Types Of Forex Broker

Forex Solutions

Forex Solutions

March 27, 2020

A clear understanding of Types of Forex Brokers is of utmost importance for all aspiring entrepreneurs looking to venture into Forex Brokering Business. It gives clarity over.

  • 1. How do different types of Forex Broker operate?
  • 2. What are the ways they make money?
  • 3. How types of Forex Broker are different than each other?
  • 4. What kind of software and tools are required for a different type of forex brokering business?
  • 5. What kind of operational set up is needed?

The core function of a Forex Broker is to help traders discover the best prices and let them trade at best prices. So, Forex Broker can be broadly divided into two categories on the basis of how trade orders are filled:

Type of Forex Brokers

I. Dealing Desk or Market maker

II. Non-dealing desk

  • STP (Straight Through Processing)
  • ECN (Electronic Communication Network)
  • MTF (Multilateral Trading Facilities)

Market Maker (Dealing desk)

  • A dealing desk broker is basically a market maker and they take opposite side of your trade.
  • A Market Maker offers fixed spreads and can elect to quote above and below the actual market price at any time.
  • Market makers are always the counterparty of the traders; they never trade directly with the liquidity provider. They get paid through the spreads (difference between buy and sell price) however many brokers actually only derive a small portion of their income through spreads. And, they generally trade against their client prior to covering themselves with regard to the liquidity providers. Although they take the opposite side of trade, it’s not illegal. It is just the way they run their business and there are a couple of advantages to trading with a market maker and otherwise known as the dealing desk.

Advantage

  • Fixed spreads: In this case, you know very well in advance that what spread you are going to pay when you enter into the trade.
  • Quick Execution: Your trades are executed at the same rate you selected.
  • No rollover fees: As most orders are offset by counter orders, no currency changes hand, so there are no additional fees.

Disadvantage

  • Price may vary (slightly in most cases) from interbank market.
  • Liquidity can be low at times when the broker cannot find counterparties for the orders and is not able to take it up themselves.
  • There is risk that broker could go bankrupt if the dealing desk isn’t managed properly.

Non Dealing Desk Broker (NDD)

The no dealing desk or NDD forex broker lacks a dealing desk, as the name implies. It also provides traders with direct access to the interbank market. In this case, there is no re-quoting of prices, which mean you can trade during economic announcement without any restriction. In such cases spread offered are lower, but they are not fixed, so they can increase significantly when volatility is increasing during the major economic event. NDD broker can either charge a commission on each trade or choose to increase the spread.

Non dealing desk further fall into two categories:

STP(Straight Through Processing)

In STP mode transactions are fully computerized processed on the interbank market without any broker intervention.

  • STP brokers don’t have a dealing desk.
  • STP brokers essentially operate on the model you thought your market making broker used. So, they make their money off the spread and you are trading against other participants in the market.
  • STP brokers have no issue in loosing you. In fact, if you lose money and stop trading then you are no longer earning your money. But on the other hand, STP brokers make the same amount of profit whether their client loses or wins, so there is no conflict of interest. In fact, STP brokers can make more money when their client wins, as they get to charge a high fees.
  • STP brokers very rarely trade against their clients.
  • Real time quotes provided by STP brokers.
  • Clients are able to access a greater number of liquidity provider.

How “STP forex Brokers” work?

The forex market is a vital part of trader’s journey. “So let see if we can explain in simple terms”. Moreover, broker’s sites have front end and back end. The front end adds some features as the trading platform, chart, order buttons, trader’s account and numbers of other things. The backend is what goes behind the scene. Today’s modern technology is so advanced that communication between the front end and backend is almost very fast. It’s like taking just fraction of second.

There are number of different parties involved in forex trading, apart from the actual buyer and sellers. It also involves a broker who acts as the middle man between the buyer and seller, and then there is a liquidity provider, which usually a major bank, that provides the prices. Everything is forex trading is done electronically. The STP forex broker finds and matches order with a counterparty that is happy to pay an agreed price. The other party could be another trader, market maker or liquidity provider.

Pros.

  • Prices are identical to interbank rates.
  • Lower entry capital requirement.
  • Smaller trade size.

Cons.

  • You don’t know where the spread will be when you enter the trade.
  • Rollover fees.

ECN (Electronic Communication Network)

  • ECN brokers provide and display real time order book information. They thereby improve market transparency by providing information to all market participants.
  • ECN brokers simply match buyers and sellers by putting orders through their communication networks.
  • ECN brokers have no role in providing liquidity. Moreover, all they do is provide a medium where buyers and sellers can connect with each other. So they play no role in manipulating market prices in any way.
  • All transactions are directly processed on the interbank market in no dealing desk mode.
  • Capital requirement are minimal. Bid and ask prices are always displayed clearly.
  • The processing of order is quick and efficient.
  • The price quoted for currencies pairs are real.
  • The level of risk is reduced.
  • Clients are able to see live market trends. ECN is becoming one of the highly recommended platforms in the forex market for all traders due to its interactive and great connectivity of features.

Pros.

  • Privacy of trades- ECN broker act as middleman for traders. So when you make a trade an ECN Network, you are completely secured and your account can not be traced. You can protect your trade strategy by using the name of broker because you are using the name of broker for trades.
  • The broker does not trade against you.
  • Trade continuity.
  • ECN broker pass their customer order directly to a liquidity provider.
  • ECN brokers are famous for providing the deposit and passing option. So, it ensures that all adjustment is implemented on time with no problems.

Cons.

  • High fees- The commission is charged on every trade.
  • Dishonesty- ECN provides liberty to become market maker to every person who can easily influence the market by introducing great volume of trade. Also there are many brokers who are not ECN brokers but they are advertising themselves as one.

The discussion will give you in-depth knowledge of types of Forex Broker. So, the knowledge of types of Forex Broker increases your business capacity.

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