What's the Best FOREX Broker; Part 2

Here we continue our look at FX brokerage and try to find What's the Best FOREX Broker.

And because there is so much to consider when selecting a forex broker, we have had to break this down to 3 separate blogs.

1. What's the Best FOREX Broker Part 1
2. What's the Best FOREX Broker Part 2 – This blog
3. What's the Best FOREX Broker Part 3

Once we went through all this, here is what we selected: Best Forex Trading Broker

Is the Forex Broker Regulated

Despite the FX market being the largest financial market in the world, it remains largely unregulated.

You are free to trade FX with either Regulated or Non-regulated brokers. This is your choice.

But we would strongly suggest you to trade with a regulated broker whenever possible.

Also most countries have their own regulation authorities that often impose quite different rules on their brokers. Some of which are very laxed and others that are extremely strict!

GLS Equity What's the Best FOREX Broker Part 2 Regulated

3 of the strongest Forex regulators in the world are:

USA

NFA (National Futures Association)
CFTC (Commodities Futures Trading Commission)
FINRA (Financial Industry Regulatory Authority)

UK – FCA (Financial Conduct Authority)

AU – ASIC (Australian Securities and Investments Commission)

Yes there are many others that are in countries like Cyprus and Belize, but these are generally less stringent, although they are getting a lot better recently.
But even this level of regulation is still better than none IMO.

Here is the basics of what to look for in FX regulation.

The regulators also do an initial check up on the owners, check their past etc. and look for any potential red flags. And they check for funding and cash reserves.

As an example of this, most regulated brokers in the FX industry are obliged to keep available sufficient funds to complete all their clients’ foreign exchange transactions. They must also keep sufficient funds available in reserve. This is to return to their clients if something goes wrong in the markets or there is a very volatile market movement that catches other traders out.

I have seen regulators demand brokers start with and keep on hand access cash starting at just 30k, right up to 20 Mill for US brokers.

The main reason for this is if the market moves abnormally fast in any one direction, it can go past the stops. And with many brokers offering very high leverage, this can end up hurting a lot. You can have people losing more than what they have in their accounts.

How many of these customers do you think add more funds after to payback their broker… This then leaves a shortage of funds in the remaining customer accounts (remember they are all
pooled together).

Bad things do happen…

This short fall either gets topped up by the broker, or the broker goes bankrupt. If the broker cannot top it up initially they may just keep going hoping to make the money back. And as long as not too many people pull their funds out, they maybe able to do this (or potentially make it worse).

In general regulated brokers are audited initially when they apply for their license and then on a regular ongoing basis. This is to ensure that they are in fact following the rules and regulations set forth by their regulating body.

The non-regulated brokers do not, they are free to do as they please. Sure they may take it upon themselves to do all the right things and even follow what the regulated brokers are doing, but they do not have to and they can change their minds any time.

There is no BIG brother, no one is watching over them…

USA

US regulation is generally referred to as OTT (over the top), and many other related, but perhaps not so polite phrases… : )

US Brokers need to be a member of the:

NFA (National Futures Association) and be registered with the
CFTC (Commodities Futures Trading Commission)
and sometimes FINRA (Financial Industry Regulatory Authority) also.

Here are the key aspects to US regulated FX trading.

You cannot fund your account with a credit card and the minimum amount is about $250 USD
Maximum leverage is 50:1 on major currencies and 20:1 on minors.
The FIFO rule. This rule prohibits hedging by requiring multiple positions held in the same currency pair to be offset on a first-in, first-out (FIFO) basis.

Not only are the rules very limiting for customers (compared to most other countries), but they are also very tough on the brokers.
To be a US licensed broker you need to prove that you have $20 million of freely accessible capital, not including client funds. Compared to around (100K for most other countries).

And the reporting and filing is also equally as extreme!

So this reduces the amount of brokers for US citizens to choose from. Which in turn limits the competition and options / benefits for US customers. Non-US brokers are not allowed to accept US citizens as clients, but they can accept non-US citizens that live in US.

Without going into a full on debate about this, let’s just say their intentions were perhaps good, but not everyone fits in a size 8 mini skirt with pleats.

For many people trading forex under these rules, it has actually increased their risk, particularly the FIFO rule.

Note:

There are other options for US citizens, but this means creating your FX account offshore with companies and countries that do not have financial ties with the US.

We are not saying this is what you should, or should not do. We are just saying from an education point of view that this is an option for some people. The people that do this still report their earnings at year end and pay their taxes in the US.

It is also important to note, these people will not be covered under the US regulations. If something goes wrong with their chosen offshore broker they will be reliant on what ever (if any) regulating authority that that broker has (most likely a lot less than the US).

Forex Pairs Available to Trade

Sure all brokers will offer the top Major currency pairs. But as for the Minors, Crosses and Exotics, you will find this will change from broker to broker.

It will depend on the broker size, who they are using for their liquidity providers, where they are located, who they are registered with (if anyone) and many other things including their own personal preference…

So depending on what you want to trade, you need to look at this.

Personally we like to trade many different pairs so only use brokers who provide this for us.

Forex Broker Customer Support

Some brokers will want to call you daily and tell you about new potential trade opportunities, these are generally referred to as Full Service brokers, but these are less common these days and also focus more on the larger clients and in other markets like Stocks.

Obviously this kind of service comes at a cost to the broker, so your fees will be higher to cover this.

Then you will have other brokers that do not proved a contact phone number, nor live chat support.

And the emails will generally get answered, but not before 24 hours and generally not accurately… But they quite often have lower fees. But not always, there are still a few cowboys out there.

Then you get the majority of the FX brokers that fit somewhere in the middle. They either offer phone support if we need it or live chat and ideally 24 hours a day 5 days a week, basically whenever the markets are open.

So you need to look at your trading and experience then ask yourself;
What kind of support do I need?

Forex Base Account Currency

Most brokers offer the option to have your brokerage account based in a few different currencies.

USD is the most popular, but many also provide the option of having it in Euro’s, Pound or AUD for example and some now even offer it in Bitcoin!

Quite often people will use their local currency if it is available, makes it easier for them to see their P&L, it reduces the potential currency risk between your local currency and brokerage currency and will reduce the fees for deposits and withdrawals (no additional exchange fee).

Say you live in Australia for example, but have your brokerage account in USD, after a month you have made $500 USD, but in that time the AUD has weakened against the USD, so when you go to pull your profit out, there is none, because the loss in the AUD/USD rate was more than your over all profits…

This is generally not such an issue with smaller accounts, but as they grow this is something you need to think about.

If you do use a different base account to your local spending currency, then I would suggest you use a hedge trade.

Here you just create another trade opposite with a similar size and keep the trade open for as long as you have the FX account funded, adjusting it as your trading account adjusts also.

This way any losses due to base currency risk will be offset by the hedge trade. For people that are using extremely volatile currencies like Bitcoin, hedging their base account can be very important!

For more details on how to do this, please contact us here

Continue to part 3 here: What's the Best FOREX Broker

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