An important consideration when opening a retail forex trading account involves choosing among the different types of forex brokers available to handle your forex transactions. This represents an important decision, because the type of forex broker chosen can affect both the quality of service you receive, as well as your transaction fees and dealing spreads.
The Three Main Types of Forex Brokers
When it comes to the key consideration of what type of forex broker to use with respect to what their forex quotations are based on, three main choices exist: no-dealing desk, market-making and electronic communications network brokers. Popular examples of the three different types of forex brokers are:
- No Dealing Desk
- Market Maker
- Electronic Communications Network
Each of these three different types of forex brokers have a different way of handling transactions and executing orders. Details about the three basic types of forex brokers and their primary transactional qualities and distinctions follow.
No Dealing Desk Forex Brokers
The No Dealing Desk or NDD type of forex broker lacks a dealing desk, as the name implies. Nevertheless, it instead offers the best composite quotes obtained from the multiple forex quote providers that give the NDD broker its liquidity in the forex market.
Typically, each of these providers will post their best markets with the NDD forex broker. The broker then executes transactions and watches and fills orders for their clients accordingly. The NDD forex broker generally either charges a commission or they widen the bid/offer spread in order to make a small profit on each trade executed, sometimes they do both.
A forex market maker will generally offer their customers a two sided market that comes from a specialist forex trader operating as part of the broker’s own in-house dealing desk. If the price is dealt on, the broker will then end up taking the other side of any given transaction from their client by buying on their bid side or selling on their offer side of the quoted price.
The market maker’s objective is to capture a portion of the spread and to do sufficient volume on both sides of the market to avoid having to lay off accumulated risk with another professional counterparty.
Furthermore, if the trade executed is large enough, the market maker might choose to offset the trade immediately, especially if they think the market might move against it. Alternatively, they can add it to their trading book, depending on their market outlook and size of the transaction.
Electronic Communications Network (ECN) Forex Brokers
An Electronic Communications Network or ECN forex broker generally does not have its own dealing desk. Instead, the broker provides an electronic trading platform in which professional market-makers at banks, as well as traders and other forex market participants can enter bids and offers through their system.
An advantage offered by some ECNs is that the trader posting the price can be given some degree of anonymity. This can suit traders who do not wish to give away the fact that they are on the bid or offer.
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