Forex Broker

Forex Broker is one of the most important participants of the financial market. It is an investment entity that allows individual or institutional investor to buy or sell financial instruments, especially those related to the foreign exchange market. Forex is an over-the-counter type of market, so there are no precise quotes of currency pairs that will apply to every institution at the same time and there is no volume data. Price of a particular instrument from the platform is simply a referenced value based on largest financial institutions around them world. It can vary from one broker to another, depending on liquidity provider and order execution model utilized by the broker.

Order execution types

1. Market Maker Brokers (MM)

This is the most popular broker model on the Forex market. Low deposit requirement, negative balance protection and the micro-lots trading volume availability – those are highly appreciated features and because of them Market Maker brokers are usually chosen by begginers. Another advantage is that in case of those brokers liquidity is also quite impressive. On the other hand, as the name suggests, Market Makers are creating market for the traders, using Dealing Desk. That means that the traders take no action on the real market and technically they are trading against the broker. Many people think this is a legitimate reason why a broker might be tempted to cheat their clients by manipulating market quotes. While this unfortunately happens and traders need to be careful with that, the broker doesn’t really need to cheat clients to make money. They can generate incomes through spreads, commission and probably the most out of the client’s losses – it’s no secret that more traders, especially beginners, lose money rather than make money on the market. So if the broker makes opposite transaction to losing clients, he’s winning. But it’s not broker’s fault – rather it’s a result of inexperienced traders and high and risky leverage that is often offered

2. ECN Broker

ECN - Electronic Comunication Network brokers are investment entities that allow the trader to take a part in the real foreign exchange market directly. ECN broker is only a mediatory institution – it means that this kind of brokerage business does not earn on its client losses, even the contrary is true. It earns money on spreads and commissions, so the longer you trade, the more this broker model will earn from your trading. Bluntly speaking – it’s good for ECN broker that you don’t lose money because you will be trading more if you still have capital for it. This kind of broker offers lower spreads and usually takes fixed commission on on every transaction made on the account. Although this kind of broker does not use Dealing Desk (i.e. NDD - No Dealing Desk), requotes and rejections of orders excecution can occur – it is caused by lower market liquidity. We should add here, that comparing to the previous broker model, there can be no true negative balance protection, so it this type of broker is recommended more for experienced investors who know and understand the risk behind leveraged trading.

3. STP Broker

STP - Straight Through Processing is a hybrid model between the Market Maker and the ECN. In the nutshell, it has the characteristics of both. Depending on its client performance, the broker chooses the model depending on the client performance. Usually there is the Market Maker type for those who lose on the market or for those with small capital and ECN for those who make profit on the market or invest larger capital. Sadly, because STP is not a legal term, some FX market brokers are advertising themselves as STP model, when in fact they are Market Makers. STP Broker is like Market Maker on the opposite side of the transaction to the trader but in a slightly different way. Even though STP brokers technically belong to the NDD group, the order excecution is not at all their advantage. Multiple requotes and price slippages can occur. What is typical for STP brokers is that offered spreads are lower than in case of Market Makers.

4. MTF Broker

MTF - Multilateral Trading Facility is a Forex broker that is dedicated to experienced investors. It is direct connector between investor and the liquidity provider. Lack of requotes and slippages are one of the many privileges of the MTF broker. Same as for the rest of NDD brokers, MTFs offer low spreads but they also expose to negative balance risk and a usually require much higher deposit to begin investing than in case of Market Makers.

MTFs themselves are liquidity providers, that are sending limit orders to rulebook. Simplifying - trader's order will be immediately executed because the trade matches trade that is already placed in the market. Transaction costs in case of MTF brokers are relatively the lowest, but high required deposit constitutes a barrier to investors that want to trade with small amounts.

DD and NDD brokers - what's the difference?

As we mentioned before, you can divide brokers into 2 types - DD (Dealing Desk) and NDD (No Dealing Desk). What's the difference?.

Dealing Desk Brokers are market makers. It is a model that is sending every orders to Dealing Desk, where quotation process applies transaction parameters to the current fixed spread.

This type of broker earns on your losses, but also on your gains (high spread). Broker makes the other side of the transaction. In the same time, the trader does not see prices (quotes) from the realmarket. This situation allows broker to slightly manipulate its quotes compared to the real market.

By analogy, NDD brokers do not make the market and all of the orders are executed without interference.

How to choose Forex Broker?

While choosing the right broker you should first define your needs. These are a few questions that will help you:

• how much time can you spend on trading?
• what is your experience on the market?
• do you know what are the rules of the foreign exchange market and do you accept all the risks and losses related to trading?
• how much capital are you willing to invest?
• what is your main trading time-frame?
• what is your country currency (tax related costs of the trading)?

After answering to all of the above questions you should then choose the Forex broker, which suits your personal criterias. You should remember that when choosing the right broker you should not under any circumstance make any compromises – those can bring only unwanted surprises.
Trading currencies and CFDs carries a high level of risk since leverage can work both to your advantage and disadvantage. As a result, CFDs may not be suitable for all investors because you may lose all your invested capital. You should not risk more than you are prepared to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Past performance of CFDs is not a reliable indicator of future results. Most CFDs have no set maturity date. Hence, a CFD position matures on the date you choose to close an existing open position. Seek independent advice, if necessary.None of the trading ideas and strategies should be considered as financial recommendations. All results from users’ strategies are historical and Consilium Invest does not guarantee the same future performance.Consilium Invest © 2017