In today’s financial markets, there are different types of brokers as well as hundreds of brokerage companies. Therefore, making a choice can become complicated.
In order to help you choose a Forex broker for you that will match your expectations, you will find in this article the different profiles of brokers available. But before we tackle the types of Forex brokers and types of brokers licenses for market participants, let’s briefly look at what a broker is.
What is a Broker
The “broker” is a trade professional practicing the activity called “brokerage.” Its role is to connect two parties seeking to carry out transactions such as the buys and sells of various financial instruments like bonds, currency pairs, or commodity goods.
Therefore, the broker could be an individual or a company that operates as an intermediary between the trader, the financial markets, and institutions. Here are the different types of market intermediaries when it comes to the forex market.
Different Types of Forex Brokers
Forex is one of the most liquid markets globally, and the volume of each transaction is very high because most players are financial intermediaries, banks, and large companies.
Over $ 5 trillion traded in the markets daily, but don’t imagine that banks will agree to deal directly with you as a Forex trader and your few thousand dollars in capital. That’s why you need to go through a forex broker.
There are two main types of a broker on the foreign exchange market: dealing desk and non-dealing desk brokers. Non-dealing desk brokers are then split into ECN, Electronic Communications Network, and Straight Through Processing STP brokers. Behind these terms, the reality is ultimately quite simple. Here are their main characteristics.
Dealing with Desk Brokers
Market makers are “dealing desk” brokers, which means that they do not transmit their clients’ orders to the financial markets but process them internally.
The trick with market makers is the notion of conflict of interest. Indeed, depending on the trading patterns and the volume of transactions, the broker may be your counterparty.
This implies that when you win, the broker will lose money. If you are a fan of scalping, for example, it will not be advisable to opt for a market maker because, given the pace of this type of trading, the latter will not have time to hedge.
Market makers operate with fixed spreads and are paid only on them, so there is no real price transparency with them.
NDD Broker (Non-dealing desk brokers)
When it comes to non-dealing desk brokers, the broker enables you to access other liquidity providers. In that case, the broker doesn’t make a spread but earns money by charging you a commission on trading transactions. We can split the non-dealing desk broker into two categories:
- ECN brokers
- STP brokers
What is an ECN Broker?
With ECN brokers, all transactions are executed directly on the interbank market. Participants such as banks or market makers act as counterparties, i.e. when you are a buyer, they are a seller and vice versa.
If an order does not find a counterparty, then the broker calls on liquidity providers. These are the banks that offer brokers significant liquidity to obtain tight spreads in normal market conditions.
With ECNs, note that spreads are always variable and very often relatively competitive. Brokers are not remunerated, in fact, not on spreads but commissions established according to transaction volumes.
What is an STP Broker?
STP brokers work basically the same way as ECNs. The difference lies in the fact that the liquidity offered is provided each time by liquidity providers like brokers, banks, and hedge funds.
Thanks to this system, lead times are reduced, and spreads are more stable.
In other words, STP brokers only act as an intermediary between the client and the bank. Regarding remuneration, the broker earns money on his client’s transaction volume or on the spread.
It doesn’t matter which broker you choose. Just make sure that it has all the features that suit your trading strategy and style.
Regulated vs Unregulated Forex Brokers
Another important point to stress regarding the types of brokers is regulatory compliance. With so many online brokerage companies online, not all of them comply with regulations.
When choosing a broker, make sure to visit the site of financial authority in your country and verify if the trading platform and the broker you want to go for are on their list of reliable Forex trade brokers.
It is important to know how a broker works in order to be able to trust them. After all, you have entrusted them with your money. Thus, it is customary to know what they are doing with it.