How to choose good Forex broker?
Proper broker selection is crucial for trading success.
Understanding the forex broker types
There are several types of foreign exchange brokers, from the most legitimate brokerage companies to illegally operating betting companies. Forex traders, whether beginners or experts, should choose a broker carefully to ensure that they work with reliable brokers. Important note is that although most of these brokers usually have the same access rights and quality in the foreign exchange market, the procedures and policies they use are still very different. Each broker also represents a different level in the industry. Some represent high-level expertise in the field and can directly enter the market. There are also some brokers that are far away and have little to do with the market. Researching different types of brokers is the key to maximizing your chances of choosing to help you transform yourself into a successful foreign exchange trader. Below is a list of the common brokers working in the foreign exchange market, their unique functions and roles.
Dealing Desk Brokers (B-book brokers or DD brokers)
The broker refers to the market maker. Dealing desk brokers or market makers usually provide fixed spreads. Most of them also work by choosing to quote below or above the real-time market price at a given time. For beginners and professional traders who do not want to trade directly with liquidity providers, it is wise to cooperate with them. Dealing desk brokers usually get paid through spreads.
No Dealing Desk Brokers (NDD brokers)
No dealing desk foreign exchange broker allows traders in foreign exchange to directly enter the interbank market. Real NDD brokers do not need to re-quote. In other words, traders have the opportunity to trade without restrictions after issuing any economic announcements. Algorithmic trading with NDD brokers can provide low and/or variable spreads. Since the spread is not fixed, there is a big increase in the spread when volatility increases due to important economic announcements. In order to get paid, NDD brokers may increase spreads or charge commissions for each foreign exchange transaction.
Electric Communication Network (ECN brokers)
These brokers provide and display the actual order book details, which usually include processed orders and quotes from different banks in the interbank market. Most ECN brokers work by providing information to all participants in the foreign exchange market to increase market transparency. They charge commissions for each transaction volume in order to get income from cooperation with traders. ECN brokers also allow traders to process all transactions in the interbank market.
Straight-Through Processing Brokers (STP or A-book brokers)
STP brokers can pass transaction orders directly to their liquidity providers. They also do not interfere with order execution transactions. Most STP foreign exchange brokers work with multiple liquidity providers. STP brokers that work with many liquidity providers can also provide their traders with better opportunities to make them successful in the foreign exchange market.
How broker selection affect trading performance?
Brokers using the A-book model transmits all orders to be filled by the broker's liquidity provider (LPs). On the other hand, B-book brokers complete orders in an "internal" manner; a B-book broker is trading against its customers. The pure B-book broker wants you to lose money, because your losses will be converted into broker's income. To this end, the broker will increase your order execution time and introduce order slippage. When you are dealing with MT4 or MT5, STP (A-book) brokers are extremely rare, although you may never want to deal with pure B-book brokers. The best option is a mixed broker.
Account profitability is not the only decisive factor in deciding whether to transfer the account to Book-A or Book-B. Account size and trading lot size are also important. For example, if the trader uses large-lot transactions, the broker may keep the account in the A-book even if the trader loses money, because moving the account in the B-book will expose the broker to unnecessary risks. In addition, brokers have tools to identify traders who use arbitrage trading strategies. If the broker determines that you use an arbitrage trading strategy, your account may be transferred to A-book.
Using expert advisors for trading with Forex brokers
Vast majority of brokers allow algorithmic trading. This is particularly true for brokers, offering MetaTrader platform. But, in some cases, trading with algorithmic systems (HFT or arbitrage) can be disabled in a given account. There are ways however to "mask" usage of EA on such accounts. Observations so far indicates that even with such functionality of programatically hiding the expert advisor's behavior, brokers were still able to detect arbitrage or HFT. Fortunately the Algotradekit Arbiter EA is not typical arbitrage expert advisor, positions are not closed in a matter of (milli)seconds, the deals holding time can vary greatly, so it is nearly impossible for the broker to distinguish positions opened with generic EA and Arbiter EA. There is another con against the idea of disguising any EAs behavior - brokers add artificial execution delay on certain instruments on live accounts (gold is a well-known example) in the range of 100-150ms. In fact most slow brokers know that their quotes are slow, that's why they separate clients account into A-book and B-book in order to reduce exposure risks.
When planning a successful foreign exchange transaction, foreign exchange traders should ensure that they choose a broker that can provide the required services without engaging in fraudulent activities. A good forex broker is the regulated one and will offer algorithmic trading, low transaction costs, favorable overnight swap rates and fast order execution times.
Related article: What is forex arbitrage?