Currency Broker Choices: Essential Info
There’s a very wide choice of currency broker companies online and when you are starting in foreign exchange trading it can be tough to find the best. We have a tendency to be interested by advertising, presuming they’re all working in the same way. Actually this isn’t true. Foreign exchange brokers have very different business models which affect the way that they operate. In some cases, you could be stunned to hear that they could be working against their customers instead of for them.
Of course historically a broker carries out his clients’ instructions, placing orders for them in the market. Originally brokers worked with telephone orders and simply put in the order for the best price that they could get through their dealing desk. Nowadays, everything is done online so that clients put in their orders for a certain price . 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’re 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 foreign exchange trading to folk with much lower investment funds. More lately, companies have come on the scene to cater for these smaller investors and they do not necessarily follow the pattern of conventional brokers. To cut costs, they customarily do not have their own dealing desks and they may operate in some absolutely different ways. This could have significant consequences for your funds and how they’re managed.
So let’s take a look at the kinds of business model that you will 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 suppliers to essentially match their clients’ orders in the market. Competition between liquidity providers keeps the spread low, even though the broker usually increases the spread to cover their own costs and earn a little 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 large currency traders. Spread is generally low but you may be invoiced per trade.
Market Makers
Market makers are not brokers in the true meaning 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 commitment to you either partially or completely. Market makers set their own prices, although naturally these will be related to market costs. They frequently 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 that might work against you as a trader.
Bucket Shops
Currency exchange bucket shops are like bet takers in that they simply match your trade without always taking any position in the market. They may not even have any connection into the genuine foreign exchange market. They win if you lose, so if you are successful they may probably close your account and return your funds. There is actually no point in becoming concerned with a bucket shop unless you just desire experience at awfully low levels of investment, and plan to lose cash. They are not legal in some jurisdictions, and do not deserve to be called a currency broker.