Forex Broker Choices: Necessary Info

There’s a extremely wide choice of currency broker companies online and when you are starting in currency trading it can be difficult to find the best. We have a tendency to be drawn to advertising, assuming they’re all working in the same way. In reality this is not true. Currency exchange brokers have very different business models which affect the way that they operate. In some cases, you may be stunned to hear that they could be working against their clients instead of for them.  

Naturally traditionally a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with phone orders and simply placed the order for the best price that they could get through their dealing desk. Nowadays, everything is done online so that clients put in their orders for a certain cost. You do still need a broker who will connect to the market thru their software platform.

Many brokers still work in the traditional way, placing orders for clients as they’re instructed. These are commonly the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the internet has opened up forex trading to folk with significantly lower investment funds. More recently, companies have come on the scene to cater for these smaller speculators and they do not always follow the pattern of traditional brokers. To cut costs, they usually do not have their own dealing desks and they may operate in some very different ways . This can have significant effects for your funds and how they are managed.

So let’s have a look at the kinds of business model that you can come across in your search for a currency broker.

No Dealing Desk (NDD) Currency Brokers

NDD brokers work in an identical way to brokers with dealing desks, but they use a selection of liquidity suppliers to essentially match their clients’ orders in the market. Competition between liquidity providers keeps the spread low, even though the broker sometimes increases the spread to cover their own costs and make some cash.

Electronic Communications Network (ECN)

Forex brokers who use the ECN can access an online network where trades are filled. Many market makers work this way, as well as some brokers, banks and other large currency traders. Spread is usually low but you could be billed per trade.

Market Makers

Market makers aren’t brokers in the real sense because rather than placing your order in the market they will match it themselves and then cover themselves against any loss by taking a position in the ECN or market that offsets their commitment to you either partly or entirely. Market makers set their own prices, although naturally these will be related to market prices. They frequently don’t like clients to use scalping strategies as the very short term nature of these trades makes it harder for them to offset their risk. Some traders are pleased to use market makers but others consider that they have a conflict of interest that might work against you as a trader.

Bucket Shops

Foreign exchange bucket shops are like bet takers in that they match your trade without necessarily taking any position in the market. They might not have any connection into the genuine currency market. They win if you lose, so if you are successful they’ll probably close your account and return your funds. There is truly no point in getting concerned with a bucket shop unless you just need experience at extremely low levels of investment, and plan to lose money. They are not legal in some jurisdictions, and do not should be called a currency broker.