Why there are different types of Forex Brokers & Which are they?
One of the first challenges you’ll face is defining which type of Forex broker is right for you. That’s right, there are different types of brokers, and your choice will depend on your trader profile, the type of transactions you want to carry out, and the capital you’ve allocated for trading.
Why are there different types of brokers?
There are different types of Forex brokers due to the diverse needs and preferences of traders. Also, because of how these brokers handle transactions and the services they offer.
Here’s a summary of the main reasons why there are different types of Forex brokers.
Diversity of Traders: There are different types of traders with various strategies, capital volumes, and objectives. Some are individual traders with little capital to invest. Others are institutional investors with large capitals. The different types of Forex brokers are designed to cater to these different categories of traders.
Business Models: Each type of Forex broker operates on a different business model. Some are Market Makers, on the other side of the counter to respond to each transaction. Other brokers use the STP/ECN model. They route orders directly to the interbank market. These business models affect how orders are executed and the spreads.
Regulation and Security: The activity of a Forex broker is regulated by the regulatory authorities of the country where they operate. They comply with regulations and offer high levels of security to their clients. However, not all currency market brokers are registered and regulated.
Differences in Spreads and Commissions: The spreads (the difference between the buy and sell price) and commissions can vary significantly between brokers. Some brokers offer fixed spreads, while others have variable spreads. The commission structure can also be different. This directly affects the trading costs for traders.
Access to Financial Instruments: Some brokers may offer a wide range of currency pairs and other financial instruments, such as CFDs (Contracts for Difference) on stocks, indices, commodities, and more. This allows traders to diversify their portfolios and explore different investment opportunities.
Types of Forex Brokers
(1) Dealing Desk Forex Broker
A Dealing Desk broker, also known as a Market Maker in the context of Forex, is a type of intermediary that acts as the counterparty in their clients’ transactions. Unlike STP/ECN (Straight Through Processing/Electronic Communication Network) brokers, who route orders directly to the interbank market, Dealing Desk brokers take the other side of the trades, meaning they assume the position opposite to that of the client.
(2) ECN Forex Broker
An ECN Forex broker is a currency market intermediary that acts as a go-between for traders and banks and financial institutions. It sends client market orders through an interconnected network (Electronic Communication Network). Unlike Dealing Desk brokers, ECNs do not act as the counterparty in transactions.
(3) No Dealing Desk (NDD) and Straight Through Processing (STP) Forex Brokers
These two types of Forex brokers share one thing in common. They are intermediaries between traders and the market. At no point do they act as the counterparty to transactions, as is the case with market makers.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].