Are You Trading With A Genuine Foreign Exchange Broker And Is That Company Working For You ?

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Are You Trading With A Genuine Foreign Exchange Broker And Is That Company Working For You ?

People new to forex trading may be astonished to find that their currency exchange broker may operate in some surprising ways. Actually, some firms offering foreign exchange trading services are not brokers in the usual sense at all.

Usually a broker would work for you as a client, placing your buy and sell orders for you through their dealing desk and charging commission (for stock exchange transactions) or making their revenue from the spread (the difference between bid and ask prices) for forex trading. In the past orders would be placed by telephone. Now they are placed online, with you in entire control of your account.

But regular currency trading accounts require significant investment. Typically the lowest deposit is anything from $10,000 to $50,000. Now that currency trading can be done from home, there are many new companies springing up with lower deposit requirements, offering currency trading mini accounts. But their business model is not necessarily the same as traditional brokers, and this can have implications for you.

So these days, there are different types of companies that operate in unconventional ways in order to provide services to the smaller investor. Most of these do not have dealing desks of their own.

Forex NDD (No Dealing Desk)

Brokers without a dealing desk communicate with third party liquidity providers to provide prices and match clients' trades. Because there is a number of liquidity providers, the real spread tends to be small but the broker may increase the spread to give themselves a reasonable profit margin.

Forex ECN (Electronic Communications Network)

ECN brokers create a marketplace where many market users including financial institutions, market makers and regular traders can see to have their trades executed. Trades will be entered under the name of your ECN provider for anonymity. Spread is generally small but the ECN will often charge a matching fee per trade.

Foreign Exchange Market Makers

When you have an account with a market maker, your trades are not being matched by third party providers but by the market maker themselves. This means that they take the opposite position and offer their prices to you, although of course these prices relate to the current price in the market. They will then cover their risk by taking an equivalent position to yours in an ECN or other environment.

Since they are not actually placing your order in the market, market makers are not brokers in the true sense of the word still nearly all traders use the term forex broker loosely and include them. Others consider that the difference between market makers and bucket shops is not clarified and prefer to avoid them.

Forex Bucket Shops

Bucket shops work a bit like market makers but they do not offset their risk and can have very little connection to the real spot currency market. When you trade with a bucket shop you could be said to be betting against them. They oppose your trade and they profit by your loss. Like commercial bet takers, if you are successful they tend not to want your business and will most likely close your account, returning your cash to you. They certainly won't provide you with additional support, like forex signals. Obviously, as with a forex signal service they would help you to win against themselves, so you can't expect such a suicidal behavior. So the best thing to do is to find a reliable forex signal provider.

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