulated. The forex market is currently the wild wild west. There are 2 agencies governing these brokers - the CFTC (commodities and futures trading commission) and the NFA (national futures association). However, this is a voluntary association to join. So, forex brokers are under no regulation at this time - mainly because it's sort of an "international" business - since you are dealing with foreign currencies. Now, they also say "no commissions!" Well, this is crap too - they make plenty of money on the "spread". This is the difference between the bid (what people will buy for) and ask (what people will sell for). Brokers can make these whatever they want. It's a built in pain for a trader - they "take" 2,4, sometimes 10 pips - so that if you want to make a profit, you first have to at least cover this spread.

So, what to do? RESEARCH! The first thing to do when considering a broker is to google them for a review - see if there's anything ugly out there. Next, go to the NFA and use their search tool to look up the company. See if there are any actions against them. Also, importantly, look at the "listed principals" (the owners, ceo, etc.). Research these people as well to see if there are any cases against them. Trust me, this will give you peace of mind. I started my Forex adventure with a company called Forex Liquidity. Within 2 months, there was action against them, and their assets (including MY money) are currently frozen. It will be months (maybe 1 or 2 years) before I see my money (or some portion thereof). The customers are low on the totem pole. You can see details here. I don't know if I'll see that money again. I'm glad I didn't move a bunch in there, but it still hurts.

Now, there are other brokers out there called "ECNs" - these are better, if they truly are. ECNs are "electronic communication networks" - but what they try to say is "we just pass your order along". And it will go into a bigger liquidity pool, where there may be several market makers or even other traders waiting to take the other side of your trade. These brokers sometimes charge a commission, or they can also take the spread. These brokers are generally more fair, but I have yet to find one that has decent software for charting and automated trading.

There are some options out there, but do your homework! DO NOT go with a broker who is not registered with the NFA, unless they are a big bank. And watch out - things are never what they seem. Deutsch Bank (huge german bank) got into the action - I thought, "hallelujah!" - until I found out all they did was partner with FXCM. Yes, dbFX is FXCM with DB logos.

Oanda is decent, but they are a market maker. However, they hedge all of their trades (they take a position opposite yours), so this would effectively net to zero (but they still get the spread).