Forex brokers control your deposited money so it is important to understand what some have tried to get away with in the past so as not to fall victim to outright scam or unethical practices.
An official of the National Futures Association was quoted as saying,
"Retail forex trading has increased dramatically over the past few
years. Unfortunately, the amount of forex fraud has also increased
Between 2001 and 2006 the U.S. Commodity
Futures Trading Commission has prosecuted more than 80 cases involving
the defrauding of more than 23,000 customers who lost $350 million. From
2001 to 2007, about 26,000 people lost $460 million in forex frauds.
to Michael Dunn from the US Commodity Futures Trading Commission,
currency trading "has become the fraud du jour" (fraud of the day) as of
early 2008. However "the market has long been plagued by swindlers
preying on the gullible," according to the New York Times. The average
individual forex trading victim loses about $15,000, according to CFTC
records says The Wall Street Journal.
The North American
Securities Administrators Association says that "off-exchange forex
trading by retail investors is at best extremely risky, and at worst,
outright fraud." They say that; "In a typical case, investors may be
promised tens of thousands of dollars in profits in just a few weeks or
months, with an initial investment of only $5,000. Often, the investor’s
money is never actually placed in the market through a legitimate
dealer, but simply diverted, stolen, for the personal benefit of the con
To review some reputable brokers, go to forex broker reviews.
Retail foreign exchange brokers
are two types of retail forex brokers offering the opportunity for
speculative trading: retail foreign exchange brokers and market makers.
is not widely understood that retail forex brokers and market makers
typically trade against their clients and frequently take the other side
of their trades. This can often create a potential conflict of interest
and give rise to some of the unpleasant experiences some traders have
had. A move toward "No Dealing Desk" (NDD) and "Straight Through
Processing" (STP) has helped to resolve some of these concerns and
restore trader confidence, but caution is still advised in ensuring that
all is as it is presented.
Retail forex brokers
traders (individuals) are a small fraction of this market and may only
participate indirectly through brokers or banks. Retail forex brokers,
while largely controlled and regulated by the CFTC and NFA might be
subject to foreign exchange scams.The retail forex (retail off-exchange
currency trading or retail FX) market is a subset of the larger foreign
It is now possible to trade cash FX, or forex
(Foreign Exchange) or currencies around the clock with hundreds of
foreign exchange brokers through trading platforms. The reason that the
business is so profitable is because in many cases brokers are taking
the opposite side of the trade, and therefore turning client capital
directly into broker profit as the average account loses money. Some
brokers provide a matching service, charging a commission instead of
taking the opposite site of the trade and "netting the spread", as it is
referred to within the forex "industry."
brokers have become increasingly regulated. Minimum capital requirements
of US$20m now apply in the US, as well as stringent requirements now in
Germany and the United Kingdom. Switzerland now requires forex brokers
to become a bank before conducting forex brokerage business from
maker is a firm that quotes both a buy and a sell price in a financial
instrument or commodity, hoping to make a profit on the bid / offer
spread, or turn.
In foreign exchange trading, where most deals
are conducted over the counter and are, therefore, completely virtual,
the market maker sells to and buys from its clients. Hence, the client's
loss and the spread is the market maker firm's profit, which gets thus
compensated for the effort of providing liquidity in a competitive
market. This extra liquidity reduces transaction costs and therefore
facilitates trades for the clients, who would otherwise have to accept a
worse price or even not be able to trade at all. Most foreign exchange
trading firms are market makers and so are many banks, although not in
all currency markets.
Foreign exchange brokers usually have to
register with some regulatory agency or association. You can find out a
lot of information about them including principles names, history,
disciplinary problems and complaints by checking out the regulatory
Before doing business, ensure you are dealing with a reputable firm.
Some of the regulatory agency's websites are as follows;
USA Go to The NFA's BASIC system
Australia Go to ASIC MoneySmart website
How to Choose a Forex Broker
There are thousands of forex brokers to choose from worldwide, so how
do you choose one or two or three? What? Yes, you read correct. I
recommend diversifying your trading funds between two or more brokers.
The old saying still holds true, "don't put all your eggs in the one
The reality is that nobody knows what tomorrow
brings. On the other hand, being in the business of "being a Forex
Broker" is very profitable undertaking. Which in turn is positive to
clients as the future of the brokerage firms should be long lasting
However, remember Barings Bank (1762
to 1995) the oldest merchant bank in London until its collapse in 1995
after one of the bank's employees, Nick Leeson, lost 827 million pounds
or 1.3 billion dollars speculating primarily on futures contracts.
(Wikipedia Encyclopedia – Barings Bank).
Some brokers offer
segregated client accounts, which protect the client in case of the
unlikely event of the brokerage firm going bankrupt.
List of considerations to suite your trading requirement can be summarized as follows;
Use a ECN or Non-ECN Account?
Read about brainyforex's experience comparing a ECN Account with a Non-ECN Account. If you or your automated trading system trades on smaller time frames this is a must read here.
recommended reading is a excellent article by TulipFX. They consider a
metatrader broker PLUGIN which can be used by brokers for their benefit.
Read more here.
Take a look at Brainyforex's list of broker recommendations here.
Have you used a forex broker in the past? We would love to hear your experience at brainyforex public reviews. Go there now.