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ALL FOREX BROKERS ARE NOT THE SAME

Before you venture into forex trading it is pertinent that you know that all forex brokers you will come across will not be the same. Forex brokers normally act as middlemen that help you enter the interbank market and then carry out trades for you. Although you can regard the basic services they render as the same, they are still certain things that differentiate them.

Before you go for the broker type you want, you need to know that the structures of their trading forms are diverse. To figure out the type of broker that might be best for you, you might need to consider your style of trade. For every broker type you will choose, there will be benefits and faults and their method of going in and out of the trade will differ. For instance, some broker types will present you with tight spreads and no commission charge or fee, while other types might offer wide spreads with no commission on every trade. They will offer you an electronic platform to trade with but what will really differentiate them is how they structure the trades.

Dealing Desk Brokers (DD)

These are the dealers known as the 'Market Makers.' It means that the prices for transacting currency are quoted by them. In other words, in the trade, they take the counterparty. Hence, they are trading against their own customer position. What this illustrates is that this type of brokers or some of their clients tend to profit from your losses because they are taking a counter position. To simply put, they are trading against your stance. Hence, most of the trades are undertaken using their own funds.

You need to understand their environment and how it operates. The interest here conflicts when you look at how these types of brokers make their money. Their money comes from the spread they offer you and also from the trades that you lose. The spread is the difference in the value of a currency's 'buy and sell' price. Notwithstanding, the key gain from using these types of brokers is that opening an account with them only costs you a small amount. They also don't charge you any commission. But again, because they are market makers and quote the prices themselves, you might be offered a price that does not reflect the price of the actual market. Most times the winning trades are achieved using their own pool of resources and you will not be dealing with the interbank market.

No-Dealing Desk Brokers (NDD)

This environment is structured in a way that offers you actual pricing, real execution and no re-quotation of prices. In dealing with your orders, these types of brokers will counterbalance them by design and then use the interbank market to move them directly. In this way, you would have bypassed the dealing desk with your trade pitted against the market. Thus, the broker connects two parties on opposing trades on the interbank market and facilitates it using their electronic platform. Because orders are not internally kept, interests will not be in conflict. Notwithstanding, dealing with these type of brokers have their drawbacks. One of the main drawbacks is that it requires a higher amount of money to open an account.

There are differences in the spread.

The spread these type of brokers offer are usually variable, thus if for instance, the market is volatile, the spreads will widen very fast. You also need to know that NDD brokers can make money through the spread they offer and also through commissions should they choose.

NDD can also be categorized into two:

Certain brokers make a claim of being actual ECN brokers, but what they have is a straight-through processing system. In the STP environment, transactions are wholly electronic and are instantly processed in the interbank market bypassing mediation of any broker. Brokers with an STP system direct client's orders right into their fund providers that are linked to the interbank market. There are many fund providers for STP brokers and each of them with their own quotes. So for example, if there are three fund providers, in the system you will find three different quotes. This different bid and ask quotes is what gives them variable spreads.


Electronic Communication Network (ECN) and Straight Through Processing (STP)

The ECN system focuses on directly carrying out a currency transaction. They offer price quotes right from the interbank market with transactions that match with the fund providers and traders interacting with themselves.

The key gain here is the direct access to the interbank market.

The fault here is that since liquidity is not sufficient to carry out orders, you will always have re-quotations. While the STP and ECN broker operate in a similar way, what differentiates them is that STP brokers are more efficient in processing orders. Apart from that, the STP broker can also be a Market Maker in instances that orders are not able to be carried out in the interbank market. In this way, you can avoid dealing with re-quotes. The STP system has its drawbacks too.

The key fault is that the spreads you get are dynamic and tend to vary as they are affected by the liquidity and the volatility of the market. The ECN, however, provides increased transparency in trading. You can always know more about these different types of forex brokers. What is important is that you study these brokers and their reputation.