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Are You Working With A Solid Currency Trading Broker And Is That Company Working For You ?
Folks new to currency trading may be astonished to find that their currency exchange broker may work in some astounding ways. Actually, many firms providing currency trading services are not brokers in the usual sense at all.
Usually a broker would work for you as a customer, placing your buy and sell orders for you through their dealing desk and charging commission (for equities trading transactions) or making their revenue from the spread (the difference between bid and ask prices) for currency trading. In the past orders would be given by telephone. Now they are placed online, with you in total control of your account.
But regular currency trading accounts require significant account balance. Generally the lowest deposit is somewhere from $10,000 to $50,000. Now that currency trading can be done from home, there are countless 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 consequences for you.
So nowadays, there are different types of firms 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 are in contact 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 widen the spread to give themselves a better profit margin.
Forex ECN (Electronic Communications Network)
ECN brokers cater a marketplace where many market players including financial institutions, market makers and individual traders can see to have their trades executed. Trades will be entered under the name of your ECN provider for anonymity. Spread is typically small but the ECN will in many cases charge a matching fee per transaction.
Foreign Exchange Market Makers
When you have an account with a market maker, your transactions are not being matched by third party providers but by the market maker themselves. This means that they take the other side of the trade 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 think that the separation between market makers and bucket shops is not clarified and rather avoid them.
Forex Bucket Shops
Bucket shops work a bit like market makers but they do not cover 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 win if you lose. Like commercial bet takers, if you are profitable they tend not to want your business and will presumably close your account, giving back your cash to you. They of course won't provide you with additional assistance, 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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