As tempting as it is to say there are really just two types of forex brokers out there (good ones and bad ones) there are actually four types. The key is to understand what each type is and does in order to find the right match for your Forex trading career.
Dealing Desk Forex Brokers
Also known as market makers, a dealing desk broker earns money through the difference in bid and ask prices – the spread. But, since they are the brokers who set both the bid and ask prices, they offer traders fixed spreads. When you place a trade with a dealing desk broker they will attempt to reduce their risk by trying to locate a matching opposite order from their client base. Without finding one, the dealing desk broker has to take the opposite side of the trade you made.
No Dealing Desk Forex Brokers
These brokers do not match your position but will send them on to the interbank market. When they do this they link you with a liquidity provider and charge you a commission. If they don’t charge a commission, a no dealing desk broker will have a spread they earn money on. Their spreads will be slightly higher than those available through dealing desk brokers.
Straight Through Processing (STP) Brokers
This is a sub-category of NDD forex brokers. They will pass your order to liquidity providers who can access the interbank market. As STP brokers have access to several liquidity providers expect to see different ask and bid pricing available as a result. A STP broker will sort through the different rates and tack on a slight mark up. Guess what you get to pay? If you said the mark up price, you would be correct.
Electronic Communication Network (ECN) Brokers
ECN brokers are a fun bunch. They are one more sub-category of NND forex brokers. They create a platform for traders where you can trade directly against participants in the market. They offer the best bid and ask prices and match orders on the best prices they can access. ECN brokers connect all kinds of players ranging from hedge funds, banks, other brokers and traders like you. Because of the way they do this it is not easy for them to charge based on spreads and so you will end up paying a ‘connection fee’ for being added to the party of participants. Think of it as a cover charge to get in on the action and it won’t sting so much. Plus, ECN brokers will require higher deposits than any other type of broker.
Remember To Keep Your Focus
When you are ‘shopping’ for a broker, it is important to keep in mind the type of trading you intend to do and what kind of risk you can handle. It won’t be hard to find the right match as long as you follow through on searching for a broker that understands your goals and style. Give it time and you will eventually find the best broker for your needs.