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 follow what is known as a B-Model, which essentially trades, or “hedges” against client positions, of which approximately 70-80% are unprofitable. 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 set up relationships with those pursuing a ‘clean’ model. Please note that options are limited for small (under $2,500 deposits) US-based clients.
We look for ECNs with true straight through processing and extremely low to potentially inverted spreads not uncommon on certain platforms (eg C-Trader, MT4 will not support). Low comparative commissions and all the benefits of an ECN: no requotes, no trading restrictions and access to deep liquidity and depth of book.
Outside of the US:
Everywhere (NFA Registered / Legal for US Citizens):
Edit: As of September 1, 2016, Interactive Brokers will be accepting ECPs only (for interbank Forex transactions). Only options left in the US for retail clients are IBFX (Tradestation), Oanda, FXCM and Gain. If you trade primarily US sessions and generally the most liquid pairs only, try futures. I recommend NinjaTrader as a platform for most traders, Autospreader for synthetics / arbitrage traders. Ninjatrader acts an an introducing broker for Dorman Trading for futures, FXCM for Forex. Regulation has essentially squashed retail competition here in the US and these companies more or less monopolize this segment of the industry much 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.