When you trade with an online currency firm, you’re either trading against them — they’re taking the opposite side of your trade — or you’re relying on them to provide order matching and financial integrity. In effect, the online forex trader has two layers of risk, in addition to trading risk, to consider: the capital adequacy of the broker and the adequacy of the bank.
In a sense, online forex firms function the same way market makers and specialists do in the stock market, providing (theoretically) liquidity and order in a market. However, while the NYSE and Nasdaq have rules regarding how specialists and market makers must honor bids and offers, there are no comparable regulations controlling online forex firms.
The disclosure documents of forex firms typically include language to the effect that the company is not responsible for providing liquidity. (Read: They have no obligation to take the other side of the market at any time, which technically means you can get stuck holding the bag when the market is screaming against you.) Confidence in the firm is vital.
“Pay attention to the asterisks — they are important,” EFX’s Floyd says. “[A trading platform] may claim to guarantee their trades, but the fine print says they’re not guaranteed during a volatile market. And guess what? They get to decide when conditions are normal in the market.”
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