When it comes to choosing a forex broker, the first step is understanding what your options are. There are different types of online forex brokers out there in the market. As a trader, you must take the trouble to understand as to how exactly each one operates so that you do not end up making unwise choices. The services offered by different brokers may appear to be the same, but there may be differences in their policies as well as methods of operation. Further, the access to market varies from one broker to another. The aim of this post is to help you choose the right online forex broker based on your specific needs.
Mainly, there are two types of forex brokers: Dealing Desk (DD) brokers and No Dealing Desks (NDD) brokers. DD brokers are also referred to as Market Makers. NDD brokers can be again divided into Straight Through Processing (STP) brokers and Electronic Communication Network plus Straight Through Processing (ECN+STP) brokers.
DD Broker or Market Maker
This type of forex broker typically offers fixed spreads. The broker may choose to quote above/below the actual market price of currencies at any time and act as the counterparty to you as you do not trade directly with those that provide liquidity. Market makers make money through spreads and by providing liquidity to you. They create a market for you and often place trades that are opposite to your trades. They do this to cover themselves against the liquidity providers. However, the question of conflict of interest does not arise at all.
DD brokers make available both buy and sell quotes, meaning they fill both buy and sell orders. This is to say that they are indifferent to your decisions. Further, you do not get to know the interbank rates when dealing with a DD broker. You do not have to worry about this because there is a high level of competition among brokers and, therefore, the rates offered by these brokers are often very close to or same as the interbank rates.
This type of broker does not pass your orders through a dealing desk, meaning the broker does not take the other side of your trades. This broker just links two parties together. NDDs make money either by charging a small commission for the trades you place or by increasing the spread slightly. NDD brokers can be divided into STP and STP+ECN brokers. Some forex brokers may claim to be ECN brokers, but in reality, they just have STP system.
STP forex brokers route your orders directly to those that provide liquidity to them. These liquidity providers would have interbank market access. They often work with many liquidity providers. Each provider will quote their own ask and bid prices. The liquidity providers’ system sorts the ask and bid quotes from the best to worst. These brokers then add a small, fixed markup show you the quote in your system. Most STP brokers offer variable spreads, meaning they will widen their spreads if the liquidity providers widen theirs. Some brokers may offer fixed spreads.
The best ECN forex broker allows you to see the orders placed by other network participants, who could be retail traders, banks, hedge funds, and other brokers. This means that the participants trade against one another by offering their best ask and bid prices.
In fact, the best ECN forex broker also allows you to see the market depth, meaning the broker displays the buy as well as sell prices of other participants. As a result, it is not possible to slap any kind of markup on spreads. This is why ECN brokers charge a small commission for the trades you carry out through them. In the case of ECN brokers, all of your transactions are processed in NDD mode and directly on the interbank market.
Summarizing, choosing the right forex broker is very important when you are opening an online retail forex trading account. This is because the type of online forex broker you choose to work with has a direct impact on your success as a forex trader. If you are a newbie as far as forex trading is concerned, then you must be extra careful because there are many dishonest brokers out there in the market and their only goal is to fool beginners. Therefore, you should involve in forex trading only with honest and regulated brokers.