The currency market or foreign exchange market is a global decentralized market for trading of currencies. This market includes all facets of exchanging, buying and selling currencies at determined or current prices. If you are an investor in the forex market or if you intend to begin your journey of online trading, collaborating with a reputable forex broker can expose you to a range of merits. However, since there are different types of forex brokers, it is vital you know how to distinguish them so that you can be certain about the specific one that will suit your online trading needs better.
Despite the fact that all forex brokers offer the same basic solution, be notified that behind the scenes their ways of operation normally vary. There are several ways in which brokers operate, and the kind of forex broker you select can have a significant impact on your online trading experience. Here are the different types of forex brokers you should know about prior to choosing one to assist you with your trading needs:
Types of Forex Brokers
1. No Dealing Desk
The NDD i.e. No Dealing Desk kind of forex brokers are brokers without a dealing desk. The leading composite quotes acquired from various forex trading quote providers give the No Dealing Desk brokers their liquidity in the foreign exchange market.
Multiple forex trading quote providers post their respective leading markets with the No Dealing Desk brokers. The NDD brokers then execute transactions as well as watch and fill orders accordingly for their respective clients.
When No Dealing Desk brokers are charging their clients, they normally either request for a commission or widen the offer or bid spread so as to make small returns on every trade executed.
2. Market Makers
Market Makers are forex brokers who provide their clients a two sided market which comes from an expert forex trader that operates as part of their respective personal in-house dealing desk. In case the prices are dealt on, the market maker forex brokers end up acquiring the other side of any provided transaction from their respective clients by purchasing on their bid side or selling on their particular offer side of the specific quoted price.
The prime objective of market makers is capturing a section of the spread and doing adequate capacity on the market’s both sides so as to protect themselves from having to put off risk accumulated with another expert counterparty.
In case the trade performed is large enough, these types of forex brokers may consider offsetting the trade immediately particularly if they doubt the market may move against them.
Pros of Collaborating with a Market Maker as a Forex Trader
- Instant Execution
As a forex trader, dealing with a market maker means your trades will be executed at that particular rate you select.
- Fixed Spreads
If you will choose a market maker as your broker, you will always know what spreads you are supposed to pay anytime you trade in the forex market.
- No Rollover Fees
When dealing with a market maker broker, due to the fact that most of the orders are offset normally by counter-orders, there is no currency that changes hand actually and thus as a trader you will not be required to pay additional swap fees.
Cons of Dealing with a Market Maker
- Varying Prices
When trading forex with a market maker, in most cases prices may slightly differ from the interbank market.
- The Marker Maker can go Broke due to Improper Dealing Desk Management
One of the risks involved when seeking for the services of a market maker is that this kind of broker might go bankrupt in case the dealing desk is not managed properly. This can translate to a loss for you if you are that market maker’s client.
- Sometimes Liquidity Might be Low
At times liquidity might be low especially when the market maker is unable to locate counterparties for the trader’s order and is not ready to acquire it up themselves.
3. ECN i.e. Electronic Communications Network Forex Brokers
Electronic Communications Network brokers generally do not have their own dealing desk. These brokers offer an electronic forex trading platform whereby expert market makers at financial institutions like banks, and traders as well as other forex trading market players can enter offers and bids via their respective system.
Pros of Choosing an ECN Broker
- Same Price Rates
Unlike when dealing with market makers whereby price rates might differ, with electronic communications brokers, you are assured of direct price rates from the interbank market.
- Cannot Bankrupt Themselves
ECN brokers cannot bankrupt themselves via trading against their respective clients.
Cons of Selecting an ECN Broker
- Dynamic Spreads
If you will consider seeking for the services of an Electronic Communications Network broker, as a trader, once you enter any trade you will be unable to note what the spread may be.
Dealing with an electronic communications forex broker also means at times you will be associated with paying the broker rollover fees and commission.
4. STP i.e. Straight Through Processing Brokers
Straight Through Processing forex brokers are types of brokers that do not have a dealing desk also. However, these brokers hire some of the strategies of market makers in order to offer trading conditions that are more flexible to their respective clients’ needs and be able to bypass various limitations linked with trading solely inside the interbank market.
STP brokers often display price rates which match with the interbank market rates. In some situations, these brokers can end up acting like market maker brokers. For instance, some STP brokers may decide to use complex algorithms so as to figure out between routing the client’s trade to the interbank and trading against the client which option is more profitable for them.
Pros of Hiring an STP Broker
- Their prices and the interbank rates are identical
- STP brokers offer their clients a low entry capital requirement
Cons of Dealing with an STP Broker
- Dynamic Spreads
As a trader, dealing with an STP broker means you will not be aware about what the expected spread is when entering a trade.
As you have seen, there are different kinds of forex brokers with varying ways of operation. Make sure therefore you do your homework accordingly on the various types of forex brokers before you consider liaising with any so that you can know the specific one that will suit your forex trading needs better.
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