Types of Forex Brokers
Forex brokers are the mediators between the interbank market and the retail traders in the spot forex market. As such they hold very crucial roles in retail forex trading and can make or mar your trading. This is if they are good or bad. There are different types of brokers differing in the brokerage model they run. This (the brokerage model) can leave them with certain advantages and disadvantages.
Different types of forex brokers
There are different types of forex brokers based on the range of instruments offered (stocks, CFDs, crypto, etc.), their regulation status, types of traders/trading allowed (scalping, hedging), and the type of execution. For this post, I will be delving into the types of brokers based on their mode of executing the trades/orders placed by the client. This is because it is important as it can affect the quality of service (speed of transaction, slippage, etc.) which can then have a positive or negative effect on the trading of the client.
Based on the mode of execution there are two major types of brokers and they are:
- Dealing Desk Brokers
- No Dealing Desk Brokers.
Dealing Desk Brokers
Dealing desk brokers are brokers that quote currency prices themselves. They take the other side of the trade whenever clients place trades. Moreover, they are also known as market makers (MM) as they create the market in which their clients trade. They make money from the spread and also when a client loses a trade (If they are on the other side of the trade when a client loses, they make a profit). When a client wins, the trade of the client is either passed on to a liquidity provider or matched with other clients’ trades.
For market makers, a conflict of interest between the broker and client can be a thing of concern. As some shameful brokers engage in actions such as stop-loss hunting.
Examples of market makers are FXTM, easyMarkets, Exness, AvaTrade, and eToro. In-depth broker reviews can be accessed here.
No Dealing Desk Brokers
The other types of forex broker are the no-dealing desk broker. These brokers do not create a dealing desk rather they match client orders directly through STP technology or to the interbank market through ECN technology.
Therefore, based on the type of technology employed by the broker, no dealing desk (NDD) brokers can be divided into two categories:
- Straight through processing (STP) brokers,
- Electronic communications network (ECN) brokers.
Straight-through processing (STP), brokers are brokers with technology that matches clients’ orders to that of other clients. They usually have lightning-fast execution with no requotes. They have liquidity providers linked to the interbank market that provides them with quotes.
Therefore, they do not quote prices themselves, and because clients’ orders are matched, they can only make a profit from the spread or by charging a commission. Examples of STP brokers include NPBFX, FBS, Alpari, XM, FXOpen, and Trading 212.
Brokers that employ the electronic communications network connect their clients directly to the interbank market. They use live quotes from the interbank market. While there are some brokers who offer other forms of brokerage and also offer ECN accounts as one of their products. Also, there are brokers that offer only ECN accounts and are referred to as true ECN brokers. Examples of ECN brokers are IC markets, Dukascopy, FXTM, FBS, and XM.
In conclusion, it is important that you carefully examine the services a broker has to offer before trading with them. This can be done by reading reviews and reading recommendations from reliable sources. After doing this preliminary research, then, you can then open a demo account with the broker to test their offerings without risking your money.