FAQ

DIFFERENCES BETWEEN FX BROKERS

When opening a retail forex trading account, a critical review involves choosing among the different types of forex brokers available to manage your trades. It represents an important decision because the type of forex broker selected will affect the quality of service you receive, as well as your transaction fees and dealing spreads.

When opening a retail forex trading account, a critical review involves choosing among the different types of forex brokers available to manage your trades. It represents an important decision because the type of forex broker selected will affect the quality of service you receive, as well as your transaction fees and dealing spreads.


Before describing the different Broker types, it is essential to clarify what a dealing desk is since the brokers' characteristics will depend on whether they manage a dealing desk. A dealing desk is where brokers execute and trade financial instruments (Forex trades, equities, commodities, and other instruments). The dealers facilitate trades on behalf of their clients and may act as the principal or the intermediary.

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Electronic Communications Network (ECN) Brokers


An Electronic Communications Network or ECN broker does not have a dealing desk. Instead, it provides an electronic trading platform in which professional market-makers at banks, traders and other market participants can enter bids and offers through their system.



Straight Through Processing (STP) Brokers


STP is a different brokerage model where the Broker sends orders directly to the market without passing them through a dealing desk. An STP Broker promises to offer a highly transparent trading environment without conflicts of interest with its clients. So far, it sounds like the ECN Type, right?


STP accounts can't be considered a perfect alternative to ECNs. ECN accounts are purely a non-dealing desk model that enables trading the markets in real-time by sending orders directly to them. STP accounts, instead, are considered to be more of a hybrid of the ECN and Market Maker models (A broker with a dealing desk).



Direct Market Access (DMA) Brokers


DMA brokers are abundant, though it is hard to know where to start when choosing which one to trade with.


A DMA broker is an execution model that allows traders to place Buy and Sell orders directly onto order books. Hence, traders enjoy greater visibility of the market whilst interacting with market exchanges directly. In addition, a DMA system doesn't rely on the aggregation of orders (As the other Non-dealing desk alternatives) over-the-counter. Therefore, investors can choose their prices since it offers the best composite quotes obtained from the multiple forex quote providers that give the DMA broker its liquidity in the forex market. The main difference between ECN and DMA is that DMA brokers make individual contracts with each liquidity provider. In contrast, ECN brokers are connected to anonymous ECN networks with no direct agreements.


Typically, each of these providers will post their best markets to the DMA broker. The Broker then executes transactions, watches, and fills orders for their clients accordingly. The DMA forex broker generally charges a commission or widen the bid/offer spread to make a small profit on each trade executed. Sometimes, they profit from both alternatives.



Market Maker (MM) Broker


A Market Maker Broker is a notably different broker type. They will typically offer their clients a two-sided market from a specialist forex trader operating as part of the Broker's internal dealing desk. As a result, a Market Maker will generally end up taking the other side of any transaction passed from their client by buying on their bid side or selling on their offer side of the quoted price.


The market maker's objective is to capture a portion of the spread and do sufficient volume on both sides (bid and offer) to avoid laying off accumulated risk with another professional counterparty. Laying off this risk costs the broker money; the counterparty is usually a big bank (or a bigger one). Furthermore, if the executed trade is large enough, the market maker will immediately offset the transaction, especially if they think the market might move against it. Alternatively, they can add it to their trading book, depending on their market outlook and the transaction size.

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Risk Warning:

By investing in or trading financial instruments, commodities and any other assets, you are taking a high degree of risk. You can lose all your deposited money. You should only engage in any such activity if you are fully aware of the relevant risks.

Contracts for Difference ("CFDs") are leveraged products and carry a high level of risk to your capital as prices may move unexpectedly against you. Losses can exceed your deposits, and you may be required to make further payments. 74 - 89% of retail clients lose money when trading CFDs. You should consider whether you can afford the high risk of losing your money. These products may not suit all clients; therefore, ensure you understand the risks and seek independent advice.

  

 

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