Brokers play a crucial role in the forex world by connecting traders to global currency markets. The type of broker you choose will have a big say in your overall trading experience.
However, all forex brokers don’t function the same way. In fact, there are different types of forex brokers, each using a distinct model to process trades and generate revenue. While they all provide access to the forex market, the way they handle your orders, set spreads, and manage liquidity can vary significantly.
Here, we will discuss the main types of forex brokers, explain how each one works, and discuss the factors to consider when choosing one.
Factors to Consider When Choosing a Forex Broker
If you are comparing types of brokers in forex and are still unsure what matters most, these more helpful hints can provide clarity on what to look for before making a final decision.
The first thing you should confirm is the broker’s licensing status. A licensed broker will ensure your funds are safe and that you are subject to fair trading practices.
Number two is the broker’s execution model. Dealing desk, or market maker, brokers offer fixed spreads but raise issues related to a conflict of interest. STP and ECN brokers offer more transparency and faster execution speed.
Third, review the trading costs, which include spreads, commissions, swap fees, and minimum deposits. Different types of forex brokers charge varying fees, including inactivity fines, which can eat into your profits.
The Key Types of Brokers in Forex
As mentioned, brokers play a key role in the forex market. However, all brokers don’t operate in the same way.
- Market Maker Brokers (Dealing Desk Brokers)
Dealing desk brokers, also known as market maker brokers, create their own market for traders. They “make the market” by providing liquidity from their pool of clients rather than sending trades to the global exchange.
Often, dealing desk brokers offer fixed spreads, which makes trading costs predictable. Moreover, these types of forex brokers provide instant trade execution in most cases. However, cases of requotes, where traders are asked to take a new price, occur when the market moves too fast.
- ECN Brokers
ECN brokers, short for electronic communication network brokers, act as intermediaries, linking traders to various liquidity providers. Compared to market makers, ECN brokers offer direct access to the market while providing better transparency.
Moreover, ECN brokers offer tight market spreads and charge a flat commission for each trade, making the cost of trading cheap. They also support anonymous trading, which most high-volume traders prefer.
The primary drawback to using ECN brokers in some cases is a higher minimum deposit.
- STP Brokers
Straight-through processing (STP) brokers are forex brokers that send customer orders straight to liquidity providers without passing them through a dealing desk. STP brokers earn their revenue mainly through spreads and commissions.
The difference between STP and ECN brokers lies in the liquidity providers. With ECN, the network is wide, while STP brokers channel customer trades to a select group of liquidity providers.
STP forex brokers offer variable spreads, which often include markup on the raw spread from the liquidity providers. The spreads can get wider, especially during periods when market activity is low.
