There are different types of forex brokers available today. And success in forex is majorly attributed to the type of forex broker that a trader chooses.
Day traders do not usually switch forex brokers ever that often. This is especially true for the more serious ones who look towards making consistent profits.
On top of the trading styles, strategies and the currency pairs that you trade, having the right broker plays an important role.
All of these aspects combined contributes to the success of a day trader.
One such important factor is the pricing from forex brokers.
Forex Pricing forms one of the most essential elements towards the success in forex trading. For a new trader, all forex brokers might look the same.
But as you will see, this article will shed light on the different kinds of forex brokers. This article will eventually help you to choose the right forex broker to help you get started with forex trading.
What are the types of forex dealers?
Forex brokers or dealers are made up of different kinds.
This depends on aspects such as the pricing structure, the commissions, fees or spreads that they charge. Overall, forex brokers can be either STP or straight through processing brokers. Then you also have the market maker forex brokers. Within these two, we can classify forex brokers into the following kinds.
- NDD Forex brokers – No Dealing Desk Forex brokers
- DD Forex brokers – Dealing Desk Forex brokers
- STP Forex brokers – Straight Through Processing Forex brokers
- DMA Forex brokers – Direct Market Access Forex brokers
- ECN Forex brokers – Electronic Communication Network Forex brokers
No Dealing Desk forex brokers
NDD forex brokers can also be termed as STP, ECN or ECN/STP forex brokers.
As obvious from the term, there is no dealing desk involved. On top of this the orders are passed through directly to the interbank liquidity providers. No dealing desk forex brokers have a business model of charging commissions or mark up on the spreads. The benefit with such type of a forex broker is that they don’t take counter positions against you.
What this means for you as a trader is that you can trade without worrying that the forex broker is acting as your counterparty.
Dealing desk forex brokers (Market Makers)
The Dealing desk forex brokers are also known as Market makers. Many of these forex brokers offer you fixed spreads. Hence, they are also called fixed spread brokers. In retail forex trading, you will find many such kinds of brokers.
Dealing desk forex brokers are the ones who make their own markets. The prices one gets to see with a Dealing desk forex broker is very different compared to NDD forex brokers. This is because the prices are not made by the interbank markets but are made by the NDD brokers themselves.
The Dealing desk forex brokers’ business model is based on the fixed spreads that they offer.
With the aspect of Market maker, for every position opened by a trader with their NDD forex broker, the opposite position is automatically opened by the NDD forex broker.
This aspect has become a huge area of debate within the forex community. But this is not the case every time. A trader’s buy order can be matched with a sell order from another trader. This is possible with a market maker.
In this instance, the market making broker adds a mark up on the spreads on both the buy and the sell side.
Are market makers really bad?
One would think so, or at least get this impression.
But this is misinformed. A market maker merely acts as a market maker when there is none. It is like going to a store, where the prices are determined by the storekeeper.
You can get the same items cheaper outside, but that would mean having to travel more distance. Market making is not as bad as it seems.
Common sense dictates that a forex broker would not be in business if they let their traders profit all the time. Further more, the biggest disadvantage being that with a Market maker or Dealing Desk forex broker, traders would not be able to scalp the markets. Usually it is mentioned in the terms and conditions that such type of forex brokers do not allow trading during economic releases.
You will also notice that with this type of a forex broker, you can open a pending order only a certain number of pips away from the market price. Read how market making works at NYSE.
Straight Through Processing brokers
The STP forex brokers is a term that also includes NDD forex brokers.
When trading with a straight through processing forex broker, the trader’s orders are executed directly to the liquidity providers in the inter bank markets. The advantage of using a straight through processing forex broker is that there are no requotes. This makes it easy for traders whose preferred style is scalping or those who use news based trading strategies.
With Straight Through Processing forex brokers, there are no delays whatsoever. The STP Forex broker makes their profits by marking up the spreads which are received from the liquidity providers.
Direct Market Access brokers
DMA forex brokers allows traders direct access to the liqiuidity providers and work similar to that of ECN forex brokers.
The difference however is the depth of the market book access. DMA forex brokers are usually for the more advanced forex traders. The commissions DMA forex brokers charge are also higher. A retail trader with an average deposit of just $1000, will not be able to trade with a DMA forex broker.
Obviously due to the fact that the commissions are higher. And in many cases, DMA brokers also need a higher capital requirement.
Watch how DMA brokers work in this video.
Electronic Communication Network brokers
ECN Forex brokers have grown in popularity!! This is because ECN brokers work on a business model that is often considered to be the purest form of forex trading. When dealing with an ECN Forex broker, the prices the trader gets to see is are straight from the Interbank markets with no price manipulation.
The ECN Forex broker only charges commissions which is usually read as $5 per 1M or 0.5pips per 1M and so on.
Trading with an ECN Forex broker brings immense benefits, one of the most important being that forex scalpers are welcome to trade with the ECN forex brokers. Trading during economic news releases is also permitted. But some ECN forex brokers make use of Last Look trading.
The business model with an ECN forex broker is that they charge commissions for using the ECN network. There is a lot more transparency in terms of pricing and thus more and more forex traders pefer to trade with STP or non-dealing desk brokers.
Finally, we will leave you with this video on how to find the difference between real and fake ECN brokers.