The Different Categories of Forex Brokers
The top forex brokers can be divided into five categories based on the types of services they offer as well as the pricing structure they use. Not being aware of the type of broker you’re working with could mean that you’re not aware that you’re paying more for their services than you really need to, which can affect your profitability. Here is a brief overview of the different types of forex brokers.
- Electronic Communications Network Brokers. Most of the top forex brokers are in this category. ECN brokers offer their clients the same quotes as those offered by banks on the interbank market by eliminating the use of market makers. This means that you get a transparent price quote from the broker that reflects what is genuinely being used in the markets. However, ECN brokers generally charge a commission per transaction rather than making their money from the spreads, which translates to higher fees charged to the trader. In addition, they may ask you to maintain a high balance in your trading account, which can be as high as $100,000.
- Straight Through Processing Brokers. An STP broker offers the fastest speed in processing orders as they directly transmit your orders to the liquidity providers in the interbank forex market. This means that there are fewer delays in processing orders and there are also less re-quotes (when a trader makes an order at a certain price only to find it rejected and a different price named for the order). These top forex brokers make their money by marking up the spreads that they are offered by the liquidity providers.
- No Dealing Desk Brokers.This is a general category of broker that can encompass ECN or STP brokers and are defined by the fact that they offer immediate access to the interbank markets without having to pass through a dealing desk manned by a forex broker who can offset trades. They earn money through the spreads or by charging a commission on trades.
- Market Makers. Also known as dealing desk brokers, these are also among the top forex brokers in the industry. Market makers do not offer quotes directly from the liquidity provider to traders but rather provide their clients ones that are slightly different and make their money from the spreads. These types of brokers have been dogged by allegations that many of them act against the interest of their clients by manipulating trading conditions to make a profit. Hence, traders using market markers should only deal with those who are licensed by recognized market regulators as well as offering them low spreads and large amounts of leverage to ensure their profitability,
- Direct Market Access Brokers. These brokers are similar to no dealing desk brokers but the major difference is that they offer their clients access to the depth of market book, which measures how many open sell and buy orders there are so that the trader can determine if they can enter or exit a trade. These brokers are generally recommended for traders who already have some experience in the forex markets.
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