The forex market is by far the world’s biggest market in volume and liquidity. In the year 2010 alone, it accounted for more than $3 trillion made from daily trading. Yet it did not exist a century ago, unlike the stock market which dates back centuries ago. With its daily increase in growth, it is obvious that there are huge profits and revenues to be made and this is why a huge industry called brokers have developed around the forex market.
What is forex market?
To fully understand what forex market is, let’s first answer the question “what is forex exchange”? Forex exchange is basically the buying and selling of securities on the FX market. The forex market is a globally decentralized market for the trading of currencies. In other words, there is no single place designated to the forex market for the trading of currencies and as such no single organization or government has an autonomy over the forex market. This makes the forex market a very conducive place to make a profit if you know what you are doing.
For the sake of comparison, let’s take a look at the stock market. Unlike the forex market, the stock market is monopolistic in nature. Rather than being filled on the interbank market, all trades on the stock market are processed through the centrzlied exchange which theoretically can manipulate the prices and take advantage of trader’s losses.
With forex market, there is no centralized market to make transactions from. In the forex market, quotes vary from different dealers at any given time. The beauty of the forex market is that it is so competitive to the extent that you can get the best deal almost everytime. Now tell me a single soul who doesn’t want this?
Parties involved in forex trading
Most people know about the brokers but there are other players on the forex trading platform. Amongst them are the major banks, large commercial companies, the speculators, Government and central banks and the Retail forex brokers.
Since the forex market is decentralized major banks like the Deutsche Bank, JPMorgan, UBS, Barclays, JPMorgan, HSBC and Citi are the ones that determine the exchange rate. They make the bid/ask spread based on the supply and demand of currencies.
Government and central banks
Governments and central banks also participate in the forex market for their international trades and other activities. The central banks also affect the forex market in other ways. An example is when they adjust the interest rates of their currencies to control inflation.
Large commercial companies
These are companies that participate in the forex market for business purposes only. An example is Apple company.
Finally the most popular players and the subject of this article. Brokers are institutions or individuals who take commisions and execute buying and selling transaction on behalf of their clients. The retail forex brokers come in two forms. The market makers and the electronic communications network.
As the name implies these brokers make their own bid/ask prices. These are the local currency exchange shops you meet in your cities. So in a practical sense, if you need some US dollars to make a transaction you simply go to them and exchange your local currency for US dollars their set rate.
Electronic communications networks (ECN)
Unlike the market makers, these brokers deal with the bid and ask prices from different institutions available on the interbank market.
Ever since the forex market became accessible to individuals to trade on, foreign exchange brokers have become a very important part of the forex market. They serve as an access point for individuals to trade on the forex market.
Best forex brokers for beginners
For a beginner, there are some things to look out for when choosing a brokerage firm.They are as follows.
- You should be certain that the brokerage firm has the appropriate license to operate with a user-friendly and easy to use platform.
- You should pay attention to account minimums. Because some firms do not have micro or mini accounts for beginners who want to start small.
How to measure the largest forex brokers
Most of these top forex brokers are very big. Being a big company gives certain advantages over the smaller firms. The advantages include economies of scale, higher scrutiny from the public and regulators, better liquidity positions and many more. When measuring the size of a company, factors like market capitalization, revenue and profit are the most considered qualities. Even though these qualities are relevant in other indutries they are not the most ideal when it comes to forex brokers and here is why.
It is true to state that ranking forex brokerage firms by revenue will be accurate but it is still not that relevant and this is why. A broker’s revenue comes from the spreads paid by traders and the commission they charge. A broker with higher commisions and spreads will produce more revenue than another broker of equal size but with lower commisions and spreads. Also, companies that offer stocks trading, future, and forex trading options will definitely have higher revenue than companies offering just forex trading even though the company with multiple trading options might have a small forex division.
Market capitalization is the total value of a company based on its current share price and a total number of its outstanding stock. Only public companies can be ranked based on market capitalization. By this reasoning, most big forex companies will be outranked. Some small but very profitable companies have higher market value than some bigger companies which don’t generate much profit.
Assets under management (AUM)
The closest thing to assets under management in forex brokerage firms are clients funds. Even though they are not managed by the brokers they represent the total value of the client’s accounts. Even though this measure is useful it is still lacking. This is because it is possible to open a large forex account with little activity. Also, most of the client’s funds are used in trading stocks in companies that mix stocks trading with Forex trading.
Since all the above-mentioned measures are inaccurate in some ways when considering the size of forex brokers it is only fair to mention what will be relevant The most relevant in this case will be daily transactions.
Average Volume of daily transactions (AVDT)
Since the daily transactions depend on a lot of factors it is always different. Hence the more active the clients of the broker are, the less volatile the value of daily transactions will be. The best way to get the volume of daily transactions is to calculate the average volume for a longer period of time. The AVDT becomes relevant when you take the last three months into consideration when calculating the average. For a forex broker to be considered big it needs to have an AVDT value of at least a billion dollars.
The largest forex brokers by volume
There are many large forex brokers all over the world. But as explained earlier on, the only measure for how big a forex broker is, is dependant on the average volume of daily transaction. Ego the category below is based on the AVDT. Below, you will see the biggest forex brokers in specific locations all around the world.
Largest forex brokers in the USA
The United States has one of the worlds biggest forex market but due to restrictive laws imposed on foreign brokers, its declining in size in recent years. It is also the most isolated market since the regulations imposed by FATCA on foreign forex brokers makes it too expensive for them to accept US clients. As of now, there are only three forex brokers in the United States and one is an institutional broker(Interactive Brokers). So the remaining two are Forex.com and Oanda. It makes you wonder who is the best forex broker amongst the two? Listed below are the best forex brokers in the USA
|Broker||Average Daily Trading Volume ( in USD billion)|
|Forex.com (GAIN Capital Holdings Inc)||15.5|
|Oanda (Oanda Corporation)||10.7|
|Interactive Brokers (Interactive Brokers LLC)||3.9|
Largest forex brokers in Australia
Australia has a very thriving forex market base. Australians have their own separate regulations under the Australian Security and Investment Council (ASIC). Unlike the USA Australia doesn’t have strict restrictive regulations so the major Australian brokers are also very successful in areas like China and Southeast Asia with top notch conditions and liquidity. There are three top-rated forex brokers in the Australian forex brokers and they are as follows.
|IC Markets (International Capital Markets Pty Ltd)||8.6|
|Pepperstone (Pepperstone Group Limited)||5.9|
|Direct FX (Direct FX Trading Pty Ltd)||5.4|
Largest forex brokers in Europe
The Europian market is where most of the big forex brokers are located.The Europian brokers have multiple licenses to operate in different countries. Cyprus (CySEC) and the United Kingdom (FCA) is the hot spot for traders in Europe. Thanks to the worlds leading regulation brokers from other countries use CySEC license for their forex trade. All European countries are in complaint with MiFID regulations which adds another layer of protection for traders. Some European brokers have gone global to areas like Africa, Asia, The Middle East and Latin America. Ego their total volume is boosted because of their international operations. Below are the top 10 forex brokers in Europe.
|XM.COM (Trading Point of Financial Instruments Ltd)||13.4|
|Saxo Bank (Saxo Bank A/S)||12.3|
|FX Pro (FxPro Financial Services Limited)||8.3|
|IG Markets (IG Group)||7.8|
|Dukascopy (Swiss Forex bank & Marketplace)||7|
|Exness (Exness Limited)||6.5|
|AvaTrade (AvaTrade Ltd)||4.9|
|Swissquote (Swissquote Group Holding SA)||4.7|
|Etoro (Etoro Europe Ltd)||4.5|
|Plus500 (Plus500 Ltd)||4.4|
|Markets.com (Safecap Investments Limited)||4.2|
Largest forex broker in other regions
Apart from the countries listed above (Europe, United States, Australia), there are other Forex brokers with high AVDT. The brokers listed below are from very different jurisdictions like Russia, and Hong Kong. These brokers also operate under very different regulations.
|Hot Forex (HF Markets Ltd)||9.5|
|GMO Click Securities (GMO Click Holdings Inc)||7.1|
|Instaforex (InstaForex Group)||4.2|
|24 Option (Richfield Capital Limited)||3.6|
|FX Open (FXOpen Markets Limited)||3.1|
|Alpari (Alpari Limited)||3.1|
Which of the large forex brokers are truly global?
Due to regulatory restrictions, traders in the United will have to settle for US-based trades. Australians and Europeans will settle for their local ones in most cases. What about the rest of the world. What are the options for people in Canada, Africa, Asia, Central and South America trade? All brokers accept people from different countries but only a few are able to handle a diversified client base. To be able to serve people from different countries a broker must be able to handle a vast number of internationally accepted and used deposit and withdrawal methods. The broker must also allow accounts to be denominated in different currencies. They should also have a 24-hour customer support system to address the needs of the clients.Below are a some of the top-notch brokers who are able to handle a diverse client base with all these qualities mentioned above.
|Saxo Bank (Denmark)||12.3|
|Hot Forex (St. Vincent and The Grenadines)||9.5|
|FX Pro (United Kingdom)||8.3|
In conclusion, in order to choose which broker is best for you, you need to carefully read all of the above. This is because there are some unscrupulous forex brokerage firms out there who can give you a very bad experience in the forex market. There are stories of traders not being able to make withdrawals whilst trading with some forex brokerage firms. In our forex brokers review section we have covered the most trustworthy and mostly regulated brokers who have excellent record of client service and flawless reputation.