How to Pick a Forex Broker
Choosing a forex broker can be a very daunting task because the number of available options is overwhelming. With so many brokers advertising themselves as being the best, people go to specialized websites to read reviews and see broker rankings hoping they will find which broker is their best choice. But the more they read, the harder the choice becomes.
If you are serious about investing in the forex market and are looking for a reliable broker, I am certain that you've already seen plenty of lists filled with brokers, and you've probably read a lot of both positive and negative reviews about many of them. If you check the forex forums where people discuss about brokers you will notice that opinions range from "My broker is awesome! I am trading with it for years and didn't experience a single problem" to "All retail forex brokers are scams and will not give your money back!". The truth is that a lot of self proclaimed forex brokers are nothing more than shady companies without any license that pretend to be serious brokers, but once you deposit your money with them it will be very hard to see any of them back. They make a very bad name for the forex industry, and once someone gets his savings stolen by such company, it is very likely he/she will make wide ranging accusations that will harm the reputation of the entire industry, including the legitimate brokers.
Which forex brokers are legitimate? How to avoid the scams?
Technically speaking, a broker that has a license to provide trading services to its clients is a legitimate broker. The license must be issued by a government institution that regulates financial services providers. Most brokers get their license in their home country and then register with the regulatory bodies in other countries where they have large operations. A broker which is registered in many countries will generally have a larger client base and will be able to offer better conditions and lower costs to its customers.
As for the brokers that do not have a license, they are to be avoided. While there can be honest brokers without a license (by honest I mean a broker that will pay out your winnings and process all withdrawals), it must be clearly understood that unlicensed brokers will always be market makers. I will talk more about market makers later in this article.
Since this article is about finding a good forex broker for large accounts, it is important to note that not all brokers are suited for people willing to invest more and trade big, and many of the regulated and legitimate brokers are not recommended when it comes to bigger investments. Some brokers are targeting only casual traders and are not well equipped to handle high-volume traders, and operating with such brokers may cause a lot of difficulties and awkward situations if you want to trade big (I will later explain why).
What is considered a large forex account?
There is no definition of what represents a "large account" but I would say that any account with 10,000 USD or more should be considered large because it allows the owner to place very large trades with the use of leverage. While many people in the industry will say that large accounts are those with hundreds of thousands of dollars or even millions, I think that a person who is serious about forex trading should act like a big investor even if he plans to invest only ten thousand. Most brokers will classify you as a VIP client if you fund your account with more then ten thousand dollars, so you will be able to take advantage of the best trading conditions if you exceed this amount.
Figure 1: Forex Account Sizes
I believe that anyone wishing to invest a large amount in forex trading should read further because the next part of this article will explain why it is very important to have the right broker when it comes to large accounts.
Market makers and why you should avoid them if you plan to trade with a large account
What many people disregard when it comes to forex trading is what actually happens with the trades they execute. Who takes the opposite position of the trade? Who is the counterparty? In the forex market, just as in any other financial market, in order to execute a trade you need a counterparty. In order to win money someone has to lose it. In order to buy a currency someone has to sell it. So what exactly happens when you open a trade? Let's see...
If your broker is a market maker (like most retail forex brokers are) you will trade against your broker. Your trade will not be executed anywhere except on the platform provided by your broker, which will be your liquidity provider. You buy from your broker, you sell to your broker. Think about your broker as the foreign exchange shop you find in an airport where you exchange currencies. You give them one currency in exchange for another at the prices decided by them. They have a spread between the buy and sell price to ensure they make a profit. When it comes to retail shops where you exchange money, the spread is so big that the shop owners will make a profit even if they are stuck with a very large amount of one specific currency and they have to change it at another third party (their liquidity provider) in order to replenish their stock of the currency in high demand, because their liquidity provider has a much lower spread.
When it comes to forex brokers that act as market makers the situation is a bit different, because each trade you open will also be closed at a later time. Unlike foreign exchange shops, where you can buy Euros with Dollars and then spend the Euros elsewhere, when you buy Euros with Dollars from your forex broker you have only one way to spend your Euros: you can buy back dollars from the broker (closing your position). This transforms your transaction into a bet against your broker on how the currencies will fluctuate. If you have a profitable trade, your broker will credit your account with money and if you lose, money will be subtracted from your account. But the money you earn from a winning trade come directly from your broker, while the money you lose represent revenue for your broker. This results in a conflict of interest between trader and broker when the broker is a market maker.
Market makers act just like bookmakers. They give you the possibility to bet against them on the evolution of currency pairs. This is why in the United Kingdom market makers were forced by the regulators to call their services "Spread Betting" instead of "Forex Trading" in order to reduce any possible confusion. But why are market makers so happy to take the opposite trade against any client? Don't they know that good traders can have good predictions of the market movements and make a profit? This would make them lose money. The truth is that most forex traders end up losing their money, so the market makers will make money out of them. The spread is also helping the market maker and gives it an edge against the trader, so in the long run the market maker will make a profit, or at least this will happen in most of the cases. It works exactly as it works for bookmakers when they accept betting on sporting events. While the bookies will suffer loses in certain situations and some bettors are making money out of their hobby, overall the business is very profitable. The same goes for market makers.
Figure 2: Forex Market Makers
Remember when earlier in this article I said that not all legitimate brokers are suited for big investors? I was talking about the market makers. Big investors usually know much better than casual traders how to trade and have a much higher rate of profitability. This makes them dangerous for market makers as they may end up losing money against such traders. Of course, they will accept large depositors because they hope they will catch the ones who don't know very well what they are doing and will end up losing money, but when they are faced with a client that wins a lot of money on a regular basis they will not like it. Since a lot of market makers such as Exness or Ava Trade are legitimate brokers (they are well regulated and established companies in good legal standing that have a reputation to defend) they will pay out any winnings and process all withdrawals. While they are suitable for small accounts because small winnings are not an issue for such large international brokers, they are not recommended for large accounts because of the conflict of interest. If a market maker is faced with a trader that wins large amounts of money on a regular basis it will have to hedge the risks by covering the trades with a liquidity provider. However, the dealing desk will have difficulties in replicating the trades instantly, especially during news trading or if the trader is scalping. This may force the broker to resort to "tricks" such as requotes, poor execution, slippage, platform malfunctioning or even stop loss hunting. While reputable market makers will not engage in such shameful tactics, they may still be forced to limit your activity during news time and will not allow scalping. In the end, the broker wants to make a profit and if it is losing money with a client it must do something to change that. Hedging the trades is a solution, but the market makers are less prepared to efficiently do that than ECN brokers.
Because of the way they operate, market makers will usually advertise themselves in a way that attracts amateur traders and is not attractive for professionals. Casual traders are the most profitable for market makers as they have a very small rate of profitability.
Why you should trade only with ECN/STP brokers when it comes to large amounts
ECN stands for Electronic Communication Network and is an electronic system that connects retail traders, brokers and liquidity providers in an exchange-like environment. An ECN broker is a forex broker that processes all orders electronically directly to its liquidity providers without a dealing desk. The broker's platform is connected directly to the liquidity providers (usually big banks such as JP Morgan, Barclays or City) and the trades are executed against the liquidity provider offering the best quote. A good ECN broker uses many liquidity providers in order to have lower spreads for its customers, since the system will connect the trader with the best quote available in the system. Such brokers are also known as STP brokers (Straight-Through Processing) since they process the trade directly to a third party instead of being market makers. They are also referred to as "No Dealing Desk" brokers.
When using a STP broker your final counterparty will be a third party, which is one of the broker's liquidity providers. This means the broker is not having a conflict of interest with you because it will not make money from your losses. But how does this work? By giving you direct access to the network of liquidity providers to which the broker is connected to, you trade on behalf of the broker directly against the liquidity providers offering the best quotes. I know this may sound a bit confusing and hard to understand, but think of it as if you are trading directly from the broker's account against the liquidity providers. If your trade is profitable the broker takes money from the liquidity providers and when your trade is a loser the broker will give money to the liquidity providers. This means that whatever you win, you win from the liquidity providers, not from the broker, and whatever you lose, you lose to the liquidity providers, not to your broker.
Figure 3: Forex ECN/STP Brokers
Ok, so if a STP broker allows you to trade directly against its liquidity providers, how does the broker make its money? There are two ways for the broker to do that:
1) The broker can add a so-called "markup" to the spread displayed in the platform. Let's say the broker adds a 1 pip markup. If the liquidity provider has a spread of 1 pip, the platform will display a spread of 2 pips. If you make a trade and market moves 100 pips in your favor you will win the value of 98 pips (100 minus the 2 pips spread) and your broker will win 1 pip (the markup). The liquidity provider will lose 99 pips (100 minus its 1 pip spread). In the opposite situation, when the market moves 100 pips against you, you will lose 102 pips (100 plus the 2 pips spread) and your broker will still win 1 pip (the markup). the liquidity provider will win 101 pips (100 plus its 1 pip spread). In both situations the broker wins, so there is no conflict of interest between you and your broker as the broker makes money when you trade, not matter if you win or if you lose.
2) The broker may decide to charge a commission for your trading and let you trade directly on the liquidity providers' spreads. A broker can charge $10 for a round trade lot which is the equivalent of 1 pip on the EUR/USD pair (this is just an example). In this case the broker makes its money out of the commissions for allowing you to trade directly against the liquidity providers without any markup at very low spreads (the actual interbank spreads).
In both situations, the broker is not your final counterparty and it is not losing money when you make a profit. An ECN broker will always prefer for its traders to win, because this will ensure you trade more volume and for a longer period of time. The broker makes money only from the volumes you trade, so it will be happy to have a winning trader.
Since s STP broker gives you Direct Market Access (DMA) and makes money from the volumes traded, not from your loses, it will always be on your side. This is why it is highly recommended to open an account with such broker when you intend to deposit large amounts of money and trade high volumes.
How to find a reliable ECN/STP broker?
It is important to understand that most retail forex brokers are market makers. While the ECN model is profitable for the broker on both winning and losing traders, it also carries additional costs and generates less profits from losing traders. The broker must run a very powerful computer network with high speed connections and maintain a good relationship with several liquidity providers in order to be part of a good ECN with low spreads and fast execution. In addition to that, the broker's markup or commission is only a part of the total spread because the liquidity provider has its own spreads. If a trader loses all his money by paying spreads (assuming he doesn't win or lose a single pip during his trading sessions until he goes bust), a market maker would take all the trader's money. In contrast, a STP broker will win only a part of it, while the liquidity providers will earn the rest.
Considering the above, it is no wonder why most brokers prefer to operate only as market makers and sometimes hedge the trades of very profitable traders. The costs associated with direct market access are also the reason why micro and mini accounts are always provided in a market-making environment where the broker will always be your final counterparty.
Fortunately, the best forex brokers know there is also a very lucrative market for high rollers who trade very high volumes and can generate very good profits under an ECN/STP system. Such traders are also very risky to trade against, so the ECN model is in the broker's advantage because it is risk free. This is why some brokers are giving direct market access to the traders that choose to open the standard or VIP accounts.
The DMA accounts will always have fractional pips (the spread can be 2.7 pips for example) and will never have fixed spreads. Real market conditions where liquidity providers compete against each other to offer better spreads will always result in variable spreads that tend to be lower when there is little volatility and will increase in time of high volatility such as during news. The size of one lot for the EUR/USD pair will always be 100,000. Mini lots and micro lots are never used by liquidity providers.
In the following paragraph I will list three brokers that offer very competitive STP accounts for big traders. They are the ones I consider to be the best choices available right now, in no particular order.
The best forex brokers for large accounts
The three broker accounts I will present below are very reliable choices for high rollers. I am trading with all of them and I am very pleased with their service, since I had no major issues so far. It is worth to check them all and decide for yourself which broker is a better choice for you.
1) XM Standard Account or Zero Account
One of the accounts I recommend most for traders who wish to make big deposits is the Standard Account offered by the broker XM. This account offers all the perks a big trader may need. XM is the trading name of Trading Point Holdings Ltd, the leading financial services company in Cyprus. The broker is the best ECN/STP broker in Europe and it is registered with all the major European regulatory agencies (FCA in UK, BaFin in Germany, CNMV in Spain, Consob in Italy and ACP in France). In January 2016 XM had over 500,000 clients worldwide, making it one of the largest forex brokers in the world.
While some traders may be surprised that I reccomend a broker based in Cyprus for large accounts, the truth is that after trying lots of brokers I ended up doing most of my trading with XM. This broker never failed me and I am trading large volumes with them for over two years already. One thing that makes XM different from other Cyprus-based brokers is that XM (Trading Point of Financial Services) is not based in Cyprus because it was cheaper or the regulation was softer. XM is based in Cyprus because the people behind this broker are Cypriots themselves. The founder and CEO of the company is Mr. Constantinos Cleanthous and all the management is comprised of Cypriots as well, so it was just a normal decision to set the company in their home contry.
If you never had an account with XM, then I really think you should open one and try them, because chances are you will stick with them for most of your trading like I did. This is the broker that anyone must try.
XM offers three account types, the Micro account for beginners (where XM acts as a market maker in order to allow micro lots), and two DMA accounts for advanced traders (which are connected directly to their top tier liquidity providers): the Standard Account (with no commission but with spread markup) and the Zero Account (with commission but no spread markup). Both accounts are very competitive and it is hard to say which one has lower costs.
The XM ECN Accounts stand out for many reasons. Here are some of the benefits for big investors:
► Client funds are secure as XM is working with investment grade banking giant Barclays Plc, one of the biggest banks in the United Kingdom.
► Trade size of up to 50 Lots (this means up to 5 million USD per trade) and a maximum of 200 open trades allowed at the same time. This means you can trade huge amounts of money. An EUR/USD trade with the size of 50 lots will result in a 500 USD value for only one pip.
► Tiered leverage: Up to 1:888 for accounts with 20,000 or less in capital, 1:200 for accounts between 20,000 and 100,000 and 1:100 for accounts larger than 100,000 dollars.
► Low spreads that can go as low as 1 pip and no commissions (for the Standard Account), and very low spreads that can go to almost zero for the Zero Account (which charges a small commission)
► Excellent execution with no requotes and no rejection of orders. XM claims that 99.35% of all orders are executed in less than 1 second.
► All trading strategies are allowed, since you are trading directly against liquidity providers, not against your broker. XM allows scalping as well as any automated trading through EAs.
► Free VPS (Virtual Private Server) for high net active clients. XM’s VPS is located just 1.5 km from their data center in London and uses a high speed internet connection. This will allow your EAs to take advantage of the fastest possible execution without having to worry about internet connection speed. This is the best possible feature for high frequency traders who use EAs as you can trade in the best possible conditions 24/7 without having to keep your computer powered.
There are many other reasons why XM is one of the best forex brokers, but I will let you check their website for additional information about their trading conditions: XM.COM
2) IC Markets True ECN Account
International Capital Markets Pty Ltd is an Australian broker regulated by the Australian Securities and Investment Commission (ASIC). It is the best forex broker in the Southern Hemisphere and one of the best brokers for big traders who want real market access with very low spreads.
As an Australian financial services company, IC Markets is a very safe broker able to handle very large accounts. It offers real direct market access thanks to a pool of Tier 1 liquidity providers that include the following banks: Nomura, Citibank, BNP Paribas, Goldman Sachs, JP Morgan, UBS, RBS, HSBC, Commerzbank and Morgan Stanley.
Here are some of the specifics of the IC Markets True ECN accounts:
► You can choose between Metatrader 4 and cTrader platforms
► Very low spreads starting from 0.0 pips (interbank spreads). This is because IC Markets charges a small commission for trading instead of adding ‘markup’ to the spreads offered by liquidity providers.
► Very good execution and all trading strategies allowed. You can use Scalping Expert Advisors and MQL4 robots if you wish. Since all trades are processed directly to the liquidity providers, IC Markets has no problem with scalping.
Overall, IC Markets is a top tier broker based on a very solid jurisdiction. If you want to find out more about it you can visit their website: ICMARKETS.COM
3) Hot Forex VIP Account (only for clients outside the European Union)
Hot Forex is another top tier broker that offers very favorable ECN/STP accounts for big investors. Hot Forex is the trading name of HF Markets (SV) Ltd, a company registered in St. Vincent and The Grenadines.
While Hot Forex offers many account types to cater to all type of investors, we recommend the VIP account for large investors. The VIP account is directly connected to their network of liquidity providers and allows you to trade directly on the interbank market. Please note that Hot Forex operates a separate business for clients residing in the European Union under the company named HF Markets (Europe) Ltd with a Cysec license. The European version of Hot Forex acts only as a market maker and does not offer ECN/STP accounts, so we don't reccomend Hot Forex for European clients.
Here is what you should expect from the Hot Forex VIP account (non-EU):
► A minimum deposit of 10,000 USD is required for the VIP account.
► Real interbank spreads. They can go as low as 0.2 pips (HotForex doesn’t add any markup as they charge a commission instead of adding markup to the spread)
► A commission of $8 for one lot traded is charged for Forex pairs. This is the equivalent of a 0.8 pips spread markup, so in the end the cost of trading is still very low.
► High leverage of up to 1:300 that can be adjusted lower when the account size is over 400,000 dollars.
► Maximum trade size of 80 lots (8 million dollars) and up to 400 simultaneous open positions.
► Personal account manager, VIP support and three free consultations with their Chief Market Analyst, Janne Muta (must be booked in advance)
There are many other advantages offered by the VIP account, but you can find them on HotForex’s website: HOTFOREX.COM
Trading forex with a large account requires a qualified broker that connects you directly with top tier liquidity providers and works on your side, not against you. Any of the three brokers mentioned above meet this criteria and it is up to you to choose the one that you like most.
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1. FCA (Financial Conduct Authority)
2. BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht)
3. CONSOB (Commissione Nazionale per le Società e la Borsa)
4. CNMV (Comisión Nacional del Mercado de Valores)
5. ACP (Autorité de Contrôle Prudentiel)
6. CYSEC (Cyprus Securities and Exchange Commission)
7. FSA Mauritius (Financial Services Commission Mauritius)
8. ASIC (Australian Securities and Investments Commission)
9. MIFID (Markets in Financial Instruments Directive - Directive 2004/39/EC)