How Are They Dealing?

A very important aspect of choosing a broker is learning how they are dealing in the currencies. You see, some brokers operate the retail side with a dealing desk, and in this case if you are winning it may be that the broker is losing. When the broker sets the rates, the system is open to manipulation.

One thing to look for is whether the broker offers fixed spreads between the bid and ask prices. If so, you can be fairly sure that he is running a dealing desk and setting his own prices. Normally the markets would dictate that the spreads will vary during the day.

And if the broker is running a dealing desk, there are several ways that you may find yourself the victim of some manipulation. For instance, the broker can send a fake spike in the price which will close out your position on a stop loss, rather than letting you ride a profitable position. Such events have been reported, along with screen captures of the charts, on some of the Internet forums. It seems from inside information that some brokers may routinely spike up to 15 pips to make this work. You may also find the broker giving you a false quote when you’re trying to close a winning position.

I can understand that this might come as a surprise to you, as conventionally it’s believed that the broker makes all of his money from the spread between the bid and ask prices. Some honest ones do, but if you use a broker who operates a dealing desk it’s really up to him how he quotes his prices, and if he’s not happy with the market spread you may find that he quotes a wider spread to get additional compensation.

One way to get around these concerns is to use an ECN broker. ECN stands for electronic communication network, and this gives you the same standard information and quotes as any other trader. When you use an ECN broker you get a custom interface that connects you directly to the market. In this way, you can be sure that you’re not trading against broker, and avoid any conflict of interest. The rates on the ECN system come directly from the interbank system.

Now this does mean that the spreads vary during the day. During busy times the spreads will get smaller because of the activity, but at slack times the spreads can get even larger than you expect — they could increase to as much as 10 pips, even though they may be just two pips when the market is busy. Some brokers that offer ECN accounts are Dukascopy, M.B. Trading, Currenex, Hotspot, and FXDD.

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