February 22, 2010

Forex Broker Selections: Essential Info

There is a really wide choice of currency broker companies online and when you are starting in forex trading it can be hard to find the best. We tend to be attracted by advertising, assuming they’re all working in the same way. In fact this is not true. Foreign exchange brokers have extremely different business models which affect the way that they operate. In some cases, you could be stunned to hear that they may be working against their clientele 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 phone orders and simply placed the order for the best price that they could get through their dealing desk. These days, everything is done online so that clients put in their orders for a certain price . However, you do still need a broker who will connect to the market thru their software platform.

Many brokers still work in the traditional way, placing orders for clients as they’re instructed. These are often the brokers who run standard forex accounts with minimum investment of $10,000 and upward. But the internet has opened up currency trading to folk with significantly lower investment funds. More recently, firms have come on the scene to cater for these smaller speculators and they don’t 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 crucial effects for your funds and how they’re managed.

So let’s take a look at the sorts 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 a corresponding way to brokers with dealing desks, but they use a variety of liquidity providers to actually match their clients’ orders in the market. Competition between liquidity providers keeps the spread low, although the broker usually increases the spread to cover their own costs and make some money.

Electronic Communications Network (ECN)

Currency 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 usually low but you may be billed per trade.

Market Makers

Market makers are not brokers in the true sense because rather than 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 dedication to you either partly or entirely. Market makers set their own prices, although of course these will be related to market prices. They often do not like clients to use scalping systems as the awfully short term nature of these trades makes it harder for them to offset their risk. Some traders are pleased to use market makers but others consider that they’ve a conflict of interest which may work against you as a trader.

Bucket Shops

Currency exchange bucket shops are like bet takers in that they match your trade without always taking any position in the market. They might not have any connection into the real forex market. They win if you lose, so if you are successful they may probably close your account and return your funds. There’s really no point in becoming concerned with a bucket shop unless you just need experience at awfully low levels of investment, and plan to lose cash. They are against the law in some jurisdictions, and do not should be called a currency broker.