Blog

The Wonderful World of Forex Brokers & Their Kind

The Wonderful World of Forex Brokers & Their Kind

There are three types of brokers out there: Electronic Communication Networks (ECN), Straight Through Processing (STP) and Dealing Desks.

The main difference between these brokers is the way they process your orders. Plus, the bid and ask prices offered by each are slightly different from the interbank rate.

interbank-rat

 

Non-Dealing Desks: ECN & STP

The ECN and STP are also known as Non-Dealing Desk brokers.

ECN is a group or network of liquidity providers that facilitates the quick execution of a particular trade via a broker.

Traders on their own cannot get the best price for a currency pair and rely on the broker to provide them with the best price, one that closely matches that offered by the interbank system or major banks.

The network of liquidity providers (i.e., ECN) passes on all of their prices to the broker. The broker then filters out and picks the best price, sends it to you as the client, and charges you a small commission for this service.

Now, the prices are not quite as good as the interbank rate, but they’re pretty close. Take the picture above as an example.

The bid and ask price offered by the ECN is not that different from the interbank’s rate. It’s pretty tight and close enough to the level at which big banks trade hundreds of millions of dollars amongst themselves, and you, the trader, get this best price by just paying a small commission.

In essence, these major banks and financial institutions also act as Market Makers.

An STP works similarly to the ECN.

The STP will get the best price from the liquidity provider or market maker and pass it on to the broker so that it can be offered to the trader. However, instead of charging a small commission to the client, the STP adds a mark-up to the bid and ask prices offered to the client.

So the price offered by a STP may just be a fraction worse than that delivered by an ECN.

Dealing Desks

A dealing desk type of broker is a Market Maker.

They are not using others to provide prices to them. In this way, they do not pass your trade price onto the real market. The prices they offer us, though, are usually not too far away from those offered by the market.

The dealing desk makes their money by taking on your trades and not hedging it off in the real market. The reality is, most dealing desk brokers profit by relying on their clients to register a loss.

With the non-dealing desk, your orders are passed straight through the market without a dealing desk. ECN and STP brokers facilitate your trade all the way through to the market. Whether you lose, win or draw, it really doesn’t make any difference to them since they’ll either charge you a commission or add a little bit to the spread.

Now, some people don’t like the idea of a dealing desk and that their trade doesn’t go through the market.

Non-dealing or dealing desk: Which one is better? Tough question.

FXPRIMUS prefers the non-dealing desk broker because of the fact that your orders are going through the market. We like to know that liquidity providers are in constant competition and we are guaranteed to get a good price.

But, ultimately, it’s really up to you to choose between both types of services.

Both offer positives and negatives. Would you rather have slightly tighter spreads and pay commission, or would you prefer slightly wider spreads and not pay commissions?

It might all depend on how frequently you trade. If you trade once a week or three or four times a month, then perhaps a spread that is a fraction of a pip tighter isn’t really going to make a huge difference to your trading strategy.

On the other hand, if you are someone who’s trading more regularly, then perhaps you want something like an ECN that could pass your trades straight through to the market, offering you much tighter spreads.

Why is the Regulatory Framework Important?

regulatory

 

The other question you need to ask yourself is in relation to whether the broker is regulated or not.

There are still quite a lot of brokers out there that perhaps haven’t got the European or American or some other well-known regulation.

So if you are going to put your money somewhere safe, it would be good for you to know that the broker you trade with is regulated. You want to make sure that the broker is operating its business in line with the law.

In the UK, you will find what’s called the Financial Conduct Authority (FCA), while in Cyprus, you’ve got the Cyprus Securities and Exchange Commission (CySEC). And there’s many more of these kinds of regulatory bodies all over the world.

The regulatory body is a professional organization that monitors the broker, making sure that their practices are in accordance with the regulation and that the client funds are protected.

When you have an account with the broker, there should never be a problem withdrawing your money or anything like that. So, if you face any kind of issues or huge charges, then perhaps you need to reconsider where you’re placing your money and who you’re using to trade.

Picking the Right Platform for You

The trading platform is another interesting component.

Most brokers nowadays will use MT4 and MT5 and they might also offer their own online platform.

Again, it’s a personal choice. If you choose to trade with something like MT4, it’s quite a generic platform. You can then find a lot of indicators online for free and realize that it’s quite a smooth platform used by quite a large number of brokers.

Bank on Good Customer Service

Customer service is another important factor to look at when choosing a broker.

As a trader, you want to focus on your trading. You don’t want to have any problems with a broker that will take away from your objective, whether they are not reachable or your trading accounts have issues or anything else that will hinder your trading capacity.

To check out a list of all of our ongoing promotions and offers, have a look at our website here.


*Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from the use of or reliance on such information.


Risk Warning: Trading on margin products involves a high level of risk , which may result in the loss of all invested capital. Show Less

risk Show More

Get Started

Risk Warning: Trading on margin products involves a high level of risk , which may result in the loss of all invested capital.

Get Started