There’s a really wide choice of currency broker firms online and when you’re starting out in foreign exchange trading it can be difficult to find the best. We tend to be drawn to advertising, assuming they’re all working in the same way. In fact this is not true. Forex brokers have very different business models which affect the way that they operate. In a few cases, you could be stunned to hear that they may be working against their clients instead of for them.
Of course traditionally a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with phone orders and simply placed the order for the best price that they could get through their dealing desk. These days, everything is done online so that clients put in their orders for a certain cost. However, you do still need a broker who will connect to the market thru their software platform.
Many brokers still work in the traditional way, placing orders for clients as they’re instructed. These are often the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the Net has opened up currency trading to folks with much lower investment funds. More lately, companies have come on the scene to cater for these smaller speculators and they don’t necessarily follow the pattern of conventional brokers. To reduce costs, they typically do not have their own dealing desks and they may operate in some very different ways . This can have important effects for your funds and how they’re managed.
So let’s take a look at the sorts of business model that you will come across in your hunt for a currency broker.
No Dealing Desk (NDD) Currency Brokers
NDD brokers work in an identical way to brokers with dealing desks, but they use a variety of liquidity suppliers to really match their clients’ orders in the market. Competition between liquidity suppliers keeps the spread low, although the broker sometimes increases the spread to cover their own costs and earn a little cash.
Electronic Communications Network (ECN)
Currency exchange brokers who use the ECN can access a web network where trades are filled. Many market makers work this way, as well as some brokers, banks and other massive currency traders. Spread is mostly low but you could be invoiced per trade.
Market Makers
Market makers aren’t brokers in the real sense because rather than placing your order in the market they will match it themselves and then cover themselves against any loss by taking a position in the ECN or market that offsets their dedication to you either partially or completely. Market makers set their own prices, though of course these will be related to market costs. They regularly don’t like clients to use scalping strategies because the very short term nature of these trades makes it tough for them to offset their risk. Some traders are pleased to use market makers but others consider that they have a conflict of interest that may work against you as a trader.
Bucket Shops
Currency exchange bucket shops are like bet takers in that they match your trade without always taking any position in the market. They may not even have any connection into the real forex market. They win if you lose, so if you are successful they may probably close your account and return your funds. There’s actually no point in getting involved with a bucket shop unless you just desire experience at very low levels of investment, and plan to lose cash. They are against the law in some jurisdictions, and do not deserve to be called a currency broker.
