Different Kinds of Online Forex Brokers

ForexNewsNow | Published on October 20, 2011 at 4:56 am

ForexNewsNow – While most traders won’t give it much thought, the type of online forex broker that you deal with can have a big impact on your trading. The system they run and how they execute trades has a significant impact on their quality of service, including the speed of trades and how stop loss orders are dealt with, transaction fees, and the size of the spread. There are three main types of online forex brokers that have significantly different ways of dealing with their transactions. Read and compare the types carefully to find the best forex broker for you.

Market Maker

The biggest kind of online forex brokers that you can deal with is the market maker. Market makers have their own trading desk and, as the name implies, make the market by taking the other side of open trades. If you lose money, the broker gains money, but if you gain money the online forex broker still gains some money to offset the loss. This may seem counter-intuitive, but the broker does this through the bid and sell spreads. The aim is to do sufficient volume and have enough bets on both sides of the transaction that they can make money off the spread with little risk on either side. If the bets are too big, they can always be offset with a third party as well.

Market makers generally offer the best spreads and best execution times for the average trader because you are dealing with the source with no middle men to pass the order through.

No Dealing Desk Brokers

No dealing desk brokers are, as the name implies, brokers that don’t have a dealing desk. Instead, their system operates by finding the best quotes from several different providers. These providers are the market makers and can include other online forex brokers, banks, and other financial institutions. The no dealing desk broker will execute your trade through the different channels that it has available to it. This is what allows it to be a broker and what gives the no dealing desk brokers their liquidity to trade.

These brokers will usually charge a commission per trade or they may widen the spread that they get from the other market makers. Both are done sometimes, so make sure you research to find which of the top forex brokers will give you the biggest bang for your buck.

Electronic Communication Network Brokers

Electronic communication desk brokers also don’t have their own dealing desks. They instead provide software that helps connect buyers to sellers. The electronic platform they provide allows market makers to enter bids and connect with each other. These types of platforms are usually reserved for institutions or large personal traders. You’ll generally get the tightest spreads and quickest execution. The platform also offers a degree of anonymity so you can enter your trades without people knowing what side of the trade you are on.

Which of these is the best forex broker for you? It depends on your trading needs and on the size of the trades that you are making. Market makers will be best for the majority of traders, but you may be able to find no trading desk brokers that offer very competitive spreads and service. For the largest traders, electronic communication network brokers may be the best option.

 

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