Lesson 6 : Retail Forex Brokers

There's one main types of retail FX brokers offering the chance for speculative money trading: brokers & dealers or market makers. Brokers serve as an agent of the customer in the broader FX market, by seeking the best price in the market for a retail order & dealing on behalf of the retail customer. They charge a commission or mark-up in addition to the price obtained in the market. Dealers or market makers, by contrast, typically act as principal in the transaction versus the retail customer, & quote a price they are willing to deal at—the customer has the choice whether or not to trade at that price.

Retail traders (individuals) constitute a growing segment of this market, both in size & importance. Currently, they participate indirectly through brokers or banks. Retail brokers, while largely controlled & regulated in the USA by the CFTC & NFA have historicallyin the past been subjected to periodic foreign exchange scams.[8][9] To deal with the issue, the NFA & CFTC began (as of 2009) imposing stricter requirements, in relation to the amount of Net Capitalization necessary of its members. As a result plenty of of the smaller, & perhaps open to doubt brokers are now gone.

In assessing the suitability of a FX trading services, the customer should think about the ramifications of whether the service provider is acting as principal or agent. When the service provider acts as agent, the customer is generally assured of a known cost above the best inter-dealer FX rate. When the service provider acts as principal, no commission is paid, but the price offered may not be the best obtainable in the market—since the service provider is taking the other side of the transaction, a conflict of interest may occur.