A Review to The Main Types of Forex Brokers And the New Alternative
Forex Blog Articles
The Difference Between Brokers
When it’s time to choose a broker for your trading career, it is crucial to understand the types of brokers out there. There are a lot of Forex brokers in the world today, and choosing the right one could be a daunting task. It is in a trader’s interest to understand that no broker is better than the other as it all boils down to the type of trade they partake. Trading involves a substantial amount of your time and hard-earned money. You’d want to settle for a credible broker with features that match your trading styles and top-notch customer service.
You can have an in-depth knowledge of Forex with a formidable strategy under your belt, but when you do business with the wrong broker than trading could turn out to be a nightmare. In this article, you learn the different types of brokers out there and the alternative to brokers that are available today. In the end, you should be able to pick a broker with quality service, as well as friendly transaction fees and dealing spread tailored around your trading style.
This article is an educational guest post, it was written by Nicole Bishop from NSBroker
The Three Main Types of Forex Brokers
As stated earlier, there are a lot of brokers in the Forex world today. They all fall into two main categories namely:
- Dealing Desk Broker or Market Makers
- No-Dealing Desk Broker
The No-Dealing Desk Brokers divided further into two more categories we call:
- Straight Through Processing Brokers
- Electronic Communication Network
Below are the explanations of these broker types to help you make an objective decision about which broker will adequately suit your trading needs.
In the world of Forex, currency prices come with two pairs: The bid and the ask price. The difference between the buy price and the ask price of a currency pair, which are the bid and ask price respectively is what we call SPREAD. The spread is measured in pips and it happens to be the smallest unit of the price movement of a currency pair.
The term commission is not new to a Forex trader. For every transaction in the financial market, a broker charges a commission. Hence, a commission is a transaction fee charged by a broker for the services they provide. Your broker doesn’t run a charity organization, and one way they remain in business is the commission they charge. They charge you for each trade you open, and the more you trade, the more they earn.
Dealing Desk Brokers/ Market makers
The dealing desk (DD) brokers grants liquidity to their clients. They earn through spreads and trade against the trader. Hence, they make markets for their clients, which is why we call them the “Market Makers”. These types of brokers operate in a closed setting from where they fill the client’s orders and set their price rates.
They do this in two ways namely:
- a) By matching the buy and sell positions of their clients or
- b) by taking the opposite side of the order if it is unmatchable.
Dealing desk brokers regulate the prices at which they fill orders. Consequently, there is an extremely slight risk for them to set fixed spreads. The dealing desk brokers do not reveal the actual interbank market rates to their clients. They make profits from adjusting these rates. They are careful while doing this as stiff competition ensures very close pricing among brokers.
If you happen to be new to the Forex world, experts recommend starting with the dealing desk brokers for several reasons. While they sometimes trade against you, the practice is not illegal. It is just the way they carry out their business. With a dealing broker, you are likely to be able to trade in Nano lots, which is perfect for a beginner.
No-Dealing Desk Brokers
Just as the name implies, the No-dealing Desk brokers have no dealing desk. The absence of a dealing desk means they do not match a trader’s positions but instead, send them to automatically to the interbank market.
The no-dealing brokers make their money in two ways. They either impose a very little commission for trading or by raising the spread slightly.
As mentioned earlier, NDDs are of two types: The Straight Through Processing (STP) brokers and the Electronic Communication Network (ECN) brokers.
Straight Through Processing Brokers
The STP brokers offer a more flexible trading environment to their clients, and they do so by overriding some of the constraints of trading exclusively within the interbank market. STP brokers usually have many liquidity providers at their disposal, and each of these providers quotes its bid and ask price.
Usually, the Straight Through Processing Brokers set out their quotes by the lowest ask prices and highest bid prices, and figure out a small markup to the value and quote this value to the customers. Consequently, STP brokers impose slightly higher spreads than the dealing desk DD brokers.
Electronic Communication Network (ECN) Brokers
The ECN brokers do not have a dealing desk. They provide an electronic trading environment where expert market-makers at banks and related Forex outfits can carry out their businesses. While all of these shareholders can enter bids and offers through the ECN platform, they can also directly trade against each other. Shareholders could be banks, hedge funds, retail traders, as well as other brokers in the market.
The market-making broker is the exact opposite of the ECN broker. Unlike the market-makers, the job of an ECN broker does is matching buyers and sellers. Also, because of the difficulty of placing a fixed markup, the ECN brokers usually get paid through a small fee.
Alternatives to Forex Brokers
Today there is another alternative in the forex market: prop firms.
Every Forex trader can sign up for one of the prop firm evaluations, and if they succeed they will receive funds to trade Forex. It is a great advantage to generate profits if you have a small account.
Some firms will even increase your funding if you succeed in meeting their goals.
Basically the finance companies are the ones who work in front of the broker, and they get great terms.
It is in the interest of the prop firms that you succeed and become profitable because they share the profit with you.
Of course, you must check the terms and their reliability.
Today in the market there are some primary firms that have quite a few traders and they have proven that they can be trusted, one of them, of course, is The5ers.
Broker Reviews Conclusion
Sometimes picking the right broker for your Forex trading career could be a daunting task. If you are new to the trading world and would love to trade nano lots with fixed spreads, then its best to start with the dealing brokers. Whatever the type of broker you deal with, remember that a proper risk management profile is crucial to a successful marketing experience. You’d want to get familiar with your broker’s platform or software, and you can always bank on the efficacy of a demo account for practice.
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