Up to $5 trillion is traded daily on the forex market, making it the largest financial market in the world. It’s a market that millions of traders, new and old, participate in every day, and it’s tempting to jump in and see what all the fuss is about. But before entering this huge market, one of the most important steps is choosing a broker that is best suited for you. Who you choose to trade with can have a big impact on the quality of service you receive as well as trade charges and variable spreads.
Forex brokers are divided into two types:
Dealing Desk Brokers, sometimes called “Market Makers”
No Dealing Desk Brokers, further divided into two types:
Straight Through Processing (STP)
Electronic Communication Network (ECN)
Forex broker types in detail
Dealing Desk Brokers
These brokers are known as market makers and act as the counter-party to a client’s trade. Market makers take the opposite side of any trade (whether buy or sell) and most orders are filled by the broker itself, rarely reaching the interbank market. These brokers offer fixed spreads and set bid & ask prices at which they are willing to buy and sell, which are usually higher than the real market at any given time. When trading with a dealing desk broker a trader doesn’t deal with liquidity providers and is usually confined to the broker’s own liquidity pool. Market makers earn their money form the spread between buy and sell prices.
Moreover, a dealing desk broker’s clients aren’t directly quoted interbank prices, although they are usually close to interbank prices.
No Dealing Desk Brokers
A No Dealing Desk broker provides direct access to the interbank, and acts as a bridge between client and liquidity provider. This type is further divided into ‘Straight Through Processing (STP)’ and ‘Electronic Communication Network (ECN)’ brokers. An NDD broker doesn’t requote, and prices come directly from liquidity providers. You can trade during economic events without any limitations. These brokers offer low spreads but they are not fixed. Therefore, spreads may increase strongly during volatile periods upon any economic data releases or events. They can also impose commission on every transaction they facilitate.
Straight Through Processing
These brokers have an automated dealing process directly with the interbank without broker interfere. The brokers with STP have a system that can direct the clients to the liquidity providers who have access to the interbank market.
Electronic Communication Network
These brokers offer a direct interaction with other clients. It could be banks, institutions, hedging funds, or even other individual brokers trading with each other in order to get the best prices. This broker gets a small commission for each transaction.
Now that you know about the different types of forex brokers, you can make a more informed decision when choosing who to trade with.