Types Of Forex Brokers And Features Offered By Each
A forex broker provides supporting trading services to forex traders which includes trading platform equipped with advanced charts and tools for the utilization of their traders, wide range of tradable markets, leverage facilities and so on.
A forex trader can buy or sell the currencies through the trading software provided by a forex broker. In the forex market, buyers and sellers reside in different locations, and so there is need of a platform where buyers and sellers can relate with each other for trading purpose, and the forex broker provides that platform.
Forex brokers are broadly classified into two:
- Dealing Desk (DD) and;
- No Dealing Desk (NDD) Brokers.
Dealing Desk brokers are also referred to as Market Makers (MM) while No Dealing Desk are further sub-classified as Straight through Processing – STP brokers and Electronic Communication Network – ECN brokers.
Dealing Desk (Market Maker) Brokers
The Dealing Desk broker plays the role of a liquidity provider and resolves the customer orders from its b-book. That’s why direct dealing broker is also known as Market Maker – the broker serves the purpose of the market for a trading client. The Direct Dealing broker writes out the trading orders by meeting them from the on-hand inventory or by harmonizing it with the other customer orders. Thus, the dealing desk broker is the counterparty in each trade.
The Market Maker brokers offer bid and ask prices by including the spread in the form of extra pips to the interbank quotes. The dealing desk brokers make money by taking advantage of Spread and usually offer fixed Spread. The stiff contest between the brokers makes their quotes very identical with the inter-bank quotes, with just some little difference.
The fact that market makers are counterparty to all your orders makes space for crooked practices of market making brokers. The nature of the market maker’s business model is apparent – each time you open a BUY trade, the market maker opens a SELL trade against you. If your Trade is lucrative, then the Trade of the market maker broker will be down. Your orders with market makers will never get performed at the real interbank market. Fair market makers can further circumvent your Orders at the right interbank market, but no usual retail market maker practices this. Hence, the primary aim of crooked market makers is quite clear – not allow traders make any profits with them.
No Dealing Desk Brokers
No Dealing Desk (NDD) Brokers offer a direct approach to the interbank market. When No dealing desk broker connects the traders with liquidity providers for the sake of trading, it is not usually the counterparty in any of the transactions.
No dealing Desk brokers are of two kinds:
- The Straight through Processing brokers and
- The Electronic Communication Network brokers.
Straight through Processing (STP Brokers)
The straight through processing broker directly sends the trading order to some liquidity providers that have different quote rates for the trading transaction. The broker’s platform sorts out the best price for the trader from available quotes to execute a trading transaction. The broker makes a profit by adding the markup in the spread.
Electronic Communication Network (ECN Brokers)
The ECN brokers do not forward the trading order of the traders directly to liquidity providers while ECN broker lets the traders directly relate with other traders in the foreign exchange market by using the electronic communication network to obtain the best trading quotes.
Nevertheless, interbank liquidity providers are a part of the ECN engine also, as self-traders themselves would not make sufficient market liquidity. So the ECN brokers match the trade for their traders with other market traders and charge fix fee on each transaction. The benefit of ECN forex accounts is lower spreads than in case of the STP trading accounts.
The forex brokers who directly send orders to the liquidity providers are an A-booking (NDD Model) and when they handle the trading orders of the client internally – that is known as B-booking (Dealing Desk – market making). The hybrid model is used purely as a tool to control the risk of trading through traders’ classification. The hybrid model used to serve as hedging tool by putting certain traders in A-Book and putting the others on B-Book to minimize risk and increase the profit of brokers. The bulk of today’s forex brokers might promote their “fair ECN/STP” pricing, and yet carry out crooked practices at their b-books.
As a recommendation, please choose a real ECN / STP broker.