The foreign exchange market or simply forex is the largest financial market in the world, with a daily traded volume of more than $5 trillion. Comprised of central banks, investment firms, hedge funds, commercial companies, and retail investors, the FX market allows you to buy, sell, exchange currencies at determined prices.
If you’re considering starting a forex trading business, one of the most important things you need to do is choose the best forex broker that meets your needs. Even though they offer the same basic service, forex brokers differ in various aspects, such as the amount of commission they charge, the type of support they provide, among other things. Another important thing to consider is the type of broker you want to work with, as this can affect various things, such the quality of service you receive, your transaction fees as well as dealing spreads. In this article, we’ve rounded up the different types of forex brokers that exist to help you make an informed decision. But first, let’s find out what a forex broker is.
What is a FX Broker?
Succinctly put, a forex broker is an intermediary between a buyer and a seller. It’s a company that provides traders with a trading platform where they can enter the market and start trading currencies. In exchange for this service, the broker charges the traders some commission, which is usually the spread.
Types of Forex Brokers
For a beginner, forex brokers may seem like the same but in reality, they come in different types, depending on the way they conduct their business. They are split into 2 main types, which are;
1. Dealing Desk Brokers
2. Non-dealing Desk Brokers
1. Dealing Desk Brokers or Market Makers
As the name suggests, market market makers are forex brokers that literally make a market for their clients. This means that they usually trade against their clients or, in other words, they are on the other side of the trade. Market makers conduct forex deals in an enclosed environment by finding a counterparty for each trader from their existing client base, and if there’s no counterparty, they take the opposite side of your trade.
Because of the fact that Market Makers are always the counterparty of the trade, they are able to create their own prices, which has led to a common misconception among traders that they bet against their clients, which is simply not true.
Pros of Market Makers
- Trades are instantly executed at your selected rate
- They offer fixed spreads which are usually lower than those of ECN brokers
- They create an even flow of trends and volumes
- Less transparency
- Prices may differ from the real interbank rates
2. Non Dealing Desk Brokers
Unlike money makers, non-dealing desk brokers pass their clients’ trades onto liquidity providers for execution and make a profit by charging a commission or fee. There are two main types of no-dealing desk brokers: STP and ECN.
Straight Through Processing ( STP) brokers
These type brokers require no dealing desk. All their clients’ orders are passed to the broker’s liquidity providers and executed at the bid-ask rate provided by them. However, STP brokers can sometimes operate like market makers whereby they match their clients’ orders with their own client base or take the opposite side if they can’t find a counterparty.
Electronic Communication Network ( ECN) Brokers
According this article, Also known as true ECN brokers, ECN brokers directly connect their clients to the interbank market and do not have a dealing desk. Their role is to provide a link between buyers and sellers without creating their own prices. Unlike Market makers, ECN brokers cannot set their own prices and the trading is completely transparent.
Pros of ECN brokers
- They offer the same prices as the interbank market
- They offer tight spreads and do not trade against you
- Trading costs are higher
- Your order may be rejected or re-quoted
- Their platforms are not easy to use.
The type of forex broker you choose for your trading can have a big impact on your success in your forex business. It’s therefore important that you carefully analyze the advantages and disadvantages of each type of broker before making your choice.