Brokers to Avoid

Brokers to Avoid

A broker that meets all of these needs should be a good broker for you, but you still need to be certain that they are honest. Dishonest brokers can be prone to prematurely buying or selling near preset points (commonly referred to as sniping and hunting) or may indulge in other habits that will cost you money.

Obviously, no broker admits to doing things like these, but there are ways to know if they have. The best ways to find out more about your potential broker is to talk to fellow traders. There is no actual list or organization that reports dishonest activity, but a visit to online discussion forums, or a simple conversation will often reveal who is an honest broker.

You should also watch to see if a broker has strict margin rules. Since you are trading with borrowed money, your broker has a say in how much risk you are able to take. You agree to this when you sign a margin agreement for your account. This means your broker can buy or sell at his discretion, to cover the brokerage firm’s interests, which could have repercussions for you.

Say you have a margin account, and your position takes a headlong nosedive before it begins to rebound to all-time highs. Even if you have enough cash to cover it, some brokers will liquidate your position on a margin call at that low point. This action on their part can cost you dearly. You can only find out whether the firm is prone to this kind of activity by talking to other traders.

When this occurs repeatedly, it means that your broker is showing tight spreads but is effectively delivering wider spreads. Rejected trades, delayed execution, slipping, and stop hunting are strategies that some brokers use to get rid of the promise of tight spreads.

Spreads should always be considered in conjunction with depth of book. Oddly enough, when it comes to economies of scale, FOREX doesn't even act like most other markets. On the inter-bank market, for example; the larger the ticket size, the larger the spread is. So when you see a 1-pip spread on an ECN platform, you have to wonder if that spread is valid for a $2M, $5M or $10M trade, which it probably isn’t. In many cases, the tight spread that is offered applies only to a capped trade sizes that don’t work for most of the common trading strategies.

Spread policies change a great deal from broker to broker, and the policies are often difficult to understand. This makes comparing brokers difficult. Some brokers actually offer fixed spreads that are guaranteed to remain the same regardless of market liquidity. But since fixed spreads are traditionally higher than average variable spreads, you can end up paying an insurance premium during most of the trading day so that you can get protection from short-term volatility.

Other brokers offer traders variable spreads depending on market liquidity. Spreads are tighter when there is good market liquidity but they will widen as liquidity dries up. When it comes to choosing between fixed and variable rates, the choice depends on your individual trading pattern. If you trade primarily on news announcements that you hear, you may be better off with fixed spreads. But only if the quality of execution is good.

Some brokers have base the spreads they offer their clients on the type of account the client has. For example; those clients that have larger accounts or those who make larger trades may receive tighter spreads, while the clients that are referred by an introducing broker might receive wider spreads in order to cover the costs of the referral. Other brokers offer the same spreads to everyone.

It is often difficult to get information on a company’s spread policy or its order book depth. Because of this, many traders get caught up in the promises they hear, often take a broker's words at face value. This can be dangerous. The only real way to find out what a company’s policy really is, is to try out various brokers or talk to those who have.

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