Learn Forex Trading: FX Brokers

FX Brokers

Your trading experience will be directly tied to the type of brokerage firm you use.

Two types of retail FX brokers offer speculative currency trading to investors: traditional brokers that provide clients access to an ECN and brokers that operate as dealing desks.

ECN Brokers

an ECN is an electronic communication network in which currency pairs are traded by banks, central banks, corporations, and now speculators. ECN brokers, however, are also known as non-dealing-desk brokers because, similar to the traditional sense of a broker, they serve as an agent to provide customer access to the FX market (an ECN) as opposed to dealing the FX pairs directly to their clients by acting as a counterparty. ECN brokers are nothing more than the intermediary that brings speculators to liquidity providers (banks and other counterparties). In essence, they attempt to find the best price for the retail trader and facilitate/execute orders on their behalf. Don’t forget that there are several ECNs, and the brokerage firm you choose will determine the quality and size of the ECN. Therefore, bids and asks, and the spread between, can vary from broker to broker.

Retail traders opting for a non-dealing-desk broker will enjoy direct access to a true currency market, and the quotes they see within their platform represent the lowest price at which other participants are willing to sell and the highest price at which they are willing to buy. It might be easier to understand this by thinking of it this way: When you look at quotes flashing on the FX trading platform of a trader using an ECN broker, you see the best offer (ask) and the best bid of all available counterparties on the ECN.

Dealing desk FX Brokers

Dealing-desk brokers go beyond facilitating the transaction. They actually participate it in by “dealing” trades to clients and taking the other side of the execution. Plainly, if you are trading with a dealing-desk brokerage firm, when you go short a currency pair, the desk goes long. as a result, such brokerage firms are often referred to as market makers.

When you have an account with a market maker, your trades are not being matched

by external 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 offset 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 although most traders use the term forex broker loosely and include them.

The dealing-desk arrangement, or non-ECN broker, creates a significant conflict of interest between the trader and the brokerage simply because the brokerage firm stands to make money as its client loses, and vice versa. This is a rather simplistic view because dealing desks typically offset their market risk by taking the opposite position in an actual interbank market, but you get the idea. If you are a buyer of the USD/JPY and your broker is the seller, the entity you have essentially hired to facilitate your FOREX trading is benefiting from your misery and suffering from your victory. I can’t think of any compelling arguments suggesting this arrangement is conducive to the success of traders.