Understanding of Different Kinds of Forex Brokers

As a FX trader or investor, you may have specific needs related to platforms, tools, or research requirements. Therefore, there are different types of forex brokers, which can meet your investment style perfectly.

What Is a Forex Broker？

A forex broker is a financial services company that provides traders access to a platform for buying and selling foreign currencies.

A forex broker essentially works as the middle-man between you and the market. In other words, in order to find a buyer or a seller of currencies, you can go to a broker and they match you up with either a respective seller or a respective buyer.

A forex broker will retrieve prices from the banks and offer investors the best price available.

A forex Brokers can also be called a retail Forex broker, or a currency trading broker. Once you have a broker, you can access the market to speculate on rising or falling prices in the hopes of making your own big win.

The Role of a Forex Broker

Most foreign exchange transactions are between pairs of the currencies of the 10 nations that make up the G10. The nations and their currencies include the U.S. dollar (USD), the Euro (EUR), the pound sterling (GBP), the Japanese yen (JPY), the Australian dollar (AUD), the New Zealand dollar (NZD), the Canadian dollar (CAD), and the Swiss franc (CHF).

Most brokers allow customers to trade in other currencies, including those of emerging markets.

Using a forex broker, a trader opens a trade by buying a currency pair and closes the trade by selling the same pair. For example, a trader who wants to exchange euros for U.S. dollars buys the EUR/USD pair. This amounts to buying euros using U.S. dollars.

To close the trade, the trader sells the pair, which is equivalent to buying U.S. dollars with euros.

If the exchange rate is higher when the trader closes the trade, the trader makes a profit. If not, the trader takes a loss.

Different Kinds of Forex Brokers

An important consideration when opening a retail forex trading account involves choosing among the different types of forex brokers available to handle your forex transactions. Different choice can affect both the quality of service you receive, as well as your transaction fees and dealing spreads. There are different kinds of brokers as following:

1. Dealing Desk (DD)

Dealing desk brokers, also sometimes referred to as market makers, create a market for their clients, or in other words, take the other side of a clients trade. Dealing desk brokers or market makers usually provide fixed spreads. Most of them also work by electing to quote below or above the real-time market prices at a given time. Working with a dealing desk is a wise move for beginning and expert traders who do not wish to trade directly with liquidity providers. Dealing desk brokers normally receive payment through spreads.

2. No Dealing Desk (NDD)

The No Dealing Desk or NDD type of forex broker lacks a dealing desk, as the name implies. Nevertheless, it instead offers the best composite quotes obtained from the multiple forex quote providers that give the NDD broker its liquidity in the forex market. In other words, traders get the chance to trade following any economic announcements without facing restrictions. Working with NDD brokers allows the use of low and unfixed spreads. Since the spreads are not fixed, there is a great tendency for their value to increase significantly when an increase in volatility takes place due to a significant economic announcement. To get paid, NDD brokers might increase the spread or charge a commission on every forex trade.

3. Electric Communication Network (ECN)

An Electronic Communications Network or ECN forex broker generally does not have its own dealing desk. Instead, the broker provides an electronic trading platform in which professional market-makers at banks, as well as traders and other forex market participants can enter bids and offers through their system. Most ECN brokers work by offering information to all the participants in the forex market as a means of improving market transparency. They charge a commission on each traded volume to earn income from working with traders. ECN brokers also allow traders to process all their transactions in the interbank market.

4. Straight Through Processing (STP)

STP brokers can directly pass trading orders into their liquidity providers. They do not also interfere in order execution transactions. Most STP forex brokers work with several liquidity providers. STP brokers that work with many liquidity providers can also provide their traders with better chances to succeed in the forex market.

When planning to succeed in foreign exchange, forex traders should make sure that they choose a broker which can offer their required services without engaging in fraudulent activities.

If we divide forex brokers from other category, there are two different kinds.

5. A-Book Brokers- used by ECN / STP forex brokers

A-Book brokers include STP and ECN brokers. A-Book brokers are intermediaries that send their clients' trading orders directly to liquidity providers or multilateral trading facilities (MTFs). These forex brokers make money by increasing the spread or by charging commissions on the volume of orders. Therefore, there are no conflicts of interest, these brokers earn the same amount of money with both winning and losing traders.

This type of forex broker is becoming increasingly popular because forex traders are reassured by the absence of this conflict of interest, as well as the fact that these brokers have an incentive to have profitable traders since they will increase their trading volumes and therefore the brokers' profits.

6. B-Book Brokers- used by Market Maker brokers

B-Book brokers include the same model as Dealing Desk Brokers. B-Book brokers are those who process clients' trades inhouse and act as a counterparty to their trades. Simply put, if you place a buy order with a B-Book broker, they will be selling to you and vice versa. Some benefits of B-Book brokers include guaranteed fills on your trades. Meaning that even if liquidity is low, you still receive good execution of orders as the broker acts as a market maker.

Brokerage firms are able to manage the risks associated with the holding of a B Book by using certain risk management strategies: internal hedging through the matching of opposite orders submitted by other clients, spread variations, etc. As the majority of retail traders lose money, the use of a B Book is very profitable for brokers.

B-Book brokers make profit through charging clients a fixed spread which is paid every time a position is opened or closed.

How to Choose a Forex Broker？

Here are three of the most important factors to keep in mind when choosing an online broker for forex trading.

First, make sure your broker is properly licensed and regulated. The safety of your deposit is always the top priority.

Next, compare the account offerings, trading platforms, tools, and investment research provided by each broker.

Finally, read detailed forex broker reviews to compare pricing and product offerings (e.g., number of forex pairs and CFDs available to trade) to find what is most important to your forex trading and investment needs.

Conclusion

Different kinds of brokers has their own qualities and downfalls. Some brokers may put a stronger focus on customer support, or low fees, while others may offer more advanced tools and resources. The most important is to know your investing style, and which areas you'd like your broker to be strong in. Thus it would be easier for you to narrow down your search and find the finest broker.