The money market can be confusing, especially if you are new to the concept. Additionally, all the terminology and acronyms used may leave you more lost than the help they give. However, there are only two things that you should keep in mind before venturing into the stock market. First, you will need a forex broker; this is a significant pillar to the success of your trading career since they influence the quality of service you get and your fees. Secondly, nail down the different types of forex brokers depending on your needs in the forex world. Therefore this article will discuss the three main types of forex brokers to help you pick the one best suited for your needs.
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Types of Forex Broker
Although there are three distinct types of forex brokers available in the market, they generally all fall into two main categories; Dealing desk and non-dealing desk brokers.
The three types of forex brokers are:
- Market Makers
- Electronic Communications Network (ECN)
- Straight Through Processing (STP)
Market Makers Forex Brokers
Market makers, also called B-book brokers, are the only forex trader brokers in the dealing desk category. They work in a closed environment where they set the market price and fill their client’s orders. In the past, when trading was offline, financial institutions had an actual physical desk in the trading room, where traders would manage the investments.
A market maker makes a market for their clients, hence their name. Therefore, how it operates is once you make an order, the broker creates a demand for you by matching your order on the opposite side. When the broker can’t match your order in the market, the broker takes a counterparty of the order.
Electronic Communications Network (ECN) Forex Broker
The Electronic Communications Network and Straight Through Process brokers fall under a no-dealing desk broker. As the name suggests, they both lack a dealing desk and can’t control their prizes. They get their price from an outside source called an interbank market, which links them to a liquidity provider such as other brokers, banks, and hedge funds.
An honest ECN broker only plays one crucial role for its clients, connecting them to the counterparties in the interbank. Therefore, apart from creating a link between the sellers and buyers, they do not manage inventories or set their prices. The ECN either charges a spread on top of the interbank buys and sells rates or gets it from the fixed execution commissions to make a profit. It is important to note that most ECN brokers require a minimum account size since most interbank market parties only trade large lots. The ECN broker model is among the fastest-growing brokerages in the Forex market.
Straight Through Process (STP) Forex Brokers
The STP has no dealing desk but adopts some of the market makers’ characteristics for better trading conditions for their clients. It helps them overcome the limitation presented by the exclusivity nature of the interbank market. Even though STP brokers will display identical price rates to those in the interbank market and give their clients the best trade option, they also choose to act as market makers when the broker cannot find a counterparty in the market. Some STP brokers have algorithms to determine if a trade is more profitable to them when routed to the interbank market or when they trade against you themselves. Therefore, this type of forex broker is considered a combination of the market makers and the STP.
Which Is Most Suitable for You?
The only way to determine which one best suits your needs is to look at its pros and cons.
- Not only do they provide support in terms of technical analysis, commentaries, online live chats, and educational material, but this type is more user-friendly and popular.
- The spreads are fixed, and no commissions are applied.
- Volatility is lower since the broker tries to stabilize the market.
- The system can be easily manipulated to clear stop-loss orders
- Compared to ECN, the spreads are not as tight
- There is a possibility of the servers freezing because of major news causing spillage.
- There might be scalping, automated trading, and EA’s limitations.
ECN Forex Broker
- There is no price manipulation by the broker
- The trade executions are faster and offer lower spreads
- It allows all trading strategies, unlike in market makers
- It has no possibility of re-quotes even during high volatility
- It has a commission charge
- To have an account requires large initial deposits
- It has highly variable spreads
- The broker has no price manipulation, and thus, the prices are similar to the interbank rates.
- It has a wide range of leverage
- Trade rejections and re-quotes are rare
- The initial capital required is low
- It has smaller trade sizes
- It has rollover fees
- The spreads are dynamic
With all the types of forex trade brokers at your tips, it will be easier for you to decide which to go for. However, this decision should also be guided by the factors such as:
- The deposit protection in case something happens to your broker.
- The trading instruments offered.
- That your broker follows all the regulations and is legally allowed to serve you.
- The minimum and maximum deposit requirements.
- Compatibility with your trading strategy.
- Deposit and withdrawal options are offered.