We have had our fair share of dealing with FX brokers over the years through both prime brokerage and in smaller scale. In the retail FX market, most brokers have traditionally followed what is known as a B-Model, which essentially trades, or “hedges” against client positions, of which approximately 70-80% are unprofitable. This is starting to change, but still exists. Coupled with this is a market making model, in which brokers pass along artificial, in-house quotes to clients, resulting in a range of very odd restrictions including a minimum trade hold time or common requotes, in addition to inflated spreads. As a result, clients generally lose more money, not to mention the massive conflict of interest between the broker and the client.
Most of your larger brokers do this simply because the money is so good. Following the passage of Dodd Frank here in the US, the number of FCM's carrying forex as a primary product declined substantially, mainly due to the capital reserve requirement. This is good and bad. Good because it ensured money is backing your broker, bad because the “good ones” rarely have entry into the market.
Brokers we are okay recommending, based on execution practices, a lack of government punitive actions, and good reviews found online by clients. We only recommend those pursuing a ‘clean' model.
We look for ECNs with true straight through processing and extremely low to potentially inverted spreads not uncommon on certain platforms. Low comparative commissions and all the benefits of an ECN: no requotes, no trading restrictions and access to deep liquidity and depth of book.
Links below point to rebates at these brokers, with the exception of LMAX. So long as spreads are not adjusted, you should almost certainly get the rebate and keep your costs as low as possible. Its money you would just lose otherwise.
Outside of the US:
At risk of sounding salesy, almost all of these guys regularly offer deposit/VPS, etc promotions as well. Follow the links to CBF and hover the contests and promotions tabs.
Everywhere (NFA Registered / Legal for US Citizens):
Edit: As of February, 2017, the only options left in the US for retail clients are Oanda, TD Ameritrade and Gain (Forex.com). Please make sure you read this:
If you trade primarily US sessions and generally the most liquid pairs only, try futures.
Otherwise, I recommend Oanda or TDAmeritrade for all others. Gain Capital (Forex.com) still operates a strict and outdated B-Model (market making, for retail customers, not GTX platform) and has an unfavorable past in regards to multiple regulatory actions taken against it (here and here). In comparison, Oanda has zero compliance actions or arbitration in its 20 years of existence (here), and runs an STP model. Oanda also beats Gain when it comes to excess book capital. Gain is publicly traded. Oanda is private. TD Ameritrade has them both easily beat in terms of size, due to its large footprint in the retail equities world. Additionally, they, too, have had zero regulatory concerns from their futures and forex business, but have only been registered as such for a little over 2 years. I currently do not know what they use as an execution model, which is why I hesitate.
DON'T choose your broker by bells and whistles, but by cost, execution, reliability and trustworthiness. Never be tied down to a broker because of a trading platform or other tool that you can easily pay for separately.
I recommend NinjaTrader as a platform for most traders (massive community input and overall stability), Autospreader for synthetics / arbitrage traders. ThinkorSwim is also a valuable platform I enjoyed using, and works with synthetics as well, but you are tied to TD Ameritrade, if that's okay with you. Ninjatrader acts an an introducing broker for Dorman/Phillip for futures, FXCM for Forex (this will obviously change).
Regulation has essentially squashed retail competition here in the US and these companies more or less monopolize this segment of the industry like cable or phone providers.
If you are an ECP looking to establish a commodity pool or CTA business feel free to reach out to me with questions as I'm well versed in this world, but have very little written on the topic open to the public. Thanks.
