Select a Broker and Low Latency VPS for professional trading (for beginners and professionals)

16 September 2017, 16:33
Alexander Gerlach
2 494

The good news

Due to increasing competition costs for trading and servers decline continuously. This is why you should always stay up to date and watch for better deals

Which Broker?

Every beginner will ask himself the same question. Which Broker should I choose?

Different Broker Types

Basically you have the choice between a Market Maker, an STP and an ECN Broker.

An important consideration to take into account when comparing forex brokers is how they execute customer transactions and whether or not they take the other side of each order and transaction you deal through them.   

Market Maker is a Broker that you should avoid. It has a dealing desk and market makers operate with the intention of capturing as much of that spread as possible for its own benefit as profit. 

This broker model implies that the broker will usually provide a two sided market price with fixed dealing spreads that depend on each currency pair quoted to its clients.

Often referred as B-Book forex brokerage model.  Although this model involves taking market risk, since the broker effectively trades against its clients and does often not hedge the trades, market making has traditionally been a popular model for forex brokers due to the high percentage of losing clients. Meaning market makers win, if their clients lose it is no secret that most of retail fx traders lose. Moreover they can manipulate prices and widen spreads in their advantage.

STP (Straight Through Processing) Broker generally have a fully automated dealing system for their clients to use. They do not operate a dealing desk, and hence are considered a NDD or No Dealing Desk broker.  This type of forex broker model is also sometimes referred to as the A-Book forex brokerage model.

Such a STP dealing system will typically process each trade electronically and enter them directly into a select group of Interbank forex market participants, known as liquidity providers, for execution at competitive prices.  Orders are entered anonymously on behalf of clients by the broker into this subset of the forex market, the members of which are chosen by the broker based on established dealing relationships.

The most notable advantage of using an STP broker is that no human related errors, delays or costs should be associated with each transaction. 

Moreover liquidity tends to be greater since prices are obtained from a number of market participants instead of from only one liquidity provider like in the market maker model. This generally means better fills, more accurate quotes and tighter dealing spreads when compared to the service provided by a forex broker that only has a single source for its quotations.

The Electronic Communication Network or ECN Forex Broker Model is the professional choice.

Forex brokers that use an Electronic Communication Network or ECN model provide their customers with a means for obtaining direct access to the Interbank forex market for pricing and execution that usually consists of an ECN trading platform. 

In effect, by using an ECN execution model for client transactions, it means that a forex broker has No Dealing Desk or NDD standing as they operate as a liaison between their clients and the greater currency market.  Choosing to deal though an NDD forex broker helps a trader cut out both the market maker and their dealing desk who may both wish to profit from their transactions.

Most ECN forex brokers will display order information and exchange rates in real time as they fluctuate, and their pricing on transactions comes directly from the Interbank forex market.  Also, since trades are processed electronically, ECN forex brokers typically have a reduced human error rate.

One substantial advance of dealing with this sort of broker is that the risk of re-quotes should be virtually eliminated.  This can really be a substantial benefit to news traders who typically like to benefit from the high level of market volatility surrounding the release of major economic data such as the NFP report or other news events.

Another notable advantage of using an ECN broker is that they allow traders to deal on spreads that are typically considerably tighter than that quoted by a single market maker, furthermore you will notice that the slippage (price you requested - price your order was executed) will be much lower than at a Market Maker or STP. ECN Broker simply can put orders together the fastest way and therefore execute the fastest.

Some forex brokers using the ECN model will start providing EURUSD from 0.1 pip Spread, which is the interbank spread often, and therefore charge a flat deal execution fee on a per trade basis as a commission.

But: Be careful: Not every Broker, who claims himself ECN Broker is an ECN Broker. You can find this out by searching in the client agreement for. Often Broker use ECN as name but are Market Maker or STP Broker. This is why you have to look for a TRUE ECN Broker.

As an example: IC Markets is a TRUE ECN Broker, whereas GrandCapital is rather an STP Broker and not a True ECN. True ECN Broker will also show you their liquidity providers, IC Markets for example works with Goldman Sachs, JP Morgan, Bank of America, BNP, HSBC, Deutsche Bank, citi and others. 

Trading Server, VPS (Virtual Private Server) with low latency

Why do I need a VPS ? Why does latency matter?

Simply because you can not run your MT4 Terminal 24/5 on your own pc without interruptions. 

Moreover latency (your connection speed, ping) matters and became one of the most important elements in todays electronic trading. Especially banks and High Frequency Traders fight for every millisecond. If you have a faster connection, your order will be routed and therefore executed faster, resulting in lower (almost no) slippage.

Which are the criterions I have to look for?

Ideally your VPS is: 

1) reliable, secure (data encryption) and offers a > 99% uptime guarantee

2) has very low latency to your Broker (best would be under 5 milliseconds)

3) has enough Processing Power (CPU) and RAM to work fast and smooth

4) be able to launch multiple MT4 terminals (I launch up to 6) to test different Expert Advisors on different Accounts

5) has a good price/value ratio

I am very happy with this fair Trading VPS with 1ms to most Brokers. You can select the VPS or Dedicated size according to your needs.

I hope you are smarter now and can improve your own trading conditions.

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