Understand how to choose a good forex broker
When you start studying Forex market, one of the first things that you learn is that you need to open an account in a broker, so that you can start trading. The truth is that without the brokers, forex market for small traders would be inaccessible. However, there are multiple types of brokers, each one with its strengths and weaknesses and that can influence directly your operations. Knowing how to make the best option for you is fundamental for you to feel comfortable and confident when it comes to trade.It is exactly about that we will be talking about in this article. Stay with us until the end and you will learn about the various broker types and how to better choose the best one for you.
Forex brokers with and without Dealing Desk
To start understanding the world of Forex brokers, initially you need to know that there are basically two types: Dealing Desk and No Dealing Desk. These terms are related to the negotiation tables of the big banks, which are the ones that provide liquidity to the exchange market. Those operating in these tables are called dealers, and they are the ones that distribute the buy and sell orders in the best manner. Within these two negotiation models, there are Market Maker Brokers (Dealing DEsk), ECN and STP. Let’s get deeper into these now…
Dealing Desk Brokers: Market Maker
The role of a broker is basically to provide access to the real market for the operations to be executed. A broker of the Market Maker type simulates the real market. It assumes the role of dealer and keeps the trades of the clients. This means that when a client opens a position, instead of going to the real market to look for a buyer for your sell, or a seller for your buy, this broker creates a market, assuming a position against its own client. This means that when you lose an operation, the broker wins.
But isn’t that illegal? No, if the trades permits the broker to create a market, which not always is the case. Hence, it is common to raise conflicts of interest and in some cases even the manipulation of the results by some of them. In December of 2019, Robinhood broker in the USA, was fined in $1.25 million dollars for sending orders of clients to for brokers without guaranteeing the best price. Read the full article here: “Robinhood trading app fined for 'failures'"
Does this mean that Market Maker brokers are bad? Not at all. Research about the broker that you choose, analyze its track record. The broker should be regulated and licensed by the respective authorities. This modality has some interesting advantages advantages for some types of traders, such as fixed spread, zero commissions and the chance to make very low deposits.
No Dealing Desk Brokers: ECN
Brokers of the ECN (Electronic Communications Network) type use communication networks that allow their clients to have direct access to other players in the forex market. Their role is to intermediate the transactions between the traders and the big banks that act as liquidity providers (JP Morgan, Deutsche Bank, UBS, Goldman Sachs and others). The operations are executed in the real market, therefore, there is no simulation or conflict of interests between the broker and the client.
The clients for this type of brokers have access to the most affordable prices. Spreads are very low, possibly even going down to zero. The confirmation of the order execution happens instantaneously.
The profit of the ECN brokers is generated mainly by the commissions charged for each operation that is executed. Some traders consider the payment of a fixed commission an enormous advantage, however for others it is not so appealing.
No Dealing Desk Brokers: STP
Brokers of the STP type (Straight Through Processing) make profit from spread or commissions, depending on the broker. The operations of their clients are forwarded to the big liquidity providers, which execute the orders. There are no conflicts of interest since the broker acts as an intermediate. However, there have been cases in which the broker held the clients’ orders, so that the broker could profit from the price variation. That is an indication why you should pay attention to the speed at which the orders are executed, as this is a very important aspect to consider.
When it’s time to choose a Forex broker, evaluate the conditions offered by each one, such as: spread value, execution time of the orders, if their profit comes from commissions or spread and choose whichever best fits in your trader profile. Are there trustworthy brokers of the Market Maker type? Yes. As there are also doubtful brokers of the ECN and STP types, so, pay attention and choose a regulated and licensed broker. Each country has its own responsible authority for regulating and auditing the brokers. Look for information with experienced and trustworthy traders and ensure that the broker that you choose is legal.