What Are the Different Types of Forex Brokers and What Do They Do?

There are different types of forex brokers. Some operate illegally, while others are legitimate, regulated brokerage firms. If you are new to forex trading, then it is crucially important that you carefully choose your broker. If you choose an unreliable and unregulated broker, you can lose a lot of money. While most brokers have the same access and can trade in the same markets, their individual policies and regulations can differ.

Individual brokerage firms differ as far as their level in the industry is concerned. Some forex brokers have high levels of expertise and access markets directly, while others are distant from the markets and have little to no connection to the market. 

This article will tell you what the different types of forex brokers are so that you can ensure you choose the right broker for you. The right broker can help you to transform into a successful and experienced trader. The wrong broker can bankrupt you and drive you away from trading for the rest of your life.

What Is a Forex Broker?

A forex broker is a financial company that provides traders with a platform and entry into the foreign currencies market. Forex is short for foreign exchange. When trading forex, you trade between a pair of currencies, for example, GBP/USD, USD/JPY, USD/CHF, USD/CAD. The foreign exchange market is a 24-hour market and is global. Forex traders include large trading firms trading on behalf of investment banks, retail currency traders, and ordinary people trading from the comfort of their living rooms. An individual forex brokerage will handle a very small amount of the foreign exchange market’s volume.

Types of Forex Brokers and How They Operate

Dealing Desk

Dealing desk brokers are market makers. They provide fixed spreads. Dealing desk brokers work by quoting below or above the real-time market prices. If you are a new trader, then using a dealing desk broker is a good option. It is also a good option for experts hoping to minimize their risk, as trading with liquidity providers can be risky. It is still worth reading one of the honest platform comparisons review sites to find the perfect broker for you, however. A dealing desk broker will typically receive payments through its spreads. A spread is the purchase of a security and the sale of another similar security.

No Dealing Desk

No dealing desk brokers give forex traders direct access into the interbank market, which is a large, often unregulated, network consisting of global financial institutions who are trading currencies between one another to manage interest rate risk and the exchange rate. Private banks are the primary participants in this market. No dealing desk brokerage firms give traders the opportunity to make trades according to economic announcements without limitations. 

With these forms, spreads are not fixed. Unfixed spreads can increase in value massively when a volatility increase occurs. No dealing desk brokers increase spreads or charge commissions on every trade to make their money.

Electronic Communication Network

Electronic communication network brokers will display and offer actual order details. These details will include processed orders as well as the prices offered for them by different banks in the interbank market. Electronic communication network brokers offer information to all traders in the foreign exchange market, which improves market transparency and makes trading much more straightforward. Electronic communication networks charge a commission on each trade made, and this is how they earn most of their income. They allow traders to process their transactions through the interbank market.

Straight Through Processing

Straight through processing brokers pass trading orders through liquidity providers. Unlike other brokers, they will not interfere with order execution transactions. Straight-through processing brokers will work with multiple liquidity providers at any one time which allows traders better opportunities to succeed in the foreign exchange market.

How to Find the Perfect Broker?

What Are Your Needs?

Once you know the different types of brokers, you can decide which you want to use. If you are a day trader, then you might want to consider an electronic communication network broker. With these brokers, you will pay commission on every single trade, but the spreads are tighter, which is important to small trade moves. 

Similarly, if you are going to scalp trade, then you should choose an electronic communication network broker. The amount of capital that you have to invest should also be considered when you are thinking about the broker. Choose a broker and account size that match the amount you have to invest. 

What Should the Broker Provide?

When you have worked out what your needs are, you should hopefully have a clearer idea of the kind of broker that you need. Your broker must be situated in a regulated country, so you can ensure your money is safely handled. More often than not, it is best to stay with known, established financial brokers. No regulation brokers can create a lot of problems. Ideally, you should also find a broker that offers demo accounts. Demo accounts give you an opportunity to practice your trades, which is especially important if you are a beginner.

Research and Reviews

When you are finding a broker, you need to read written reviews extensively. You should also participate in or read discussion forums. You can find out a lot about a brokerage firm through a discussion forum. Be sceptical about what you read, as sometimes unscrupulous firms will send agents into forums and to write positive reviews. 

Also, remember that traders do lose money – a lot of it – so just because a person says that they have lost money this is not a reason to avoid a brokerage firm or platform. If however, you see a number of reviews that say the platform will not allow them to withdraw their money or that it ‘goes missing’, then this is a red flag. There should never be issues when it comes to getting your money. 

Knowing the difference between types of brokers will help you to find the right broker for you. This page should have given you a brief overview of different brokers, and how to select which one is perfect for your trade. Always scrutinize a broker before committing yourself to it. Good luck.

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