By Javier H Paz, ForexDatasource.com
The retail FX industry is reaching puberty and it has brought a few million people to trading Forex over the past 10-12 years.
But in the vast geographic and digital expanse where retail FX trading takes place, a key question arises regarding the 100+ brokers that control this marketplace.
What makes an FX broker better than others?
The answer to this question opens the door to a host of opinions. But an informed person looks for coherent, comprehensive answers, not anecdotes and hear-say.
Last summer, Forex Datasource announced results of a 2-
year study identifying the best brokers in the retail FX arena. To reflect changes since then, the 2010 FX Traders' Choice Awards will be announced during the second half of July in special partnership with IBTimes.com, the large global news leader.
As a special preview for FX Trader Magazine, this article based on the data used to generate the 2010 awards identifies the key attributes that FX traders look for in brokers.
Before we get to the findings we should establish just how credible they might be. Properly constructed surveys take snapshots of opinion using random sampling methods.
If the sampling is random and controlled, a relatively small number of people can reveal accurately the behavior of a large crowd. For example, In the United States we rely on political polls that reveal the sentiment of 100+ million voters by randomly sampling 1500 people.
For the 2010 FX Traders' Choice Awards, we obtained more than 1000 valid responses over the May 2009 - May 2010 period. These entries came from 111 countries thanks to the wide reach of IBTimes.com. In addition, we set up steps to further limit vote rigging.
But when it comes to the following question we asked our respondents, there was no obvious incentive for voters to want to rig anything:
What is the most important characteristic of a FX Broker?
The options were: spreads, execution, platform, dealing-desk/no-dealing-desk, regulation, service, or other.
What the results of this table reveal is that there are four attributes that are most important for FX traders: trade execution, trading platform, spreads, and customer service. Together they account for 78% of all votes, with an average of close to 20%.
Execution refers to whether a trade is executed in a straightforward manner, without requotes or slippage. The Trading Platform response in our poll could mean a couple of things, whether a broker offers a popular trading platform such as MT4 or whether the trading platform has the (advanced?) specific features traders seek.
Of course, spreads refers to a broker offering tight spreads which translate to a low cost of trading. Customer service is important because very often it is hard to reach broker representatives to solve trading issues.
Interestingly, the issue whether a broker has a dealing desk or not is not what traders think as the most important characteristic of an FX broker. Some brokers base their whole marketing pitch around the fact that they are ECN or that they don't have a dealing desk. It seems that on this issue, it is as the French say, ca m'est egal!
Perhaps to the dismay of regulators, being a regulated broker is not one of the four critical factors.
The first column in the table above displays the percentage of voters that selected each response. I thought it would be interesting to show in the second column what broker was most often mentioned among people who selected each attribute.
I should clarify that even if a broker is a leader in one attribute it does not necessarily make them the most popular broker overall . . .
Putting these results in perspective ...
Most traders have multiple factors that are important to them, not just one. When we make a broker selection, we do look at multiple factors.
As a result, the table above helps us catch a glimpse of the most important trait to a large group of people in the industry. But it does not necessarily tell us what is important and what isn't, nor does it tell us how we select a broker.
Having polled traders for three years in multiple categories, I have seen situations where people rank a broker a 10 in five categories, or a 10 in the overall category and a 5 in the other four categories. Most often though a broker gets a numeric ranking around 7 (plus or minus 1-2 points) in all categories.
I think we as a trading community have a predominant broker factor that is most critical to us. Because a broker has that critical factor we are willing to forgive imperfections in other areas.
Now, switching gears, I would like to add a geographic dimension to these findings.
Before I venture into making regional comparisons, I will establish what is the normal geographic distribution of retail currency traders. Using the voting percentages from the various continents over the past three years, it seems pretty clear that FX traders originate from:
Americas 35%, Asia 30%, Europe 21%, Africa 9%, and Oceania 5%.
Having said this, I should add a BIG caveat: this is the distribution of English-speaking retail Forex traders - next year we will hopefully have meaningful sentiment data from large non-English audiences as well.
For this particular poll (what is the most important characteristic . . . ) there was a heavier-than-normal concentration of American and African voters, while a smaller representation of Asian voters: America 39%, Asia 22%, Europe 19%, Africa 17%, Oceania 3%.
For voters in the Americas, the most important broker characteristic was Trade Execution, and it was selected by 28% of Americans polled. The second most important characteristic was Spreads, with 20% of the vote. In third place was a tie between Platform and Customer Service, with 16% each.
Voters in Asia considered Trade Execution and Platform equally high, with 29% of the votes each. Regulation was the third most important, with 14% of the vote.
For Europe, the single most important broker characteristic was simple: Trading Platform, which garnered 50% of the European votes. Spreads came in a distant second with 17% of the votes.
Africa demonstrated its own preferences as well. Customer Service was the single most important feature for Africa with 36% of the votes, followed by Spreads with 27%. The Other category came in third, with 18% of the votes. The Other category may include things such as, account size, leverage, etc.
For Oceania, the number of votes was smaller than for the other continents, so there was less of a spectrum of answers. The top two categories were clear though: Trade Execution and Customer Service, with roughly 50% each.
It never ceases to amaze me how making decisions is much easier after getting briefed with specific, reliable data. But even after reading something insightful, a nagging question from a former business professor surfaces: this information is great, so what?
The relevance of this information to traders is that it helps us understand what broker features are important to traders in our continent and in the world. It puts decision-making in context. This data also may validate or refute long-held beliefs of what traders consider most important when selecting a broker.
Can brokers learn from this analysis? Clearly, the marketing department of brokers could learn a lot from this information. Here is enough analysis to establish a rough marketing plan that recognizes continental differences and establishes four broker features as the most important ones in the minds of English-speaking FX traders.