SELECTING A CURRENCY DEALER

The only partner a retail currency trader needs is a retail currency dealer.
No two dealers are alike, so care should be taken to select the very best
dealer as your trading partner. We discussed earlier that currency dealers
are different from stockbrokers because they routinely assume the full

risk of your trade and make the market for you rather than simply matching
you with a counterparty on the exchange floor. Currency dealers will
aggregate the positions they are holding for retail traders and offset their
risk by trading with partners on the interbank. This arrangement requires
great faith that the dealer is trustworthy and will not manipulate a retail
trader’s positions in the dealer’s favor.
In this section we look at four key attributes you should evaluate before
selecting a currency dealer. These attributes include a dealer’s product
offering, trading technology, regulatory status, and capitalization.

Product Offering
Currency dealers are a competitive bunch, and you will find that most have
similar product offerings. Ensure that your broker offers multiple lot sizes,
including standard, mini, micro, and even nano lots, but pay close attention
to whether your broker allows flexible lot sizes in one single account. Some
dealers lock micro accounts in their own group as a discount service and
offer reduced customer service. Ensure that you understand which currency
pairs are available and whether they are available for your account
type. Many dealers do not offer the same currency pairs for a mini account
as they do for a standard account.
In this same category, it’s important to understand the dealer’s policy
on interest rate swaps. You may be able to get a better payment on interest

if you call the dealer and ask for it. Take the time to compare the dealer’s
spread on each pair you intend to trade. The difference of a single pip can
mean a difference of several hundred dollars in transaction costs over the
long term. Many dealers also advertise guaranteed stop orders without
slippage, but you must check the fine print to understand the restrictions.
Many of these guarantees are suspended during times of high market
volatility. Make sure that you read the fine print and understand your
trading agreement.
No matter how good a dealer looks on paper, you should test-drive
his customer service prior to opening an account. Call the dealer’s customer
service desks, use his online chat capability, and make sure they are
prompt and accurate with their answers before sending them a dime of
your trading capital. After all, an extra pip on the spread may be worth the
added customer service you get from some dealers.
Finally, we already discussed how margin requirements affect your
ability to apply leverage to your trading account, potentially increasing
profits or losses. Although high leverage and low margin rates may seem attractive,
you should be prudent and use good judgment to ensure that your
margin is set at a level that allows you to sustain losses without wiping out
your entire account. A good currency dealer will allow multiple levels of
margin and allow you to customize your account settings as required.

Trading Platform
The trading platform offered by currency dealers varies from custombuilt
to third-party packages such as Meta Trader. If you are a long-term
trader, you might not need many fancy features; however, if you are a day
trader, instant execution and information about volume could be useful.
You should test drive each currency dealer’s platform by trading on a demo
account until you find a trading station you’re comfortable with and that
you enjoy using. Some brokers have technology that’s so difficult to use
you’ll be glad you took the demo account for a spin. Additionally, only a
handful of brokers offer mobile trading technology. If you need the capability
to trade directly through a handheld device, your choices will be limited
to a handful of brokers for now.

Regulation
It is important to remember that forex is an unregulated market. Fortunately,
in the United States the National Futures Association is beginning
to require that dealers meet certain capital requirements in order to conduct
business in the United States. Traders should seek out currency dealers
who have registered themselves with the regulatory agency for the

country in which they operate, ensuring they are trading with a currency
dealer interested in regulatory oversight. Three of the major regulatory
agencies are the National Futures Association (NFA) in the United States,
the Financial Services Authority (FSA) in the United Kingdom, and the
Australian Securities and Investments Commission (ASIC) in Australia.
Any retail currency dealer worthy of your business will have registered
with one of these regulatory agencies. If not, trader beware.

Capitalization
Currency dealers registered with a regulatory agency are required to maintain
a minimum level of reserve capital to continue making a market for
retail traders. The level of reserve capital maintained by a currency dealer
has a direct impact on that dealer’s ability to remain solvent. Having visibility
to the reserve capital, a currency dealer allows traders to gauge the
overall health of that dealer. In the United States the level of capital required
was recently increased to $5 million, which helped clean out some
undercapitalized and shady currency dealers from the marketplace. The
CFTC is proposing these capital limits be increased to $20 million at the
time of writing. Currency dealers registered with the NFA are required
to report their net capital monthly, and the information is published on


I highly encourage you to visit this site monthly and monitor the health
of your currency dealer as part of your plan to manage risk. In the United
States, currency dealers are not required to segregate client funds from
corporate funds, and many currency dealers have bankruptcy clauses in
their trading agreements that will place you as a debtor to the currency
dealer in the event of insolvency. Let me repeat that in case you are reading
this before bed, because it is very important to understand: If your currency
dealer goes bankrupt, your trading account may not be segregated from
the general operating capital of the dealer. You will be treated as a creditor
in bankruptcy court. You do not want to fight a bankruptcy court to get
back your trading capital among a long line of unhappy creditors if your
currency dealer goes bankrupt!
It is critical to trade only with well-capitalized dealers who are members
of a regulatory agency that requires them to disclose their financial
health so that you can gauge the solvency of your dealer. If you have a
very large account, it might be in your best interest to trade with more
than one broker or consider an account in the United Kingdom, where
segregated accounts are required by law. Whatever you decide, read your
trading agreement closely and always monitor the financial health of your
currency dealer.