Before you choose a forex broker, you need to know the choices you have available. There are two main broker types – dealing desk brokers, also known as market makers, and no dealing desk brokers. No dealing desk brokers can be broken down into further categories known as straight through processing and electronic communication network plus straight through processing.
Dealing Desk Forex Brokers
Forex brokers that work via dealing desk brokers normally earn their money through spreads. They also trade against their clients. Dealing desk brokers create artificial foreign exchange rates and a market for their clients. At this point you may be thinking that this creates a conflict of interest, but that is not so. Dealing desk brokers provide their clients with a buy and sell quote which indicates that their dealings are not dependent upon your decision as the trader.
Dealing desk brokers control the prices quoted to the client which means there is no risk to them when they set fixed spreads. Their clients are unaware of the interbank rates the broker obtains. This does not mean that you being ripped off because you cannot see the interbank rates. There are too many forex brokers in the market, hence the competition is so stiff that traders are often offered rates very close to the interbank rate, if not the same.
Trading via a Dealing Desk Broker
If you place a trade with your broker, the first step will be for your broker to find a sell order that matches your buy order. The broker does this by viewing orders from its other clients. If there is no sell order immediately available, your broker passes on your trade to its provider which is normally a large institution which is always ready to buy or sell what is on the market.
Your forex broker minimises its risk by dealing with their liquidity provider. They still earn from the spread, but do not have to take the other side of the trade you placed. They may be forced to take it in certain circumstances, such as if there are no matching orders. Your broker may have a specific risk management policy and it is a good idea to find out how your trades will be handled before you choose a broker.
No Dealing Desk Broker
As is suggested by the name, this broker does not pass your orders via a dealing desk. They are not interested in the other side of your trade as they are simply a middle man who links the two trading entities. They often charge their clients a small commission for the trade or they add a small mark-up by allowing for an increase in the spread.
These brokers link your orders straight through to their liquidity provider. They often have a range of liquidity providers, each providing its own quote on the buy and sell prices. For all their trouble and effort, your broker normally adds a small fee to the price quoted. The variance in spreads may be based on the spread of the liquidity provider.
These are the different types of brokers available to you and it is your decision as to the one you choose.