Every individual investor who wants to dabble in foreign currency trading has to channel his transactions through a broker who has established linkages with the interbank market. It is only through these brokers that the individual investors will be able to access the special rates of exchange the interbank players conduct business with each other.
The interbank market used to be the exclusive turf of the major banks and large financial institutions. They conduct the buying and selling of various currencies among each other through the use of electronic communications networks set up specifically for this purpose. There are two major networks that connect the major interbank players – Reuter’s Dealing 3000 and the EBS or Electronic Broking System owned by ICAP Plc, a UK based company.
Through time, the need to have more liquidity left the interbank players no other option but to open the doors of the interbank currency market to individual investors. The advent of more efficient communication systems and the emergence of retail forex brokers made this possible.
Brokers sprouted like mushrooms all over the globe to serve as the various conduits between the interbank market players and the individual investors. The trading platforms they offered are digitally linked to electronic communications networks of the interbank market; thus, allowing them to offer the same interbank rates to retail forex clients.
Unfortunately, the brokers are not created equal. They differ from each other in many ways - from the buy-sell spreads they offer, the range of leverage they give, to the quality of service and order execution they provide, not to mention the other value added services and tools of the trade they offer to beef up their services. Naturally these are the things you should consider as your basis of comparison when choosing the best broker for you.
Of course you should also consider the customer feedbacks from various online forums but pay particular attention to the negative comments. They should give you an idea of the kind of service they provide. Add some sense of security to your investment by also looking into the registration and affiliation of the broker.
As a rule of the thumb, you should never deal with a broker who is not affiliated with or under the supervision of a bona fide financial regulatory body. For US based investors, make sure your broker is registered with the CFTC and at the same time a member of the NFA. For brokers based in other countries, make sure they are affiliated with a legitimate regulatory body in those countries and not just from any trumped organization in the Cayman Islands. This should give you some peace of mind knowing you have a ‘big brother’ you can run to in case things turn topsy-turvy.
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