The Main Types of Forex Brokers

The Main Types of Forex Brokers 05.04.2016


The Forex broker is a company providing brokerage services to retail customers - traders. The essence of mediation of a forex broker is to provide traders the access to large financial institutions operating in the foreign exchange market, as well as directly to the trading platforms. Forex brokers can vary according to several classifications. The main criteria of a broker are the presence of a regulator, the speed of order execution, the size of the spread, as well as the possibility of using automatic trading software.

Bank - In our case – the bank is a financial institution that provides brokerage services in the banking forex trading market. The Main difference between a bank and a dealing center is that on many occasions the dealing center carries out customers’ transactions on its behalf and at its own expense. In general, the customer profit is a loss for the dealing center. In the case of the bank-broker, a conflict of interest between the client and the bank is not so clearly expressed, as the sources of income of the bank broker is much wider than that of a dealing center. Another advantage of a forex – bank is that the licensing and regulation is often more reliable than of conventional brokers. Also, broker banks may participate by themselves in the interbank trading and have more robust liquidity providers.

NDD (Non Dealing Desk) – it is a technology of order execution in the Forex market without a dealing center. When NDD technology is used, client applications are executed automatically based on the choice of the best prices of competing liquidity providers. NDD is a general concept that includes STP and ECN technology. That is, any broker, organizing direct and automatic transfer of quotations from the liquidity provider to the trader and the transfer of trading orders from the trader to the liquidity provider, is a NDD broker. The main purpose of NDD technology is increasing the speed of execution of trade orders, thus reducing the time of market slippage and completely eliminating the possibility of such a phenomenon as re-quotes.

The main advantages of NDD brokers are the transparency and anonymity. Transparency means that a trader enters a real market rather than the market being artificially developed for him. Better fills are a result of the direct and competitive market bids and offers. Anonymity means that there is no Dealing Desk monitoring who has come to the market and is asking for an order to be filled, instead client orders are carried out automatically and anonymously.

STP (Straight Through Processing) – When using STP technology, all the quotes and trades are transferred directly without the involvement of a dealer. But the main difference from the ECN is that when using STP, there are excluded the impacts on the financial transaction not only on the part of the intermediary broker, but also on the part of any human factor person in principle, to increase transaction speed. If you trade with a STP technology, the intermediary may charge a fee for each transaction separately, or add the fee in the spread.

ECN (Electronic Communication Network) – it is a network offering the broker the best quotes, selected among all market participants, in order to reduce the spread to the lowest possible figure. When the broker gives the trader access to the ECN network, the broker itself ceases to participate in the execution of orders. He just acts as a connecting element between liquidity providers and retail customers in exchange for a commission for brokerage services. The main essence of ECN technology is to avoid exchange mechanisms and manipulation by an intermediary broker. In order to make the currency trading on the ECN technology possible, it requires special software.

Here are some advantages of ECN brokers:

-          It is anonymous – the whole ECN trading process is completely anonymous. It gives you as a trader the chances to deal on neutral prices.  In this way, the possibilities of some interest conflict are lowered.

-          Immediate Trade Execution – traders can trade the currency pairs instantly on live streaming, best executable prices with instant confirmations. There is no dealing desk to intervene, so the re-quotes are not possible.

-          Client-to-Bank Trading – the ECN model allows you to trade on the global liquidity of the most popular banks.

-          Variable Spreads

MM (Market Maker), DD (Dealing Desk) or liquidity provider – is a financial institution taking on the risk of acquiring and storing in their accounts currencies and securities to organize their subsequent sale. Liquidity Providers are mostly large financial institutions or banks that are trading currencies and securities on a large scale. Also, the market maker may be an intermediary broker, which, under the agreement with the exchange, takes on a commitment to keep within a certain time the spreads that do not exceed a specified value.

BB (Binary Broker) – it is a broker providing services for trading binary options. Trading binary options is the fastest, but the riskiest way to make a profit on international financial markets. The essence of the trade is in the correct prediction if the price of an underlying asset will increase or drop in a predetermined period, so, it is about the ability to predict the market. As assets, there may serve currencies, raw materials, precious metals, shares of the world's leading companies, as well as stock market indices. To trade binary options, the trader needs special software provided by the broker.

When choosing a Forex broker, it is recommended to get introduced to this list, because the DD brokers can often trade against their successful clients. The ECN can be a better option, but you should also consider other aspects, like the regulation and reviews.

We hope you will find the right broker that will match your expectations! 

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