The Piggy Bank

There’s a extremely wide choice of currency broker firms online and when you’re starting out in forex trading it can be hard to find the best. We tend to be attracted by advertising, presuming they’re all working in the same way. In reality this is not true. Currency exchange brokers have extremely different business models which affect the way that they operate. In a few cases, you could be stunned to hear that they may be working against their customers rather than for them.  

Naturally traditionally a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with telephone orders and simply placed the order for the best price that they could get thru their dealing desk. Nowadays, everything is done online so that clients put in their orders for a certain cost. You do still need a broker who will connect to the market thru their software platform.

Many brokers still work in the old way, placing orders for clients as they are instructed. These are commonly the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the internet has opened up forex trading to folks with significantly lower investment funds. More lately, companies have come on the scene to cater for these smaller backers and they do not always follow the pattern of conventional brokers. To cut costs, they customarily do not have their own dealing desks and they may operate in some totally different ways. This may have significant results for your funds and how they’re managed.

So let’s have a look at the types of business model that you may come across in your hunt for a currency broker.

No Dealing Desk (NDD) Currency Brokers

NDD brokers work in an identical way to brokers with dealing desks, but they use a selection of liquidity providers to essentially match their clients’ orders in the market. Competition between liquidity providers keeps the spread low, although the broker sometimes increases the spread to cover their own costs and make some cash.

Electronic Communications Network (ECN)

Foreign exchange brokers who use the ECN can access an internet network where trades are filled. Many market makers work this way, as well as some brokers, banks and other massive currency traders. Spread is mostly low but you may be invoiced per trade.

Market Makers

Market makers are not brokers in the true sense because instead of placing your order in the market they will match it themselves and then cover themselves against any loss by taking a position in the ECN or market that offsets their dedication to you either partially or completely. Market makers set their own prices, although naturally these will be related to market prices. They often don’t like clients to use scalping strategies because the very short term nature of these trades makes it tough for them to offset their risk. Some traders are happy to use market makers but others consider that they have got a conflict of interest which may work against you as a trader.

Bucket Shops

Foreign exchange bucket shops are like bet takers in that they match your trade without always taking any position in the market. They may not even have any connection into the real forex market. They win if you lose, so if you’re successful they will probably close your account and return your funds. There’s truly no point in getting involved with a bucket shop unless you just want experience at awfully low levels of investment, and plan to lose money. They are not legal in some jurisdictions, and don’t should be described as a currency broker.