image_pdfimage_print

Choosing an Ideal Forex Broker

In order to participate in the forex market, traders cannot deal directly. They have to trade through forex brokers. This will entail opening an account with a forex broker, funding that account and then opening and closing trades in the forex market.

However, there is a lot about brokers that most retail traders do not know, and that is why many traders have problems when choosing forex brokers.

Types of Forex Broker

There are three types of forex brokers.

a) Electronic Communication Network (ECN) brokers

b) Market makers

c) Dealing Desk brokers with an ECN Bridge

ECN Brokers

Electronic Communication Network brokers are sometimes referred to as direct market access brokers or non-dealing desk brokers. ECN Brokers provide traders with Level II, institutional-type pricing in the market. What this means is that the prices

Forex brokers

that are provided by the liquidity providers in the market (usually banks), are passed on straight to the trader. The trader then has an option of choosing from the several prices that are displayed on his platform, and places his order, which is then sent back directly to the liquidity providers for processing and execution. This is the most transparent model of pricing available in the market. Spreads are usually variable and the trader is required to start trading with a large capital base, with capital requirements starting from $10,000 on some forex broker platforms to as high as $50,000 on others.

Market Makers

Market makers are also referred to as dealing desk brokers. The pricing provided by liquidity providers is usually Forex Brokers routed to a dealing desk forex brokers operated by the market maker, and there prices are marked up slightly and sent to the trader as a single price quote. When the trader executes the order on his platform, this again goes to the dealing desk of the broker and executed at that level. So the trader is not actually buying from the liquidity providers but from the market maker. Spreads are fixed and capital requirements are small. However, the trader is essentially holding a contrary position to that of the broker and for that reason, this is not the most transparent pricing model there is out there.

ECN Bridge Brokers

These are brokers that are essentially market makers, but allow traders to use what is known as the ECN bridge software to bypass the dealing desk process in order processing and execution. Many brokers that operate as ECN brokers, Forex Brokers are in reality, market makers with ECN bridge. This is especially so if the broker Forex Brokers in question has low capital requirements. Using a direct or straight-through processing system on a true ECN environment is expensive, and ECN brokers need traders with large capital to be able to generate enough offset the costs of providing this ECN environment. However, for traders who cannot afford the steep capital requirements of true ECN brokers, the ECN bridge option is the way to go.

So before you delve into the forex market, take time to weigh the options you have from the types of brokers described above, match it to what is available to you, and make an informed choice. FOREX BROKERS