Types of Forex Brokers: How to Choose the Best Broker

peter.nguyen

Trader
Apr 6, 2022
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Types of Forex Brokers​

Forex brokers come in several types, and while most of them usually offer the same access to the foreign exchange market, the procedures and policies applied by each type differ dramatically.

Each type of broker represents a different level in the market. Some employ a high level of expertise and can directly access the market. On the other hand, some brokers are very distant with little connection to the actual market.

Understanding the different types of forex brokers is essential for maximizing your chances of becoming a successful forex trader. The following are the main types of forex brokers working in the forex market, the role they play and the functions they offer you as a trader:

Dealing Desk (DD) – The dealing desk broker is a market maker that usually provides fixed spreads. Most DD brokers offer quotes below or above the real-time market prices at a given time. A dealing desk broker operates in a closed trading environment wherein they set their own price rates and take the counterparty of unmatched trades. A broker with a dealing desk is called a Market Maker.

Market Makers (MM)

Market makers act as a liquidity provider and execute trading orders from its own inventory. Also known as a dealing desk broker, market makers offer bid and ask prices or currency quotes by adding the spread in the form of extra pips to the interbank quotes. Dealing desk brokers profit from the spread and usually offer fixed spreads to their traders. Their quotes are almost identical with the inter-bank quotes, with some little difference.

As the name suggests, market makers literally create a market for their traders which means that trades are conducted internally out of the broker’s inventory. The market maker forex broker is the counterparty in every trade. It executes trading orders either by meeting orders from the on-hand inventory or by finding a counterparty for each trade.

The structure of a market maker broker is clear and simple; every time a trader opens a BUY order, the broker opens a SELL order in exchange. If the trade is profitable, the market maker loses. If the trade is losing, the broker is winning.

A forex market maker provides a two-sided market to its clients.

With market makers, trades are never executed at the real interbank market. Some market makers may hedge your orders at the true interbank market, but obviously that’s not always the case.

Pros:

  • Instant trade execution.
  • Fixed spread.
  • Flexible high leverage.
  • No swaps.
Cons:

  • Relatively low liquidity.
  • Slight price differences.
  • Bankruptcy risks in case the dealing desk is not managed correctly.

Electronic Communications Network (ECN)

An Electronic Communications Network (ECN) forex broker does not own a dealing desk. Instead, the ECN broker provides an electronic trading platform through which traders can execute their trades and interrelate with other traders in the market to obtain the best trading quotes.

ECN brokers connect traders directly with counterparties in the interbank market. Its main role is creating the link between buyers and sellers. They match the trade for their traders with other market traders or liquidity providers and charge commission on each transaction. ECN accounts are known for lower spread.

While basically profiting from commissions, some ECN brokers also profit from bid-ask spreads by offering slightly higher quotes than those received from the liquidity providers.

Many traders believe that ECN brokers are the best among all types of forex brokers as orders are matched up with the opposite trades all the time. But this is not correct. The forex market works differently, there’s no central exchange which makes it impossible to have all buy trades matched by sell trades.

Pros:

  • Real-time rates from the interbank market.
  • Lower spread.
  • Direct access to the market.
  • No swaps.
Cons:

  • Commissions.
  • Re-quotes.
  • Limited leverage.
  • Rollover fees.

Straight Through Processing (STP)

A straight through processing broker directly forwards the trading orders to a number of liquidity providers in the interbank market that have different quote rates for the trading transaction.

Similar to ECN brokers, STP brokers don’t have a dealing desk and process trades directly in the interbank market. However, when a counterparty for an order cannot be found in the interbank market, an STP broker may act like a Market Maker and match the order within its own client base, or sometimes take up the counterparty of the order itself.

STP brokers provide more flexible trading conditions to clients and bypass some of the limitations of trading within the interbank market.

Mostly, STP brokers provide identical price rates to those of the interbank market. The broker’s platform typically sorts out the best available rates in order to perform a trading transaction. The broker makes a profit by wider spreads.

Many believe that STP brokers combine the best of both worlds; they don’t manipulate rates and at the same time are able to execute smaller trades without re-quotes or rejection. Make sure to check out the broker’s risk management policy to learn about their practices.

Pros:

  • Identical rates to the interbank market.
  • Flexible leverage.
Cons:

  • Rollover fees.
  • Dynamic spreads.

Why Choose AximTrade?​

AximTrade is a fast-growing forex broker in the global markets that stands out for its reliability and excellent trading conditions as well as providing traders with top notch trading solutions. Check the full AximTrade Review to learn more about trading services.

Open a Forex Account with AximTrade​

Follow these steps to open a forex account with AximTrade:

  1. To open forex account log in to your member account from AximTrade login, and click on the “ + Open Extra Account” button on the top right.
  2. Choose your preferred account type. You can choose between Standard, Cent, ECN or infinite leverage accounts. You can also choose a demo account if you’re a beginner.
  3. Select your account and press “Open”.
  4. Name the Account and create both trading and investor passwords for your account. The investor password should not be the same as the account password. Remember to use both uppercase and lowercase letters, use a combination of numbers and letters. Then click “Done”.
  5. Now your account is ready for trading. You can find all your accounts in the “My Accounts” tab.
Source: Types of Forex Brokers: How to Choose the Best Broker