Forex FCM report.(Guide to e-Forex)

While Forex trading is not new -to the marketplace, many retail traders are new to forex, and forex brokerage firms that targeted retail traders have been around for some time. Unfortunately, the forex arena hasn't always been the safest for individuals. But this is changing - for the better.
The CFTC has spent much of the last several years cracking down hard on illegal forex brokerage firms, and it continues to do so. While retail clientele must be ever vigilant when selecting those they conduct business with, the result of this crackdown has been that traders now can feel safe participating in the potentially lucrative electronic forex markets.
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Legitimate firms have been responding in kind. Some are offering a gamut of services, including miniforex accounts that traders in traditional futures long have taken for granted. Continually increasing legitimacy thanks to tougher regulations and smaller account requirements should fuel forex's continued growth.
One thing those new to forex trading may not be familiar with is the difference between an e-forex broker and a regular futures broker.
"An e-forex broker is an [FCM] and is regulated in the same manner as a regular futures broker," says Barry E. Calder, SVP at forex FCM hotspot FX. "In e-forex, however, there is a distinction between brokers that execute client trades on a pure brokerage or agency basis for a commission, like traditional FCMs, and e-forex brokers who have proprietary desks that trade against their client orders and hold positions."
Calder says the first agency model is closer to the futures exchange model where the client pays a negotiated brokerage commission and deals on the best price in the market, or enters his own bids and offers. The second model is less transparent in terms of market structure and trading costs. Almost all forex firms, however, do not charge commissions for trades.
When you trade futures, the broker delivers your order to the exchange, and makes sure your order is matched up against some other trader's. For this service, the broker charges a commission. It's different with forex brokers.
"When you trade forex, the broker really should be described as a dealer," says Dan O'Neil, principal at Xpresstrade. "The dealer acts as your counterpart in every transaction and hopes to earn a profit by quickly closing out each position in a subsequent trade with another client, or by quickly entering into an equal and opposite trade with another currency dealer."
In the futures world, the broker tries to get the order executed against that of another trader. In the forex world, the broker acts as a dealer or market maker, and actually takes the other side of the trade.
"A forex broker offers trading in actual, physical currencies," O'Neil says. "When you trade forex, you're actually buying and selling real currency in the spot, or cash, market, and you have to make delivery of the currency or take delivery of the currency in two business days."
A futures broker, by contrast, offers trading in futures on currencies as well as on a variety of other products. When you trade a futures contract, you're entering into a contract to buy or sell the underlying commodity at some point in the future - often months from when the trade is placed.
While neither the National Futures Association nor the CFTC will provide an official list of forex-only regulated firms, Futures has tracked down the main players to get an idea of their experience, flexibility and customer support. The table on page 33 includes two lists: forex-only firms and futures and forex firms.
Forex-only firms, such as CMC forex, are ranked here by adjusted net capital. Firms offering trading in both cash or eforex and futures, such as the the Chicago Mercantile Exchange's forex futures and soybeans, are not included in the forex-only ranking because their futures-related capital does not necessarily reflect just forex market activity. Firms offering both futures and forex are listed separately in alphabetical order.
SETTING UP AN E-FOREX ACCOUNT
A potential client goes through similar steps in opening an e-forex account that they would go through in opening a regular futures account. Steps include:
* Researching and the services and reputation of several e-forex brokers.
* Completing a due diligence review of those firms that meet your initial criteria for selection.
* Filling out account papers. In many cases, all the material can be filled out online. However, if your broker requires a copy of a photo ID, that may have to be faxed or mailed.
* Funding the account. This generally can be done online or within a couple of days by certified check.
* Learning how to use the trading platform. While futures brokers often use similar order entry screens, many times ones re-branded from the same software company, because forex brokers are the dealers themselves and don't have to meet exchange technology standardization, every order entry system can be different.
In researching e-forex brokers, clients should use the same criteria they apply to any broker, including reputation, services provided, costs and leverage allowed.
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