PIP ACADEMY
The Ultimate Path to Trading
Length : 3.00 Minutes
Forex Brokers Types
What is a Forex Broker?
A Forex broker is a firm that provides forex traders with access to a trading platform that allows them to buy and sell foreign currencies.
A currency trading broker, also known as a retail forex broker, or forex broker, handles a very small portion of the volume of the overall foreign exchange market. Forex traders use these brokers to access the currency market and trade 24 hours a day, 5 days a week.
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There are mainly two types of forex brokers:
1) Dealing Desks (DD) brokers
2) No Dealing Desks (NDD) brokers:
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Dealing Desk (DD) brokers:
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A dealing desk broker is basically a market maker. They make money through spreads and providing liquidity to their clients.
They create a market for you as a trader by taking the opposite side of your trades.
In most cases, dealing desk brokers keep trades safely within their own liquidity pools and do not require external liquidity providers. While some people believe that there is a conflict of interest between the broker and the trader and that this type of brokerage takes advantage of the trader, many traders appreciate the fixed spreads.
The Dealing Desks brokers offer fixed spread, and it does not fluctuate much.
So many traders appreciate fixed spread when it comes to this kind of brokerage.
No Dealing Desks (NDD) brokers:
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No Dealing Desk (NDD) brokers do NOT pass their clients’ orders through a Dealing Desk. They do not take opposite side of their clients trades, and that makes NDD brokers seem more transparent than DD brokers, as the conflict of interest does not exist here between the broker and its clients.
NDD brokers make money by charging commissions and/or spread. The spread in the NDD environment is variable and generally wider that what marker maker brokers offer.
NDD brokers fall into two categories:
Straight through Processing (STP)
Some brokers claim that they are true ECN brokers, but in reality, they merely have a Straight Through Processing system.
Forex brokers that have an STP system route the orders of their clients directly to their liquidity providers who have access to the interbank market, and at the end provide the clients with the quote that liquidity providers offer plus usually a fixed spread for their compensation.
NDD STP brokers usually work with many liquidity providers to facilitate the orders, with each provider quoting its own bid and ask price, therefore it is common for these brokers to offer variable spreads.
Electronic Communication Networks (ECN)
On the other hand, ECN forex brokers, use electronic communications networks (ECNs) to give clients direct access to other participants in currency markets. Participants could be other brokers, banks, retail traders, hedge funds, and other financial institutions involved in FX market.
Because an ECN broker consolidates price quotations from several market participants, they have the ability to offer their clients tighter spreads. In essence, participants trade against each other by offering their best bid and ask prices.
ECNs also allow their clients to see the “Depth of Market.”
Depth of Market gives an insight where the buy and sell orders of other participants are placed.
ECN brokers usually charge a small commission but on the other hand their offered spreads are usually more competitive.