Market spreads and broker commissions are incredibly important to any trader attempting to scalp. The choice of broker for a scalper is thus a decision that can not be taken lightly.

When it comes to scalping it makes no sense to use a regular fixed spread forex broker. You are better off just plumping for an ECN (Electronic Clearing Network) broker that gives you direct access to multiple bank feeds. The spread on an ECN broker is dependent on the number of bank feeds as well as the overall volume transacted. While many ECN brokers have seemingly similar spreads one area where they differ widely is in their commission costs.

The three ECNs which most interest me at this point as potential candidates for scalping live are:
1/ MB Trading
2/ ADM Derivatives
3/ Interactive Brokers

MB Trading

I have had a backup account with MB Trading (formerly EFX Group) for several years now, so I’m pretty familiar with their trading platform and cost structure.

MB Trading does not have any charting capabilities as part of the Trading Navigator platform. It is thus necessary to use a third party charting package. I have been using NinjaTrader for my charting needs. It is a generally robust charting solution that also now allows a cut down version of the Trading Navigator platform to be used from within NinjaTrader. To complicate matters further, MB Trading does not currently provide any historical data so when starting up NinjaTrader it is first necessary to connect to Gain Capital to download historical data (using a dummy demo account) before switching to using the MB Trading feed.

MB Trading allows leverage usage up to 100:1 and accounts can be opened with as little as $400. They also support micro-lots (1000 units of base currency) which is a huge boon for anyone trading with a small account balance.

The biggest tick against MB Trading is their commission structure. They charge $5 for every $100,000 transaction ($10 round trip), which is double that of the two other ECNs I have short listed.

Their customer service has always been prompt and any issues I have had have always been resolved to my satisfaction. Their customer service is generally considered to be excellent.

ADM Derivatives

ADMD offer slightly different setups depending on your account balance. If you have $25,000 or more you can jump straight in with their Currenex Pro platform.

If your pennies don’t quite reach that far but you do have $2500 you can opt for their Currenex Lite option (which goes by the name of Viking Trader). They allow 100:1 leverage.

In striking contrast to MB Trading their commission is only $2.25 per $100,000 traded ($4.5 round trip).

To balance things out they do have one restriction that I don’t like at all: the minimum lot is a 1 standard lot (100,000 units of base currency). This means that if you opened an account with the minimum amount of $2500 and traded just one lot of EUR/JPY (when EUR/USD was 1.4000) then your initial gearing is 56:1! Oww!

Viking Trader has the basic suite of charting features but the inability to go below a one minute timeframe (i.e. no tick or second options) means these charts aren’t really suitable for my scalping needs. On the plus side you can trade directly from the charts if so desired. ADM Derivatives do not currently have their data feed or historical data supported by any third party applications.

Their customer service seems to be good; any questions I have had during my trial period have been answered promptly to my satisfaction.

Interactive Brokers

IB are a discount broker and seem to allow you to trade everything under the sun. Their forex commission rate is $2 per $100,000 ($4 round trip) with a minimum cost of $2.50 per order. This means that if any transaction is less than $125,000 in size you’ll pay $2.50.

To open up an individual account with IB you need to deposit a minimum of $10,000.

One area where IB are different than most other forex brokers is in their allowed leverage. For the major currency pairs they allow 50:1. For all cross currency pairs they only allow 25:1, which would be the case if I was to stick to trading EUR/JPY.

Lot sizes are also slightly quirky. The minimum lot size is 18000 of the base currency, but above that you can specify the lot size exactly. So you could buy 27389 EUR in EUR/JPY.

The IB trading plaform, TWS, is comprehensive and complex. While it does offer charting capabilities many third party trading applications offer better solutions, such as Sierra Charts.

There are also numerous third party trading platforms that can hook directly into IB’s backend. One such application that seems to be highly praised amoungst scalpers is ButtonTrader.

The flip side of being a discount broker is that there are many reports of terrible customer service.

Decisions, decisions

If I had the starting capital to open an Interactive Brokers account I think that would be my first choice. I think I’m experience enough with most aspects of trading and computer technology to put up with crappy customer service on the few occasions when it might be required. The commission structure is good and the leverage limits are not an issue with a sufficiently funded account. I also like the ability to pretty much use whatever charting package and trading platform suits me best.

ADM Derivatives has good commission rates but the lack of micro or even mini lot sizes is an upfront killer. To use standard lots right off the bat I would want to have a large enough capital base that I’d start straight off with the Currenex Pro offering.

Which leaves me back with MB Trading for now. The ability to use micro lots allows me to keep my gearing in tune with my account size. The increased commission costs (compared to its competitors) means that I have be that bit more profitable with my scalping to see a positive return. I can demo trade using NinjaTrader hooked into the MB Trading Navigator platform to give a pretty decent approximation of how the same setup would work live.

I’m going to be demo trading this scalping approach for quite a while yet. No point in getting the cart before the horse.

As far as I can tell, there is no noticeable difference for the average retail forex trader on the new no dealing desk as compared to what FXCM had in place before. If you weren’t trying to take advantage of FXCM’s price feed, which is most often done by trying to trade news releases, then the switch from one fully automated trade execution system to another was hardly going to be noticeable. I’m not a current FXCM client, but I wonder if clients were informed of the switch over and if any of them were able to tell the difference?

The ‘no dealing desk’ name seems to be an attempt to brand their trade execution backend and link it somehow to non-dealing desk systems.

I have nothing against dealing desk brokers. As long as I know that the broker uses a dealing desk model, whereby they earn money on the fixed spread, I have no issue against them.

In using the no dealing desk nonclamature, FXCM seems to be sidling up to the term non-dealing desk, which is also often referred to an Electronic Communications Network (ECN). On an ECN trading system, the broker does not earn any money from the spread available on any given currency pair. The ECN broker offers straight through pricing. It offers the exact same pricing its receives from the banks and other institutions that it is partnered with. To make money, the ECN broker charges commissions on each trade.

The very fact that FXCM’s no dealing desk still offers fixed spreads means that it is not an ECN. With an ECN the spread can vary, even dropping to zero or a negative pip spread. With an ECN you can also gain access to the depth of the market (often referred to as Level II), where you can see the total volume of the bids and offers in the market currently available.

With FXCM as the largest retail forex broker out there, I don’t understand why they don’t just move to become a proper non-dealing desk broker. If retail forex brokers have any chance of throwing off the bucket shop persona that exemplifies far too many of them, in part due to the largely unregulated nature of the forex market, then only by moving to an ECN do they have any chance of showing true legitimacy.

I think it is inevitable that FXCM will have to go down the ECN route. All other markets have ended up this way, and competition between brokers will force their hand eventually. EFX are already leading the charge and I fully expect more retail forex brokers to move in this direction in the near future.

The FXCM press release stated: “In effect, we have now ended our dealing desk trading system, thereby removing any possible conflict of interest.” Until FXCM offer a full ECN system, and charge a commission for each trade being executed, there will always be the possibility for them to have a conflict of interest with their clients. Every time that they offer a client a spread that is wider than the current true market spread (as offered by the banks that give them price feeds) they have succumbed to a conflict of interest: they have manipulated the bid and offer prices so as to include their spread fee.

Another smoke and mirrors claim in the press release states “FXCM expects the number of banks that provide streaming prices for No Dealing Desk execution to increase from 6 to 9 in coming weeks. FXCM believes this will lead to consistently lower spreads.”

Since FXCM make money on the spread, I fail to see having more bank feeds will reduce the spread. Having more bank feeds may indeed result in more consistently low spreads being fed into FXCM but there is no cause to believe that it will be in turn passed on to FXCM’s clients.

The only real way I can see FXCM reducing their spreads, especially on the majors where spreads are already very low, is if FXCM increases their customer base. With more customers putting on more trades they are able to reduce the spread without losing any revenue.

I’m sure that FXCM are very happy with their new trade execution backend systems, but trying to parade it as something that it really isn’t doesn’t do them any favours.

FXCM are one of the largest retail forex brokers, with over 90,000 customers, so they must be doing something right. I hope that they’re keeping their software developers busy; perhaps with an ECN?

For further commentary on the FXCM press release, check out the Forex Non-dealing desk blog.

There are eight main factors that I like to consider when making this decision:
1. Regulatory oversight
2. Safety of your funds
3. Leverage/Margin/Gearing
4. Lot sizes
5. Interest/swap rates
6. Ease of use of software
7. Reports
8. Telephone support

Let’s take a look at each of these in turn.

1. Regulatory oversight

To make sure that the broker is not a bucket shop or other type of ‘fly-by-night’ operation you should check to see if the broker is registered with the appropriate offical financial associations in the country where it operates.

For brokers based in the United States you should check out the NFA and CFTC websites. If the broker purports to be a member of the National Futures Association (NFA) you can double check this by doing a search for them on the National Futures Association’s Background Affiliation Status Information Center (BASIC) search page.

Another interesting check that can be done is to see how much capital your broker currently has. If the broker is registered as a Futures Commission Merchants (FCM) you can perform a check on the Commodity Futures Trading Commision‘s website for the broker’s financial data here. Just download the most recent .pdf or Excel file to see how much capital the broker has reported to the CFTC. Make sure to check out the Adjusted Net Capital, Net Capital Requirement and especially Excess Net Capital figures.

If you are unable to find the broker as being listed, double check to see if the broker’s parent company is registered. For example, FXDirectDealer (FXDD) is a subsidiary of Compagnie Financière Tradition, and is registered with the NFA and CFTC as Tradition Securities and Futures Inc.

If you live in the United Kingdom then you need to check with the Financial Services Authority.

2. Safety of your funds

Since the number one priority of any trader should be to preserve their trading capital, the safety of your funds is of vital importance when choosing what broker to do business with. You don’t want to find yourself in the same position as what happened after the Refco scandal, where customer accounts were frozen for a long period of time.

Make sure that client funds are in placed in a segregated account. This means that money you deposit with the broker is keep in a separate bank account from money that is used to run the day-to-day operations of the company. You don’t want the broker using your money to pay the salaries of its employees.

It is also beneficial if the broker has insurance such as a Fidelity Bond 14 from a reputable insurance company. This insurance is to protect the assets of the broker against loss resulting from fraudulent acts committed by the management or employees of the company. In the unlikely event of fraud, theft, or embezzlement the bond should offer sufficient protection so that the company does not have to declare itself bankrupt (whereupon it becomes almost impossible for you to extract your money).

This type of extra insurance does not insure against your risk exposure on market loss.

You also need to be aware that there is always the possibility that you can lose more money on a trade than you have in your account. Let’s take a look at an example of how this might happen:

Let’s say that you have deposited $1000 with your broker. You decide to place a 100,000 lot trade on EUR-USD. This means that each pip move results in a $10 change to your unrealized balance. Let’s imagine that price goes against you by 75 pips. This means that you’re down $750, and have just $250 left of your original $1000.

Suddenly there is a huge gap in the tick price and price has in an instant jumped another 50 pips against you. This price jump has in one fell swoop completely bypassed your margin call level. Your broker immediately closes the trade automatically for you, but you have still managed to lose more money than you originally had in the account. The 50 pip spike move means that when the trade was closed you were actually 125 pips in the red. This means that you actually lost $1250, and thus are $250 in debt to the broker.

Market prices do not always move in smooth one pip increments. It can jump multiple pips at a time. For evidence of this you only need to look at a tick chart around any major economic news release.

3. Leverage/Margin/Gearing

Your trading system will dictate what your maximum gearing will be at any one time. This is the maximum size of all open positions in relation to the size of your actual trading capital.

Most forex brokers offer leverage far in excess of what most sensible trading system need. You might even find that the broker offers better roll-over rates the lower your chosen leverage level. If your trading system has you never exceeding gearing of 50:1, then there is no real advantage to choosing leverage of 100:1 or 200:1.

The only other factor that might impact your decision is the margin call level, which most brokers tie in directly to the selected leverage level. Given the projected maximum drawdown of your trading system and your maximum gearing level, you should be able to work out if you need to worry about the margin call level at all. As a general rule of thumb, if you expect to have your account balance approach anywhere near the margin call level then there is a pretty fundamental flaw with your trading system.

4. Lot sizes

A lot size is the smallest number of units of the base currency in a currency pair that you are allowed to buy or sell.

The standard inter-bank lot size is 100,000 units. If you bought a standard lot of EUR-USD you would be buying 100,000 euros.

Most retail brokers now offer mini-lots which are equivalent to 10,000 units.

You can also find some brokers that include micro-lots, which are 1,000 units.

The only other varieties that I know about are GFT who offer a Base-10 system, where you can buy lots in multiples of ten units, and Oanda, who allow you to buy any number of units that you wish.

In order to be able to apply sound money management policy as part of your trading, it is vital that you do not under fund your trading account. Underfunding your account means that you deposit too little money in relation to the minimum lot size that you allowed to use for a single trade.

I have a simple rule of thumb that I go by: your trading balance should be at least five times that of the minimum lot size available to you.

Let’s say you are using a mini lot account and only trade on EUR-USD. If price on EUR-USD is at 1.3000, what should your minimum account balance be?

The answer is $65,000. 10,000 x 5 x 1.3.

If you’re able to use micro-lots then you only need a tenth of that: $6,500. 1,000 x 5 x 1.3

Choose a broker that is going to allow you to implement sound money management strategies. If you are looking to only fund a small amount of money to your brokerage account, then look to choose a broker that offers small lot sizes, such as Oanda.

5. Interest/Swap rates

Brokers will offer widely differing interest rates for holding various currency pairs. The best interest rates are normally only offered to institutional clients (these will be large companies with far more money than you are likely to have). It is always beneficial to use a broker that offers you interest rates as close to the instituational rates as possible.

Make sure to compare the interest rates between the brokers that you are considering using.

Some brokers openly advertise the interest rates that they offer. For example, InterbankFX displays theirs on this swap rates page. With other brokers you might have to get in contact with their support or sales staff to find out what rates they offer.

Some brokers show their interest rates via buy and sell premium rates (which are expressed in percentage terms) while others show the dollar amount that is gained (or lost) via the interest rates when holding 100,000 units of the base currency.

How do you compare the two?

It is quite easy to convert between the two methods.

If you want to convert from the premium rates to knowing how much it equates to in daily dollar terms you would use the following equation:

100,000 * ( (Premium Rate / 100) / 365 )

If you remember any of your school math you should be able to see that the equation can be easily simplified to look like this:

Premium Rate / 0.365

So all you need to do is take the premium rate (either the buy or the sell) and just divide it by 0.365. You can then use the resulting number to compare it with the daily dollar amount paid out by a broker that does it that way.

You can easily reverse the process and calculate the premium rate given the daily dollar amount.

Just multiply the daily dollar amount by 0.365 instead.

6. Ease of use of software

Open a demo account with a prospective forex broker. Download their trading software along with any support documentation on how to use it. Experiment using the software to see if you like it or not.

You are more than likely going to be entering a lot of orders no matter what trading system you follow so you must feel comfortable with the software you use. User preference has a large role to play here and whether the software has the features that you require.

7. Reports

Another area that comes down to personal preference more than anything else is the reports that the broker can present to you on your trading activity.

For example, many people find the trading reports produced by GFT to be very confusing (I am one of them). On the other hand, the reports produced by most other brokers are much simpler to understand. GFT says that their reports are more ‘correct’. If you were a large bank or accountant then you might actually prefer it this way. Unfortunately, GFT is a retail forex broker, so I fail to understand why they don’t produce reports that are in-line with the way just about every single other forex broker does them. There’s nothing from stopping them keeping their current reports, but why they don’t offer more understandable reports I just don’t know.

Make sure to test the reporting aspect of any broker that you demo with to make sure that you comfortable with the way that they record your trading activity.

8. Telephone support

You never know when there is going to be problem with your computer or any other aspect of the internet that connects your machine to that of your broker’s servers. With this in mind, it is important to be comfortable with phoning the broker up to place or change any of your orders if the need should arise.

It is a good idea to phone them up and place an order even if you are not experiencing any technical difficulties. It gives you a chance to test their phone operations as well as keeping you comfortable with being able to place orders over the phone. Place your broker’s phone numbers in an easily accessible place. You don’t want to find yourself in a situation where you’re scrambling around trying to find your broker’s contact details after a power cut hits just before you had a chance to enter your stop loss on a new trade you’d just placed.

Being able to trade electronically is a relatively new phenomenon, so don’t be afraid to go old school and use your phone to conduct your trading. You never know when it might come in vitally handy!

Are there any other main factors that you take into account when choosing a forex broker to do business with?

If you want to have a long lasting, fruitful relationship with your broker then you need to be see things from their side of the fence. While your broker shouldn’t be out to screw you over (and any good broker isn’t out to get you personally), they do want to make money so that they can stay in business and even generate some profit too.

If you become aware of what their business plan is then it is possible to align your trading goals and their business plan so that it becomes a win-win scenario for everyone.

You can read the broker newsletter here.

I certainly came across enough of the news trading marketing from the trading marketing wizards to have my curiosity peaked. I did my own investigation into how things are in the world of news trading as compared to how it was done when I first got into the forex business a few years ago. My first purchase was the ‘Forex Bootcamp Papers’ ebook by Tom Yeomans, which goes over the general method (of trading expected versus actual news data releases), as well as some background of the various data releases and what they they mean to the economy of that country.

I trialed the Trade The News audio broadcast service for a week. I can see how this would be useful in keeping abreast of relevant news items as they break during the trading day but it definitely did not seem adequate to the task of allowing you to the trade the economic data releases the second they are released. It obviously takes the presenter time to read out the relevant numbers, which can often take up to a minute or so, depending on how many numbers are being released at the same time.

I then investigating some other services being offered to help the cash strapped trader make the big money trading news releases. The fastest way to get the news data is either by subscribing to Bloomberg or Reuters; unforunately, signing up for these can be rather expense. Bloomberg is $1700 per month and you have to pay for the first three months up front, as well as signing up for a minimum contract period. The latest batch of forex news trading services use these more expensive data feeds, and then can pass on buy or sell recommendations if the actual data release is sufficiently different from the expected figure. Bloomberg does not let these services forward on the actual data release figure, but does allow them to forward on the deviation amount between the actual and the expected numbers.

I signed up for a month with ForexMasterMaker (which is a terrible name I think), as they offered the generic service of being hooked up to Bloomberg at their end, and passing on the deviation figure to their clients, via an online chatroom setup in Omnovia. While this basic service seems to be no more or less than what is offered by several other competitors, I was intrigued in that they were soon to release an application that each client could have installed on their own PC that would receive the deviation information and auto trade the news release, thus hopefully bypassing the time lag in even having to comprehend if the news release was tradeable or not. Set up your deviation parameters in the application and let it decide on whether a buy or sell trade is warranted. Unfortunately, this auto trade application has yet to make an appearance, so I can’t comment on how useful or successful it might be.

I have sat in on enough data releases now to have a fair idea if it is an approach that will work for me. At this stage I think I have to side with pretty much everything that Dirk says in this latest newsletter.

When it comes to trading news data releases there are basically three strategies that can be applied:

1. Trade the spike.
2. Fade the spike
3. Trade the aftermath of the spike in the minutes that follow the news release

Let’s take a quick look at each of these in turn. To trade the spike you need to know which direction the market is going to go immediately, and then get in your order before everyone else. All the forex news services that purport to help you trade the news that are hooked up to Bloomberg are trying to do just this. They have their ‘trigger’ values set up, that if the actual data release is sufficiently different from the expected data then the market is guaranteed to go in a certain direction.

As Dirk mentions in his newsletter most of the big players will sit on the sidelines of these news releases, which means that the amount of liquidity that will be available at the time of the news release could be anything. The other two enemies of the news trader trying to make money on the spike is time and their broker’s spread (assuming that their broker even allows them to trade the news in the first place). To make money on the spike you have to get your order in before anyone else. It takes time for the deviation amount to make its way from your news trading service to your PC. It takes time for you to process that information and make a judgement as to whether you want to make a trade or not, and if that trade should be a buy or a sell. It then takes time for your order to go from your PC to your broker’s server. Having an application on your PC that makes that split second decision for you (such as the one that ForexMasterMaker.com are supposedly working on) can definitely cut down on the time here, but how can you guarantee that you’ll be able to beat everyone else who is doing the same thing? Someone with more money can have their setup to be faster; they could have their computer physically located closer to Bloomberg (which is in New York), to cut down on the time it takes the Bloomberg data release to arrive at their computer, as well as using a broker that is also physically located in close vacinity too. They could pay to use dedicated internet lines to make sure they have the least amount of latency possible. This is a battle that the small retail trader will never win.

The second major impediment to trading the spike is your broker’s spread. The broker mentioned in Dirk’s newsletter that he says that recently started to widen their spread around news releases can only be Oanda. Brokers need to be able to make money to stay in business. A deal desk broker will generally be losing money on news releases if you’re making money. To dissuade traders from placing orders around news releases times they will widen the spread, thus making the chance of a quick profit on a sudden market move relatively unattractive to the trader. More often than not, the spread will widen dramatically just after the news release. I witnessed multiple instances where even if you had gotten in with your order before the spike occured, the spread would widen to such an extent that it was almost equal to the amount of the spike. Exitting for a quick profit is then next to impossible. Your only chance to evade the spread conumdrum is to use a broker that does not use a dealing desk, and uses an ECN. If nothing else, my investigation into news trading has resulted in my evaluation of forex brokers as they stand today. Things certainly move at pace in the world of forex brokers, and there have been some nice new features that brokers offer that were not available a few years ago. I have opened up back up brokerage accounts with Oanda and EFX as a result of this latest broker appraisal.

A third reason that spike trading won’t get you very far in the long run goes back to the liquidity issue. If you are trading a small amount of money then getting a fill on your order should generally not be a big deal (if you are quick enough to get in before the spike). Things are a world apart if you have a lot more money and are trying to get a fill on an order for a huge position. You will more than likely not be able to get a fill for your order all at one price, and who knows how much of a gap there will be between ticks. You could find yourself with part of your order filled at the bottom of the spike, and the rest of it filled right at the top of the spike. Not exactly an ideal situation in which to find yourself. Of course, most people trading the news don’t have such large accounts, so it’s not exactly something they have to worry about!

Let’s move on to the second possible news trading strategy: fading the spike.

This one is tricky in that there is no real way of knowing beforehand if the spike is going to fade at all. At least when trying to trade the spike you can use some quantifiable data (the news release itself) to determine if you have a valid trigger to enter a trade. The most popular entry technique for fading the spike is to fade if the actual news release is pretty much in line with the expected data value; if a spike happened anyway, then the reasoning goes that the expected data number was already factored into the market, so it should return to that price level given that the actual news release is in-line with what was expected. I have no statistical analysis to back up if this reasoning is an edge or not, but to me it seems to be more of a crap shoot than anything else. I think it equates to attempting for a quick scaple move.

The final strategy involves digesting the news release, waiting for the spike to do its thing and then making a decision if there is a trade to be made. In Tom Yeomans’ words: ‘Using your brain’. If your trigger value is conservative enough, then after a spike and fade there should be a good chance that the market will move in the direction as dictated by the trigger. The market should move over the coming minutes in that direction. An entry is made if the spike fades, or else at market if no fade appears. A predetermined profit objective level is used to know when to exit the market (generally some previously identified support or resistance level). If anything this is a microcosm of the relation analysis advocated by Dirk. The danger here comes from the random nature of the market as such short time frames. I don’t have enough experience of using this sort of trading method to comment further on it. This final strategy seems to be the methodology used by Tom Yeomans, as he uses the Trade The News audio broadcast to receive his news data, and is thus not attempting to trade the spike at all. He is also very conservative in the trigger values he looks for; far more conservative then most of the other news trading services that are currently out there.

And that is news trading in a nutshell, as it stands today.

Not quite the walk in the park that all the forex marketing wizards would have you believe.

Tread carefully.