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Foreign exchange market

Choosing Forex Brokers Wisely


Choosing the right forex broker to go with is a big challenge for most traders and investors out there. This challenge requires taking a lot of factors into account. Transaction expenses should be one of the key factors when making such a choice. They are crucial when it comes to trading, but when it comes to long-term investing, the safety of client funds almost matters a lot.
 
When talking about brokers, we often use abbreviations that beginners may have a hard time understanding. So if you are just getting your feet wet in trading, this is the right article for you. Please read it attentively to understand all you need to know about forex brokers and choose the one that suits you best.
 
What Are Forex Brokers? How Do They Operate?
 
Forex brokers are financial institutions acting as intermediaries between those who make deals in the international forex market. They trade currency pairs and contracts for difference (CFDs). There are several hundreds of license brokers you can go with to trade forex.
 
The choice is really wide, so is the list fo factors to consider when making this choice. However, you should keep in mind that not all of those brokers are actually brokers acting as intermediaries. Some of them act as counterparts, which means they win if their clients lose.
 
On top of that, brokers offer their trading platforms and quoting to let you open and close traders. Sounds intimidating, and indeed it can be dangerous if you choose an unlicensed broker headquartered somewhere in a tax haven. There is no doubt that you should consider going only with licensed brokers, which basically means they are regulated and supervised by specific financial regulators in specific jurisdictions, the more respected the better. OK, now let's talk about types of forex brokers depending on the way of processing transactions.
 
Forex Broker Types: ММ, STP, ECN, NDD, MTF
 
All in all, we can differentiate between 4 ways of processing forex transactions. Sometimes, you can come across a new term on the broker's website. In this case, make sure that the broker works with at least one of the following transaction models: MM, STP, ECN, or MTF. After reading this article, you will be able to find out which model the broker belongs to. Always avoid those marketing traps and take your time to investigate into the matter and assing the model to the broker on your own. This will help you to figure out whether a certain broker is a good choice for you. Also, you should keep in mind that the model of processing orders is going to affect the choice of you trading strategy. If you are just starting out, chances are you won't see any difference but as you mature as a trader, you will definitely start seeing the difference. OK, now let's go ahead and take a closer look at those models:
 
Market Maker
 
This is the most popular model among forex brokers. Market makers literally make the market. Basically, such brokers are responsible for creating a trading environment for market participants. In practice, it may seem that market makers are counterparts waiting at the other side of the deal and responsible for decising whether they want to hedge the deal. for example, through so-called liquidity providers. Why is this the most popular model? I hope you have already figured out that this is the most profitable model, and that's the answer. Apparently, every market participants is there to make money, which is also the case with forex brokers.
 
MM is the model implying a conflict of interests if there is no backing the deal. This means your loss is the broker's profit. This description doesn't encourage investing. However, in practice, those licensed market makers have to comply with the legislation of the jurisdiction they belong to, which drastically reduces the chance of manipulation.
 
Market makers often have their marketing campaigns tailored to newbies, since they are the group of market participants with the highest probability of losing their trading capital due to a great deal of wrong market decisions, mostly triggered by fear,greed, and some other emotions, not to mention their desire to get rich fast. Simply put, the savvier and more experienced the trader or investor is, the fewer MM brokers are willing to render services to them. This is a good example of a broker you should probably avoid going with unless you are pretty sure that the broker hedges all trades.
 
Opening an account with such a broker is free but trading implies fees like the spread and the swap (if the trade is extended overnight). At the same time, pay attention to the factor of withdrawing funds. Some market makers will charge you with a fee for withdrawal transaction. if that's the case, that's a wake-up call. This is definitely not the broker you want to go with. However, it doesn't mean that all MM brokers are not safe to trade with.
 
NDD Broker
 
NDD stands for No Dealing Desk. Basically, this is some kind of market maker evolution. In this model, the broker is kind of a counterpart but without the dealing desk, which means no transaction pre-processing. Essentially, a dealing desk is a virtual place where the broker checks whether your transaction can be opened and closed. Most transactions are made automatically, transaction fees are basically the same - spreads and swaps. Chances are, you would like to avoid NND brokers as well.
 
STP Broker
 
STP stands for Straight Through Processing. The name speaks for itself - simplified processing. All of the transactions are processed by the liquidity provider. In this case the broker is some kind of a mediator. Often times, STP charges you with extra commission instead of the spread. At first sight, it might seem that STP is costlier than MM but we should check each and every option thoroughly. Usually, STP brokers charge you with a fee much smaller than the spread charged by MM brokers. It's interesting to note that some MM brokers offer STP model for VIP clients. 
 
ECN Broker
 
A couple of years ago, ECN was the most wanted model. Why? ECN stands for Electronic Communication Network. In practice, this model is similar to the one they use in stock markets. The broker tries to bring together the two parts of the deal, which can be a liquidity provider or another trader. This may sound like a good option but in practice everything is not as ideal as one might thing at first, and there are 2 reason for that:
- the broker may still try to manipulate the liquidity in some cases
- liquidity providers have a competitive edge over retail traders
 
In this case, the liquidity provider may reject the transaction in the last millisecond after figuring out that a better price is about to come an instance later. Liquidity providers have this competitive edge in MM, STP, and ECN. On top of that, in practice, amid low liquidity, some ECN deals may end up being costlier than those even with MM brokers.
 
As for the model used by stock markets, it's called MFT where all market participants are equal. Still, this is an unpopular model and is tailored to VIP clients.

 

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