Are Forex Trading Brokers For You Or Against You?

The manners in which forex trading brokers operate come as a surprise to newcomers to forex trading. For those used to stock brokers, it is quite a revelation to see the fx trading services offered by some companies. It is a departure from what they know brokers to be in conventional terms.

The traditional role of a broker before was to service the client by buying and selling for them via their dealing desks. For stock exchange trading, they would receive compensation via a commission charged on transactions. In the case of fx trading, they would make their profits via the difference between bid and ask prices or what is known as the spread. In the past, orders were placed through the phone which is in stark contrast to trading today which is done online with the trader having complete control of their account.

However, opening standard forex accounts required a large investment with minimums ranging from $10,000 all the way to $50,000 rendering it beyond the reach of individual investors. Today however, there a good number of companies offering lower minimum deposit requirements for forex mini accounts and allowing you to trade from your home. The business models of these companies are quite different from the traditional broker and you must be aware of them as they may have an impact on your investments.

Nowadays, there are a wide variety of companies that offer their services to the individual investor. Most of them don’t have their own dealing desks and operate in very different ways.

Forex NDD (No Dealing Desk)

These are the forex trading brokers who don’t have their own dealing desks. They utilize external liquidity providers to give prices and to match the trades of their clients. The true spread is usually small due to the liquidity providers range though the brokers sometimes opt to increase spreads to create a more optimal profit for themselves.

Forex ECN (Electronic Communications Network)

FX electronic communications network brokers offer a venue for market users such as market makers, banks and regular traders to have trades filled. For the sake of anonymity, trades are entered under the ECN providers name. While the spread is usually small, they generally charge matching fees for each trade.

Forex Market Makers

When a forex market maker is handling your account, the trades are not matched externally but internally by the market maker. What this means is that the market maker will occupy the opposite position in your trade and offer their price to their client, namely you. These prices correspond to the prevailing current market prices. To offset the risk of their position, they then take an equivalent position to yours with ECN or other venues.

In this case, the market makers are not true brokers since they don’t actually place your order in the marketplace. However a lot of traders define fx brokers with some ambiguity and consider market makers as fx brokers as well. Furthermore, some traders cannot see much difference between the market makers and bucket shops and would rather choose to steer clear of them.

Forex Bucket Shops

Bucket shops and market makers work a bit like each other. But bucket shops dispense with offsetting risk and have minimal connection to actual foreign exchange spot markets. Consequently, when dealing with bucket shops, you are actually betting against them. So they take an opposing position to your trade and profit when you lose. So in a manner similar to commercial bet takers, these bucket shops dislike it when you make money and would, in all probability, refuse your business, close your account and give back your funds.

They are considered illegal in some locations and even if they are legal in your location, it would be wise to avoid them, particularly if you are a beginner. As you can see, aside from not being true fx brokers, the bucket shops work against you and not for you.