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Types of Forex Brokers – Pros and Cons of Each

types of brokers by regulatedbrokers
 

A forex broker is a firm that facilitates transactions between buyers and sellers in the forex market. The best forex broker is convenient to the needs of buyers and sellers and provides all the tools needed for effective trading. It is important that a trader chooses a forex broker who is not manipulative and one that offers great trading experience based on a trader’s forex trading strategies.

What is a forex broker?

A forex broker is a firm that facilitates execution of trading transactions in the forex market. The broker earns a commission once the transaction between the buyers and the sellers is finalized. Online forex brokers are responsible for the provision of support services for forex traders. In addition to the forex trading website, online forex brokers provide tradable securities, trading platforms, advanced charts and tools for trading among other crucial services.

What are types of brokers?

Dealing desk (market makers)

The dealing desk brokers provide liquidity for their tradable instruments. This means that they execute the customer orders using their inventory. They are known as market makers because they are the ultimate market for their customers. The broker matches the buyers and sellers’ orders in every trade to provide liquidity.

The market makers have an offers the bid and ask levels prices. They have a fixed spread that is charged in pips for the forex traders. By charging a spread, the market makers are able to make profits.

Pros
• Minimum deposit is low.
• No commissions charged.

Cons

• Counter trades orders.
• Have conflicts of interests.
• Have fixed spreads.
• Low order executions.
• Broker-quoted prices.

No Dealing Desk (STP, ECN)

No Dealing Desk Brokers have a functional direct approach to the forex trading in the interbank currency markets. NDD brokers connect their clients to banks and other financial institutions without being a counterparty in any transaction. They are categorized into two:

Straight through Processing (STP) Brokers

STP brokers functions by forwarding orders for forex traders to liquidity providers. These providers form the interbank market with various quotes rates that facilitate a trading transaction. These brokers make profits by charging a markup for the spread of their clients’ trades.

Pros

• No counter-trading.
• Variable spreads.
• Low minimum deposits.
• Fast order execution.
• No commissions.

Cons

• Spread mark-up

Electronic Communication Network (ECN) Brokers

The ECN Brokers do not directly forward the forex traders’ transactions to the interbank but allow them to interact with their fellow traders in the market. This is facilitated by use of electronic communication network which helps the brokers in assigning the best quotes for their traders.

ECN brokers also match their traders’ transaction with liquidity providers to generate sufficient market liquidity for their traders. They make money by charging a fixed fee or commissions on every transaction a trader makes.

Pros

• Does not countertrade.
• Conflicts of interest not present.
• The market spreads are variable.
• Fast order execution.

Cons

• Minimum deposit a little higher.
• Charges commissions on orders.

Hybrid brokers

A-Booking brokers forward the customer orders directly to the liquidity market. On the other hand, Brokers who manage their customer orders internally are known as B- Booking or Dealing Desk brokers. Hybrid brokers come in as the hedgers between the A-Book and B-Book traders to minimize risk for their trades and increase the earnings for the brokers.

Pros

• Offers fixed as well as variable spreads.
• Offers a low minimum deposit.

Cons

• Can trade against forex trade orders.
• Conflicts of interest are common.
• Low order executions.

Trading is profitable if you have the right skills and tools. Trading is favorable for the experienced traders, but they did not become experienced without first being novice traders. By selecting the best-rated brokers that provide excellent forex trading services, the trading game can be won by everyone.

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