Who is a modern broker?

You can’t just walk into the New York Stock Exchange and ask to buy some shares there. Brokers pay to have access to the exchange, and in turn provide that access to retail traders for commission fees on trades, monthly fees, or service fees. The same goes for futures and options contracts.

A forex broker has agreements with multiple banks to provide the liquidity and price quotes offered inside their trading platform. They have essentially created their own market where retail traders can interact with other trades, buy and sell from the big banks, and have access to opportunities they otherwise wouldn’t.

“You can be free. You can live and work anywhere in the world. You can be independent from routine and not answer to anybody.” – Alexander Elder

Binary options brokers also create a market. They provide retail traders with pre-set payouts and risk. The retail trader never actually owns the underlying asset; rather, the trade is a bet between the broker and trader.

All brokers provide a history of trades, and also track the performance of current trades. They show the current loss or profit on the trade, the entry price, the asset name, and commissions charged.

Brokers are also risk managers. For brokers that provide access to exchanges such as the stock market, the stock exchange and other governing bodies implement rules to control risk. This helps keep the financial system stable.

One such rule is leverage. For example, in the US, stock trades held overnight are limited to 2:1 leverage. If you have $50,000, you can hold $100,000 worth of stock positions. This helps limit risk to the individual, the broker, and the financial system. Imagine if a person with an account worth $100 could buy $1 million worth of stock.

What if that stock dropped by 50%? The trader now owes $500,000, but wouldn’t be able to pay it. Brokers, combined with regulations, try to prevent such scenarios from occurring. In the forex market, brokers offer 30:1 leverage and higher.

It is a broker’s job to impose risk limits, such as leverage requirements, and to stop traders or close positions where the trader doesn’t have enough funds to cover a loss. Binary options are different, since the payout and risk are fixed. Traders only put into the trade what they are willing to risk, in exchange for a fixed payout if they are correct on the trade.

Each broker’s trading platform is a bit different. Some are simple – just a chart of an asset’s price history and the ability to buy and sell. Other platforms include in-depth analysis, chart pattern recognition, analyst recommendations, risk/reward calculators, economic and financial data and analysis, and position sizing calculators.

There are also companies that create and maintain trading platforms, but are not brokers. MetaTrader is the biggest example of this. Most forex brokers offer MT4 and MT5 software. This is not the broker’s software; they are simply licensed to use the platform by MetaQuotes, the company who makes MetaTrader 4 and 5.

In addition to the trading platform, brokers may offer other services such as trade recommendations, economic calendars, daily or weekly market analysis newsletters, price charts, or copy trading services. Copy trading is when clients are allowed to copy the trades of a willing successful trader.

The successful trader usually receives a fee for taking trades, and the broker gets a commission from the copied trades. Read our broker reviews for a full breakdown of the services each broker offers.

Some countries have stricter regulations than others. US regulators want to verify any broker offering services to the US residents. Other countries allow their residents to make their own decisions, and thus you may be able to trade with a broker that is regulated and situated outside of your home country.

This scenario is common in forex and binary options where most of the brokers are situated in tax-haven countries, and most of the traders are situated in first world countries such as Canada, the UK, Germany, Australia, and so on. Assuming that a broker is regulated, it is subject to the conditions set out by the governing body.

Regulations it must follow include leverage limits for clients, which assets it can offer for trade, and the ability to pay clients what is owed to them. There may be different governing bodies for different markets, such as a governing body for stocks, for futures/forex, and so on. Here are several broker governing bodies around the world:

United States: The National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC)

United Kingdom: Financial Conduct Authority (FCA)

Australia: The Australian Securities and Investments Commission (ASIC)

Japan: The Financial Services Agency (FSA)

Canada: The Investment Industry Regulatory Organization of Canada (IIROC)

Cyprus: Cyprus Securities and Exchange Commissions (CySec)

“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.” – Paul Tudor Jones

Broker Theft

Broker theft is when a broker just takes your deposit. You may not even get to trade, or you may be able to trade it but the money you deposited is gone and you are essentially trading with play money; profits you do make aren’t real, and when you go to withdraw you won’t be able to. The theft could also be more discreet: they may say you lost a trade when you actually won.

Such fraudulent schemes are often perpetrated by very new companies or websites. Avoid brand-new brokers unless they are regulated in a major country like the US, Canada, UK, or Australia for example. It will be harder for a fraudulent company to be approved by these governing bodies, and thus fraudsters probably won’t try.

If a broker is new, and regulated, check on the regulator’s website if the broker is in good status. Some brokers may lie and say they are regulated when they actually aren’t.

“Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.” – Larry Hite

Brokers Front Running Orders

You see a great trade and the price is starting to rise. You hit your “buy” key….but there is a lag. You wait as the price keeps rising. Finally, your order goes through – way higher than you expected. The lag could have just been your slow computer or internet connection, but that’s probably not the case if you could still see the price moving up.

What could have happened? The broker may have seen a bunch of buy orders coming in, and instead of letting customers get the lower prices, the broker started buying instead. Once they have their position, they let the customer’s order go through, pushing the price up some more.

This is called front-running. In the old days, if a broker knew a client had a big order they had to execute that would push the market up (or down), the broker would buy (or sell) some beforehand. This makes for a quick easy profit…but it is illegal.

Dealer Desk Rip-Off

“Dealer desk” brokers are often taking the other side of your transactions. When you buy, the broker is selling to you, and vice versa. A non-dealing desk means you are buying or selling from/to some other market participant, but not your broker.  Dealer desk brokers have a conflict of interest with you, since they don’t want to lose money if you win.

As discussed above, a dealer-desk broker will often give you a worse price than you expected, or may pause or re-quote the order when you need to get in or out quickly, resulting in missed opportunities or taking a bigger loss. By doing so, they protected themselves instead of you.

Avoid dealer-desk brokers if possible. They may be regulated, and being a dealer-desk isn’t illegal, but I personally would rather always be getting the real price in the market than the price my broker thinks I should get.

The Broker Uses Your Funds…For Whatever They Want

The world was rocked by the downfall of FTX, a crypto currency exchange and broker. It was essentially a massive house of cards – the funds weren’t there to make payouts to customers. Brokers should keep customer funds in a segregated account, so that it can’t be used for other purposes. That is not the broker’s money…it’s yours.

The broker then pays their bills and expands using the profits they make, which should NOT be done using client funds.  Look for brokers that offer segregated clients accounts. This means they can’t touch your money, and it should be safe even if the broker goes bankrupt.

That said, there is no way to know for sure that someone isn’t sneaking in there and stealing funds, but at least knowing the broker has segregated accounts and reveals how that process works may provide you with a better night’s sleep.

How to choose the right forex broker?

Pick a forex broker that is regulated. You should choose a broker that offers ECN or STP processing, not a dealer desk. This means your orders are directed directly to the real market instead of to the broker’s desk, where they may be taking the other side of the trade.

Vantage Fx and NPBFX are examples, check the reviews about it. Also look for a forex broker that offers segregated clients accounts, so they can’t use or lose your money if they get in financial trouble.

Where are the best brokers situated?

There are great brokers all around the world, such as Plus500 which operates in several jurisdictions. “Best” is subjective. Some people place more value on low fees, while traders with very large accounts may place more value on safety of funds.

Generally speaking, brokers that are regulated by large or multiple governing bodies will be under more scrutiny and thus less likely to be fraudulent than brokers that aren’t regulated or that are only regulated by a tiny governing body in a place you have never heard of.

Who is the best binary options broker?

The best binary options brokers are regulated, have segregated client accounts, and offer true market pricing on their assets. Compare the prices the broker is quoting compared to the underlying asset’s price listed on TradingView or some other charting platform. This way you can tell if the broker is manipulating the price so you lose more often.

What do I do if I can’t withdraw funds from my broker?

The first step is to contact them. It may be a fixable issue. Don’t assume immediately they are acting fraudulently. If the problem persists and you’re getting the “runaround”, contact their regulator. The regulator is usually listed at the very bottom of a broker’s website or in their About Us or Regulation section.

Is a no-commission broker a good idea?

On the surface, not having to pay commissions looks great. But that broker needs to make money somehow. If they don’t charge commissions, how are they making money? They may be charging other fees, they may be taking the other side of your trades and profiting that way, they may be selling your order information to other people.

An up-front and transparent commission may be preferable to those possibilities. You need to know how your broker makes money. If you don’t, it’s coming from you and other traders – or it may be an illegitimate operation.

Which broker trading platform is best?

Trading platforms come in all shapes and sizes. One that allows you to execute your trades quickly and efficiently is all you need at a basic level. If it is hard to use, your trading will likely suffer. Having nice candlestick charts is a bonus, but not a requirement since there are many free and paid charting sites which could be used instead of a broker’s charts.

Final Thoughts

Choosing a broker is one of the biggest trades we make, because we are trusting our capital with that broker. Remember to check that your potential broker is regulated and keeps client deposits in a segregated account. Choose straight through processing (STP or ECN) brokers over dealing-desk brokers who may manipulate your orders.

I hope this information was helpful in your search for a reliable broker. Check out our broker reviews as a starting point for finding the best trading platform for you.