In the realm of forex trading, there are two main distinctions to consider when it comes to the type of forex broker: how they execute your trades and how they profit. Here's a breakdown of the two main categories:
Execution Method:
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Market Makers (Dealing Desk Brokers): These brokers act as the counterparty to your trades. When you buy or sell a currency pair, the broker itself takes the opposite side of the trade. Their profit comes from the spread (difference between the buy and sell price) they set. Market makers can potentially benefit from your losses.
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Non-Dealing Desk Brokers (NDD): These brokers don't take the opposite side of your trades. Instead, they act as an intermediary, connecting you with other market participants or an Electronic Communication Network (ECN). Their profit typically comes from commissions on your trades or markups on spreads. NDD brokers are generally seen as having less conflict of interest since their earnings aren't tied to your trading wins or losses.
Within the NDD category, there are further distinctions:
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Electronic Communication Network (ECN) Brokers: These brokers connect your orders with buy and sell orders from other market participants through an ECN. ECNs essentially function as electronic marketplaces for forex trades. Brokers using ECNs profit from commissions or markups on the spreads.
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Straight Through Processing (STP) Brokers: Similar to ECN brokers, STP brokers route your orders directly to liquidity providers like major banks. However, unlike ECNs, STP brokers may not display the full depth of the market before executing your trade. Their profit comes from commissions or markups on spreads.
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Direct Market Access (DMA) Brokers: These brokers provide the highest level of access to the interbank market, allowing you to see the full depth of the market before executing your trades. They essentially connect you directly with liquidity providers. DMA brokers profit from commissions on your trades.
Choosing the Right Execution Method:
- Beginners: Market makers can be a good starting point due to their user-friendly platforms and potentially lower minimum deposits. However, be aware of potential conflicts of interest.
- Experienced Traders: ECNs, STP, and DMA brokers may be preferable due to their transparency and potential for tighter spreads. However, these options often come with higher commissions or minimum deposit requirements.
Remember, the best type of forex broker depends on your trading style, experience level, and priorities.