A broker can make or break a trader. Your broker provides you with all necessary trading tools and accompanies you on your trading journey, ultimately having a great impact on your trading performance down the road.
With so many important points to consider, selecting a broker can be an exhausting experience for many traders. That’s why we’ve created a checklist guide that goes through all the important points you need to consider before making your final decision. We’ve covered everything from regulation to subjective benefits to make your decision easier.
Check #1: How is the Broker Regulated?
Perhaps the main consideration when choosing a broker is regulation. When you deposit your funds with a brokerage firm, you want to be sure that all industry standards are enforced and upheld and that your money is held safe and treated right. There are many regulatory bodies in the CFD trading industry, which differ by many factors such as capital requirements, maximum leverage and fair market pricing, to name a few, and we’ll cover the main market regulators in the following lines.
The CFD trading industry in the United Kingdom is arguably the most mature CFD market in the world. As at December 2016, there were 104 firms that have been offering CFDs authorised by the Financial Conduct Authority – the UK regulatory body. The United Kingdom is also one of the largest markets with an estimated 135,000 active traders.
The FCA also ensures that UK-regulated brokerages provide fair market pricing to their customers. Fair market pricing ensures that the price of a CFD on a transaction is in-line with general market expectations, which is an important concept fundamental to a fair and transparent trading market. However, the nature of CFDs makes fair market pricing difficult to implement in practice.
One problem that often arises during very volatile market conditions or when trading less-liquid CFDs is that the price can change in a matter of milliseconds, often before the broker receives your trading order. Nevertheless, this phenomenon, known as slippage, sometimes works in favour of the trader and sometimes to the benefit of the broker. Over a large enough sample of trades, the costs of slippage should become symmetrical and average over time.
The Financial Conduct Authority also makes sure that an FCA-regulated broker maintains enough financial resources to operate properly, that the broker regularly reports on it financial standing, that the employed management team has sufficient professional experience to run a brokerage firm and that the broker has a sound business plan for current and future operations.
FCA-regulated firms also have to hold all client funds in segregated bank accounts. This ensures that every pound that goes through the broker can be tracked to its final destination. In case of a bankruptcy of the firm, client funds are protected by the Financial Services Compensation Scheme to an amount up to £50,000.
Everything combined ensures that traders who trade with an FCA-regulated broker have peace of mind regarding the safety of their funds while trading with a fully-regulated entity that abides by strict industry and regulatory requirements.
Brokers that operate in other jurisdictions outside the United Kingdom have to be regulated by the respective regulatory body of the country of operation.
In Australia, brokers must hold an Australian Financial Services (AFS) Licence, which authorises them to advise and make a market in derivatives and FX contracts. As of June 2016, there were 65 CFD brokerages and around 37,000 active traders in the Australian market. Unlike in the United Kingdom, brokers that operate under the AFS are not required to provide fair market pricing, but the AFS does provide a general obligation on all AFS-regulated brokers to operate “efficiently, honestly and fairly.”
Other important regulatory bodies are listed below.
- The Cyprus Securities and Exchange Commission (CySEC) counts around 181 providers and is an important regulator for brokers that operate in the EU. Due to the EU Passport Rule, brokers that are regulated by CySEC are allowed to offer their products and attract customers from all over the European Union, making CySEC a popular regulator for EU-based brokers.
- In the United States, there are two main regulatory bodies: The Commodity Futures Trade Commission (CFTC) and the National Futures Association (NFA). The US market is quite different from other jurisdictions, as traders don’t have access to CFD trading and brokers have very strict requirements that they must meet in order to offer their services.
Check #2: The Broker Type
The broker type is also an important consideration point when choosing a broker. Essentially, brokers can be grouped into two major groups: advisory brokers and execution-only brokers.
Advisory brokers are registered by the corresponding regulatory body to provide advisory services on investments. While this may sound attractive at first, traders should know that there is no free lunch in the market. Advisory brokers charge for their services, usually significantly more than brokers which don’t provide investment advice.
Execution-only brokers have the sole purpose to route your order to the market and execute your trade. They don’t provide investment advice, which is why they’re called execution-only brokers. These brokers have considerably lower transaction costs compared to advisory brokers and traders have to perform their own analysis. If you want to become a full-time trader, we strongly recommend to go with an execution-only broker and do your own market analysis. Only through trials, mistakes and experience – and through learning via an online financial trading courses – will you be able to become a consistently profitable trader.
Brokers can also be grouped by the way they execute your orders. In this regard, the main types of brokers are dealing desk (DD) and no-dealing desk (NDD) brokers.
Dealing desk brokers (DD)
Dealing desk brokers are also known as market makers, as they’re the entity that creates the market for their traders. In other words, DD-brokers take the opposite side of your trade – if you’re buying, they’re selling to you, and vice-versa. Obviously, this creates a conflict of interest between the broker and its customers.
No-dealing desk brokers (NDD)
No-dealing desk brokers, on the other hand, route your orders to internal and external liquidity pools and match your trade with the best available price. They’ll first look inside their own liquidity pool, made up from orders from other traders, and match your order with an adequate counter-order from another trader. In case there’s no counter-order in their internal liquidity pool, NDD-brokers will pass your order to external liquidity providers and execute your trade.
Check #3: What Markets Does the Broker Offer?
The number of markets on offer is also an important consideration when choosing a broker. While most brokers offer all major asset-classes nowadays, including stocks, bonds, indices, commodities and currencies, it’s the number of instruments in each asset-class that sets apart a great broker from an average one.
If you trade stocks, make sure that all your favourite stocks are offered by the broker. Stocks from international market centres are also a great way to diversify your trades and reduce your overall risk exposure to any single market. The major stock indices, such as DJ30, S&P 500, FTSE 100, DAX 30 and Nikkei should also be on offer.
Forex traders should pay special attention to the number of exotic currencies. All Forex brokers offer the major currencies, but only a few list exotics such as the Russian ruble, Turkish lira, Argentina and Mexican peso or Czech krone. These currencies are extremely volatile, which is a prerequisite for Forex traders who essentially live on volatility. If a currency pair doesn’t move, there is simply no way to make a notable profit.
Commodities like gold, silver or Brent crude are also essential to diversify your portfolio and should be offered by your broker.
Check #4: Fixed vs Variable Spreads
Transaction costs are a part of trading; there is no way around it. Brokers usually charge transaction costs in the way of spreads and commissions. Nevertheless, lower transaction costs are not always better. You need to take into account the whole user-experience and services provided by a broker to assess whether a broker has high or low transaction costs.
That being said, brokers that offer a full-range of services (advisory brokers) usually have much higher transaction costs than execution-only brokers. Since your goal is to become a consistently profitable trader on your own, we don’t advise to trade with full-service brokers. Trading is best learned through a thorough education in addition to trials and errors, and an execution-only broker is essentially everything you need to have access to the markets.
Also, the more services and features an execution-only broker provides (think: trading tools and market commentary and research), the higher your transaction costs will be. Certain market conditions can also increase your transaction costs significantly through slippage, which is where a broker with fixed spread has an obvious advantage compared to brokers with variable spreads. Fixed spreads ensure that you always know your transaction cost in advance, anytime you trade.
Check #5: What Trading Platforms Does the Broker Offer?
A trading platform is a trader’s window to the market and the place where he or she will spend most of their time. That’s why a robust, secure and powerful trading platform is a must when selecting a broker.
Many brokers offer proprietary trading platforms, and it’s always a good idea to check their features with a demo account first before applying for a real account. In-house developed trading platforms can be very powerful and feature a bunch of options that can make your trading easier.
On the other side, there are also third-party trading platforms like MetaTrader 4. MetaTrader is the most popular trading platform among retail traders, with a large online community and thousands of available add-ons for any trading style and strategy. The platform features a range of different market orders, advanced charting tools, backtesting capabilities and automated trading – all packed in an easy-to-use interface.
In addition, if you’ve already traded on MetaTrader, you’ll find it much easier to switch to a different broker that also offers MetaTrader.
Mobile trading apps and web-based platforms are also a must in today’s fast-moving financial markets. With mobile apps, you’ll be able to open, manage and close trades directly on your smartphone or table, wherever you are. Some apps even provide research and charting tools, which allows you to analyse the market on the go and place a trade whenever a trading opportunity arises.
Similar to mobile apps, web-based trading platforms provide you access from any computer with a web-browser – in the library, at the airport or in your favourite internet café.
Check Out: 13 Best Stock Trading Apps for Beginners
Check #6: The Broker’s Customer Support
Customer support is an extremely important topic when selecting a broker. Whenever you have questions or issues with your trading platform or trade execution, you should be able to contact your broker’s customer support and ask for help.
Typically, brokers offer a telephone line and e-mail support. However, brokers that really care about their clients should go one step further and add additional ways to contact them. In my personal opinion, live chats are the most convenient and fastest way to resolve any issues you might have. Check the broker’s customer support on its website before you open a trading account.
Check #7: Last but not Least – Subjective Benefits
In addition to all the mentioned points in our check-list, there are also subjective benefits which may help you in determining which broker is best for you.
- What is the general experience of browsing through a broker’s website?
- Has the broker been awarded any awards?
- Are there any partnerships signed with sport or business organisations?
- Does the broker offer any educational material, webinars and e-books?
- Do you have access to independent market research when opening an account with the broker?
These questions may help you to identify the subjective benefits that you have with a certain broker.
Selecting a broker can be a tough and overwhelming endeavour. In our guide on selecting a broker, we’ve provided the most important checks you need to go through when picking your broker.
Regulation is the first on our list, and should also be the first on your list. FCA-regulated brokers, such as Core Spreads, ensure that all industry standards are upheld and enforced, that your funds are kept safely in segregated client accounts and that the broker meets all necessary regulatory requirements which lower risks on your side to an absolute minimum. Also, FCA-regulated brokers have to provide fair market pricing, which ensures that you’re always quoted the best prices in the market.
While advisory brokers may be beneficial to certain traders who require financial guidance, execution-only brokers are the better choice for aspiring traders who want to trade on their own. FCA-regulated Core Spreads is our Preferred Broker and ticks all the above boxes. it is an execution-only broker with fixed spreads, offering one of the lowest and most competitive transaction costs in the industry.
Core Spreads offers both an in-house developed trading platform and MetaTrader – giving you the best of both worlds – featuring mobile trading apps and web-based trading platforms. And in case you encounter an urgent issue, Core Spreads provides a toll-free telephone line, e-mail support and a live chat option directly on its website.
We’ve got a special offer for My Trading Skills students, this can be viewed on the Core Spreads site. If you’d like to learn more about Core Spreads we’ve done a video introducing them:
We’re 100% transparent about how we operate, you can read our disclosure about our relationship here.