A Forex broker is licensed and regulated company. It gives you (as a retail or professional client) the ability to buy and sell foreign currencies. This can be done online or by phone (known as voice broking). In other words, a Forex broker is the middleman between the retail forex trader and the interbank global market. Most brokers make their money from the spread (the difference between the buy and selling price). This is the reason their commissions are very low or non-existent. That creates a perfect trading environment for beginner traders.
In addition to that, Forex brokers provide to its clients trading platforms and tools which are very helpful for the users by providing them with the ability to place orders, analyze the markets and view quotes of currency pairs.
How Does the Forex Brokers work?
It is very important to find out what execution model your choice for Forex broker has. There are two types of forex broker execution models:
- Dealing Desk (DD) Forex Brokers – they are a type of broker that does not execute all the traders’ orders via liquidity providers and thus keeps some of the trades “in house”. These types of brokers attempt to stand between customers and the interbank market as a means of making trades (theoretically) quicker and more efficient. To do so, they accept the risk that they can anticipate changes in the market well enough to shield against market risk. The pro is that the clients usually get fixed spread, and their orders are executed no matter what happens in the market. The cost of trading is lower, and the broker often does not charge a commission fee. The con is that you literally trade against your forex broker, as the broker makes a market by often taking the other side of the trade – putting them in a direct conflict of interest with their customers.
- No Dealing Desk (NDD) Forex Brokers – is a type of forex broker which does execute all the trades via liquidity providers and does not keep trades in “the house”. The spread is not fixed and some of your trades might not be executed at the same moment or not at all. They provide what is known as Straight-Through-Processing (STP) execution of forex trades. Forex brokers who use this system work directly with market liquidity providers. This way the investor must deal with numerous liquidity providers to get the most competitive bid and ask prices. Depending on the currency pair being traded and depending on the dealing-desk broker being compared, NDD brokers may offer wider spreads. That means the cost to make a trade is greater (since retail traders must give up the value of the spread with each round-trip trade). Additionally, an NDD broker may charge an exchange fee or a commission. The pro – you don’t trade against the broker. The con is the cost of trading is greater with these types of Forex brokers.
