THE 2 MAIN TYPES OF FOREX BROKERS
Market Maker is the type of forex broker which makes money from spreads that are offered to you. They are called the Dealing Desk brokers where they literally the other side of the trade. They will offer the sell and buy quote where they control the prices of the orders. In doing so, their rates can be quite competitive as compared to interbank rates. You can view this concept as the broker being the ‘dealer’ on the blackjack table.
No Dealing Desk
The No Dealing Desk Brokers on the other hand are those who do not take any side of your trade. This means that the broker is involved only to match the 2 parties together like a bridge. In other words, this is where Forex Trading happens where you will enjoy a direct access to the interbank market where the foreign currencies are traded. This type of dealer differs from its opposite counterpart (dealing desks) where the broker can offset trades because he is registered with the FCM or Futures Commission Merchant and the RFED or Retail Foreign Exchange Dealer. They work with market liquidity providers directly.
Straight-Through Processing Brokers
An STP or Straight-Through Processing broker is one who will direct the order that you place to the liquidity provider directly. This can only be done if the provider has access to the interbank market where the quotes will usually involve a small markup that the broker profits from.
STP is actually quite different from the more common T+3 Trading concept where it adopts a more same-day settlement platform. This helps to shorten the risk. When the transaction-related processing time is decreased, it will then increase the probability for a contract to be settled in a timelier manner. When information can be passed through faster (electronically), this helps to increase the efficiency of the process in every way.
Electronic Communication Network Broker
Meanwhile, an ECN or Electronic Communication Network broker is one who will allow your orders to interact with others in the same network. This could be in the form of banks, retail traders and could be other brokers as well. This means that you are actually trading in something like an open market where the best bids and asking prices are offered. Apart from that, ECN brokers will let you see the Depth of Market which is where the buy and sell orders of other market participants is being shown
Your trading style
You must first consider what resources you have and your trading styles. From there, you will know what you need from your forex broker. You have to determine what type of trading you intend to carry out. This can only be done after some research. If you do are working with a few thousand dollars, then you will be trading in micro lots and that will determine which broker will be suitable.
Moving of funds
Not all brokers are based in the country of your residence. You need to know how you will be moving your funds. Most forex brokers will allow you to transfer money in for trading but what about moving out? If you want to cash out, is it going to be as easy as cashing in? This is because the laws of the country you are in might have certain restrictions when it comes to channeling money out either physically or digitally. Knowing which broker gives you that provision will help you in deciding if they are worth using.
Using Spreads
Picking a forex broker with competitive spreads might be quite challenging. This is because forex trading usually do not involve commissions like stock trading. Traders are usually required to pay a spread which is what the broker earns. Some have fixed spreads while variable spreads are practiced by others. This is the difference between the bid and the asking price and you need to know what the spreads are being offered by the forex broker before you engage them.
Selecting your Broker through reviews
Reviews While the best (and easiest) way to pick a forex broker is by reviews and what people have said about them, it might not be the most reliable. In fact, you should not put your judgment in what you read around. The best way to know if the broker is right for you is to learn about it yourself. Find one with a live demo account which will give you the right feel about the market. If you like that experience, start with a small sum and then work your way up.
