Forex Broker Choices: Necessary Info

There’s a extremely wide choice of currency broker firms online and when you are starting out in currency trading it can be tough to find the best. We tend to be drawn to advertising, presuming they’re all working in the same way. Actually this isn’t true. Currency exchange brokers have very different business models which affect the way that they operate. In a few cases, you may be stunned to hear that they could be working against their customers rather than for them.  

Of course traditionally a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with telephone orders and simply put in the order for the best price that they could get thru 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 through their software platform.

Many brokers still work in the traditional way, placing orders for clients as they are instructed. These are often the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the Net has opened up forex trading to folk with much lower investment funds. More recently, corporations have come on the scene to cater for these smaller backers and they don’t always follow the pattern of conventional brokers. To reduce costs, they usually don’t have their own dealing desks and they may operate in some totally different ways. This could have crucial results for your funds and how they are managed.

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

No Dealing Desk (NDD) Currency Brokers

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

Electronic Communications Network (ECN)

Foreign exchange brokers who use the ECN can access a web network where trades are filled. Many market makers work this way, as well as some brokers, banks and other large currency traders. Spread is generally low but you may be charged a fee per trade.

Market Makers

Market makers aren’t brokers in the real sense because instead of 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 completely. Market makers set their own prices, though naturally these will be related to market prices. They frequently do not like clients to use scalping techniques as the awfully short term nature of these trades makes it hard for them to offset their risk. Some traders are pleased to use market makers but others consider that they have got a conflict of interest which may work against you as a trader.

Bucket Shops

Currency exchange bucket shops are like bet takers in that they just match your trade without always taking any position in the market. They might not have any connection into the real currency market. They win if you lose, so if you are successful they will probably close your account and return your funds. There’s actually no point in becoming concerned with a bucket shop unless you just want experience at very 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.