How to choose a reliable broker

How to choose a reliable broker

Do you wonder, “How to select a reliable broker?”. Having read the article, you can identify, whether your provider is a dealing centre or a broker. You will also learn, whether your broker transfers your trades to the interbank market.

I, as most  stock market speculators, thought, that if I worked out my profit-making trading system and sticked to the discipline, I would be rich. But there is one more important thing in stock trading, which I missed, as well as many other stock speculators do. It is choosing your broker. How can the broker influence the profitability of your trading system? To answer the question, it is necessary to know,  how a broker works, and how a broker differs from a dealing centre ( it’s common name is a “kitchen”), which makes profits due to its clients’ losses.

Broker’s work methods

When you initiate a buy or a sell order, a broker immediately transfers your trade to the interbank market. Liquidity suppliers are the financial institutions, which, seeking their clients, charge a reasonable spread. The more the amount of initiated trades is, the more the total spread is, which increases the company's profits. In fact, a trader gets transparent and
favourable working conditions in all markets.

Features of dealing centre trading

It is not a secret, that 75% of all stock traders lose their money and only 25% of them gain. This statistics is not accurate, but the sense is clear. This fact was used by many deceptive companies. Why should they transfer the trades to the market, if most of them will be closed with losses? It is better to keep the money for themselves than to make small profits from the spread difference. That is the work principle of most kitchens. Stock players’ money is not transferred to the interbank market, it circulates inside the company. But what if traders don’t lose but increase their deposits? Many kitchens try to impede money withdrawal in any way. There is a set of methods, kitchens use against successful traders:

1. Slippage;
2. Requotes - rejecting to give a trade upon the price you entered;
3. Spikes (price injections) - a significant deviation of quotes from the real price, aimed at causing financial losses to the clients’ positions.

If all those tricks don’t help, and a trader manages close the trades with profits, then a dealing center can defer money withdrawal or doesn’t answer to the support service referrals, totally ignoring the claims for payments or money withdrawals. A speculator can only go to court, but it turns out that the “kitchen” is incorporated in offshore and doesn’t have necessary licenses and other legal instruments, governing its activities. That means, it is hardly possible to get the money back, as speculator’s profits are the dealing center’s losses.

 

How do you know, whether it is a broker or a dealing center?

On the world wide web, there are numerous ads, inviting speculators to make profits on the exchanges. They corral their clients with the minimum deposit amount, high leverage, which often runs to the absurd, low spreads as well as with different promotions and bonuses. But most of them are “scams” which pretending to be brokers.

Some of them have the sense of conscience, other don’t. How to distinguish them? If you work with a company, specify the speed, the orders are processed at. If there is often a request for a new price when opening an order and the terminal freezes, you are likely to deal with a “kitchen”. Fixed spreads also indicate a dealing center, as brokers, as a rule, apply only floating spreads. If you haven’t chosen your broker yet, pay attention to the following features:
1.         Where is the company incorporated? You shouldn’t work with firms incorporated with “problem” countries. It is good if a broker is registered in a developed country.
2.         A broker should be licensed in all its services. An excellent regulator is FCA, which has recently fined a U.S. broker company, FXCM the sum of more than £4 million, because it used in trading a “skewed slippage” to its benefit.
3.         Use of NDD technology. Trading with «Non-dealing desk» doesn’t involve broker. This ensures a steady speed of orders processing.
4.         Use of ECN accounts. ECN trading system automatically transfers your orders to the counterpart, offering the best price. Broker makes money by charging a fee for each transaction, without any arguments with speculator.
5.         Transparency. If it is a broker and not a dealing center, it will submit upon request all the necessary information, for example, on the liquidity supplier or audit recommendations.
6.         Floating spread. Remember, that in the real market you’ll never find a fixed spread, only floating one. If a company offers you a fixed spread, it is a dealing center.

Before you open an account with a company, study user agreement (terms and conditions), where you can learn whether your broker transfers your trades to the interbank market.

Interesting fact: In the long run, casinos all go broke sooner or later, which cannot be said about speculative trading. Forex and casino are often compared, but for me it is obvious that roulette is pure luck promoted by puppeteers. Earning on currency rates, on the other hand, requires patience and the ability to think and analyze.

How do you know, whether your orders are transferred to the interbank market?

Working with ECN accounts, you see a market depth table, which shows the supply and demand for a certain instrument at different prices. To learn about orders transfer to the interbank market, you need to place the order in the first broker’s market depth and then check its presence in the market depth of the second one. Every order has two numbers, from a broker and from exchange. Having closed the order, check it in the stock exchange by its exchange number
If don’t find your order in the other broker’s depth, then your broker isn’t a broker, but a kitchen.
Remember, that some brokers sometimes require a certain deposit amount, request your ID verification. As not all traders can afford to invest large capitals in the stock exchange, there are also “semi-kitchen” brokers. Usually they offer accounts with a small deposit amount and fixed spread and ECN accounts with a transfer to the interbank market.

Some stock exchange traders think, that one can trade through dealing centers too, as long as they pay fairly. The matter is, that there are such markets when many traders make profits. How will a dealing center act in this case, which is similar to a sweepstake? It won’t be able to pay back, even if willed. So, the difficulties with payments are inevitable.

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