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Before a trader decides on a broker that provides an investment platform, he should learn about the types of forex brokers. Depending on the type, each operates differently, and the choice of brokerage model largely depends on the investment strategy chosen by the client.
Types of forex brokers. How do forex brokers work?
A forex broker is an institution that allows traders in the international foreign exchange market to make trades using trading platforms.
They allow traders to buy and sell currencies, as well as other instruments that are traded on Forex. Brokers make money on spreads, or commissions, which are associated with each transaction a trader makes.
At a Forex broker you can trade with leverage on CFDs, but keep in mind that leverage carries the risk of losing all your capital. The list of CFD instruments that are available at brokers is very long, starting with the EUR/USD exchange rate and ending with Bitcoin or gold. Deciding to trade j broker, the trader does not physically own the raw material or currency.
Forex brokers mainly operate in 4 basic market models:
- Market Maker, or MM – in Dealing Desk and Non-Dealing Desk models,
- Straight Trough Processing, or STP,
- Electric Communication Network, or ECN,
- Multilateral Trading Facility, or MTF.
The above types of forex brokers differ from each other in their procedures, technologies, or security of transactions. They offer different commissions, spreads, differ in the way and time of execution of orders, as well as the size of the initial capital. The choice of the type of broker will depend first of all on what the trader expects from the market.
STP broker
STP brokers are not parties to the transaction, so it is also a type of Non-Dealing Desk. The task of this type of broker is to mediate transactions, and anonymously transmit orders to cooperating partners, i.e. bank funds and other intermediaries or retail clients. As a result, there are no conflicts of interest, and what’s more, this type of operating formula makes it possible to ensure favorable transaction costs and high leverage. STP broker earns money on the spread or commission on the value of the transaction.
As for this model of the broker’s activity, in this case you can not put your own offers in the order sheet. On the other hand, in a situation of dynamic changes in rates, price slippage can occur.
Brokers that operate in this model are Trading 212, RoboMarkets, Pepperstone.
ECN broker
In the case of the Non-Dealing Desk variant, the ECN broker is also only an intermediary in trading, but it seeks to centralize the Forex market. Therefore, this type of broker gathers liquidity providers in one place, and this makes it possible to offer traders the best price, as well as low spreads. At the same time, the trader can also become a liquidity provider and put his own offer in the sheet, so there is no price slippage and also no conflict of interest.
These types of brokers profit from commissions and the value of transactions. However, when choosing this type of broker, the trader must expect a higher minimum deposit, as well as lower leverage.
Examples of this type of broker include IC Markets, Admiral Markets and Pepperstone.
MTF broker
This is an exchange-traded model of order execution in the foreign exchange market, in which the broker is also not a party to the transaction. It is characterized by transparent trading, as well as orderly trading, so traders get access to the order book. This type of broker charges a commission on trading. In this case, the risk of price slippage is small, and orders are evacuated instantly. However, this model is used rarely.
MM broker
Market maker brokers are called market makers and simulate the real market, although speculation in the broker’s internal market is also said to be involved. This is one of the most popular types of brokerage due to its relatively low operating costs, as well as its simple operating model.
A trader who opens a position on the platform actually trades with the broker, whose further task is to secure it on the currency exchange. The investor does not trade directly on the market, and has the opportunity to take advantage of high leverage, as well as trade with a low minimum deposit. The MM broker also often offers percentage bonuses for deposits, and earns money on the spread itself, which can be either variable or fixed.
Examples of brokers that operate in this model include Plus500, XTB, eToro, XM, Easy Markerts, BDSwiss, among others.
Market Maker Non-Dealing Desk Broker
With this type of broker, orders are executed without undue delay. The broker is still a party to the transaction, but in the case of the execution of orders itself, it does not intervene – it does not delay or reject it.
Examples of brokers operating in this model include Libertex, Admiral Markets, Orbex and FX Pro.
What is a Forex broker?
A Forex broker is a financial institution that buys and sells assets on behalf of users, i.e. its clients, receiving some remuneration for this, in the form of, for example, spreads or commissions.
It can be said that the broker acts as an intermediary, allowing private investors to make exact instructions for buying and selling in the foreign exchange market. This means that if an investor wants to invest his capital in the Forex market, he must have an account with one of the Forex brokers.
If the institution of a broker did not exist, a person would have to have a great deal of money and great relationships with banks in order to invest. A forex broker, on the other hand, allows traders to make investments in relatively small amounts. In addition, it usually provides a forex demo account, where one can get acquainted with the platform for making trades, as well as the functioning of the forex market.
What does a forex broker do?
When brokers used to receive orders from their clients and, based on this, give instructions to sell or buy specific assets. Currently, Forex brokers are largely responsible for providing traders with a trading platform, relevant applications, as well as an account, which is used by the broker to conduct transactions in the foreign exchange market. Thus, the broker allows private traders to sell or buy currency pairs, as well as its storage.
Brokers offer their clients two ways to trade forex. One is the so-called dealing desk, which involves the broker acting as a dealer and taking an opposite position to the trader. In this situation, the trader can pay a higher spread, and the broker executes his orders as he sees fit (read also: Forex trader).
The second way of Forex trading is the so-called no dealing desk, which means that the trader has direct access to the market in exchange for a certain fee. In addition, he has to expect higher spread changes, which depends on market conditions.
In addition, forex brokers deal with:
- providing market price charts,
- providing information and analytical services,
- providing trading training or consulting,
- professional management of accounts.
The task of a broker is simply to provide basic services to private traders in the foreign exchange market.
Types of forex brokers. How do forex brokers work
A broker can make money from spreads, its own trades, and commissions charged for trades that are made by clients. What does it mean that a broker earns money on its own trades? It trades in the opposite direction of its clients. This is how MM brokers, for example, make money.
In the case of the spread, brokers make money on the difference between the bid and ask price of a certain currency pair. The change that occurs in the relationship between two currencies of a specific currency pair is measured in pips. When a trader makes a transaction, the broker charges a fee, amounting to a few pips.
hile this does not seem like much, if leverage is taken into account, the value of each pip is correspondingly greater. This makes the spread paid by the trader larger as well. The important thing is that in the case of spreads, the forex broker makes money regardless of whether it gains or loses on the transaction. An MM broker is one type of broker that makes money on spreads.
A forex broker can also earn commissions on trades. Its amount depends on what kind of account the trader has, as well as the turnover on it. The commission is taken from the capital in the investment account at the time the position is opened.
It is worth remembering that the higher the volume of transactions, the lower the commission will be. The investor should pay attention to this, as his actual profit refers to the amount he earned, after deducting all fees.
The important thing is that with some Forex brokers, the trader will have a choice. The broker may waive the commission if the trader agrees to a higher spread. However, if the trader wants a lower spread, he will have to pay an additional commission on each transaction. Which of these solutions is best depends on the investment strategy chosen by the trader.
In addition to the fees outlined above, brokers may also charge either account fees or brokerage account fees. However, there is so much competition among brokers that it is increasingly rare to encounter such fees.
Types of forex orders
It is useful to know the types of forex brokers, but also the types of orders. As a rule, forex orders can be divided into two main categories, namely buying and selling. Forex works on the principle of pairing 2 selling sides with each other. Always one side buys and the other sells a specific currency. It is said that when buying in Forex, a trader opens a long position, in turn, when selling, he opens a short position.
In the case of currency pairs, a long position means that one buys the base currency for the quoted currency, that is, as far as the EUR/USD is concerned, one buys euros for dollars. When it comes to a short position, selling refers to an instrument that the investor theoretically does not own, and in the case of the EUR/USD currency pair, the investor sells the base currency, the euro, while buying the quoted currency, the dollars.
To take a position in the forex market, you need to place an order – bid in the case of selling or offer in the case of buying. Prices of currency instruments are quoted in 2 values. The price gap between bid and offer is called the spread. The spread can be defined as the broker’s margin, which makes money on exchange rate differences.
Each order can be activated as either a pending or immediate recommendation. The latter is activated immediately after the bid is placed, execution is a matter of seconds. A pending order differs in that the trader independently sets the price level at which the order will be activated.
Both types of orders have common options that you set for the order:
- Position size – positions in the foreign exchange market are calculated in lots. By default, a lot means 100 thousand base units of a specific currency, the size of available transactions depends on the broker with which the investor has an investment account,
- Stop loss level – this is the function of a limit order; a stop loss is a level that a trader can put on his own transaction to protect his capital. When a predetermined level is reached, the order is automatically closed,
- In combination, the two functions form an OCO order, or orders that cancel each other out,
- Trailing Stop – this is a less popular order that allows the stop loss to move.
In addition, for pending orders, there are also orders called “if/then” orders. These are orders that activate only under certain conditions by the investor:
- Buy limit – this is a buy order, which is set below the current price of the price, when the price reaches the level set by the investor, the order will be activated,
- Buy stop – is a buy order, which is set above the current price of the exchange rate, when the price reaches the level set by the trader, the order will be activated,
- Sell limit – this is a sell order to be set below the current price of the exchange rate, when the price reaches the level set by the trader, the order will be active,
- Sell stop – this is a sell order to be set above the current price of the course, when the price reaches the level set by the trader, the order will be activated.
Types of Forex brokers. The best brokers on the market and top 10 forex brokers in the world
Below is a list of forex brokers along with a description of the best Forex brokers from which you should choose the most suitable one for you.
XTB
When it comes to types of forex brokers, this one operates under the MM model and has been around since 2002. It is the largest Polish forex broker that is regulated by the Financial Supervision Commission. XTB is a company that is listed on the Warsaw Stock Exchange.
Clients’ money is kept in accounts that are segregated from the company’s funds. The broker’s and clients’ financial resources are mainly deposited in Polish banks. XTB broker’s funds are covered by the compensation system of the National Securities Depository. The broker is registered by the Polish Financial Supervision Authority and has its headquarters in Warsaw.
The platforms it provides are Meta Trader 4, Meta Trader 4 Mobile, WebTrader and xStation 5, which is available in web, desktop and xStation Mobile versions. It offers the ability to trade more than 3,000 financial instruments, including global stocks from 16 different exchanges and cryptocurrencies. It is a suitable choice for beginners, intermediate traders and professionals alike.
The minimum initial deposit is PLN 0, and the account can be held in either PLN, USD or EUR. The broker does not charge for account maintenance, but one transaction per year is required. Deposits and withdrawals can be made via bank transfer, credit card, PayU, PayPal and Bluemedia.
Forex broker XTB offers free trading in Polish and foreign stocks, as well as access to a wide educational database. These include materials from both Polish and foreign experts.
Easy Markets
This is also an MM broker that has been operating since 2001 and is regulated by the Cyprus Securities Commission. This broker is also regulated in Australia and operates in 160 countries from around the world. Clients’ money is kept in accounts separate from the broker’s funds. The broker’s and clients’ funds are deposited in European Union banks. The broker is regulated by the Financial Supervisory Commission.
The broker offers more than 200 financial instruments, in addition to stocks, as well as leverage of 1:30. A personal account manager is available 24 hours a day, 5 days a week.
This broker will be suitable for beginners and intermediate traders. In this case, the minimum initial deposit is 100 euros, and the spread is fixed. Deposits and withdrawals can be made via bank transfer, credit card and skrill. The broker does not charge a fee for maintaining an investment account.
Read also: Is Saxo Bank forex broker good?
TMS Brokers
This is an MM broker that was founded in 1997. It is one of the two largest and oldest Polish CFD and stock brokers. The broker is distinguished by the fact that it is completely regulated by the Polish Financial Supervision Authority, and participates in the compensation system, which is run by the National Securities Depository. Investors’ funds, including in the form of securities up to 3,000 euros, are covered by the compensation system.
The broker offers an automatic stop loss, which protects against negative balances. The forex platforms it offers are Meta Trader 5 and its own proprietary mobile platform. The trader can trade more than 8,000 forex instruments, including CFDs on cryptocurrencies. The broker offers the possibility to invest in Polish and foreign stocks. Technical and chat support is in Polish.
The minimum deposit is PLN 0, and the spread is variable. The account can be held in PLN, USD and EUR. Running the account is free – only one transaction per year is required. It is possible to trade 300 CFDs on cryptocurrencies 7 days a week.
NSBroker
This is an ECN broker that has been operating since 2011. It is distinguished by its method of trading, known as ECN, where investors’ orders go directly to the Forex market. This broker provides many financial products that allow traders to invest in 5 global markets. Traders can make investments in currencies on CFDs, commodities, precious metals, indices and cryptocurrencies.
The broker provides the Meta Trader 5 platform, where 150 of the most popular instruments are available, as well as Polish-language telephone or chat support. This broker is suitable for both beginners and advanced traders. The account can be held in 3 currencies – USD, EUR and GBP. This is a not very popular broker, which is created for big players who have a portfolio containing at least $500.
eToro
This broker began its operation in Israel in 2007. What sets it apart from its competitors is its copy trading feature, which allows clients to copy trades made by other traders. Also popular is the “Popular Investor” program option, which allows top traders to earn money for sharing their trades. Nevertheless, CopyPortfolio is also popular, which means buying entire investment portfolios, instead of individual stocks. So what, forex broker eToro allows you to trade stocks without fees, or buy cryptocurrencies on its own exchange.
eToro is one of the most popular brokers, especially thanks to its great functionality, efficiency and low trading costs. Many useful tools are available on the investment platform, including a demo account. Trading costs are relatively low, with leverage of 1:30, while the minimum deposit is $200.
Interactive Brokers
At this broker you can trade CFDs on stocks, indices, forex, metals with low, transparent commissions, as well as financing rates. Commissions start at 0.05% on all stock CFDs, and rates are lower for active traders.
It is a reliable broker that is listed on NASDAQ. It offers low commissions and the best price execution, which is made possible by IB’s SmartRoutingSM system. Free trading tools that both advanced traders and beginners will appreciate.
Admiral Markets
It has been operating in the financial market since 2001 and serves more than 120,000 clients from 130 countries around the world. The brokerage company has offices in 16 countries.
What sets this broker apart from others? This broker offers a number of different benefits, including fast order execution, as well as relatively low spreads. Users of this broker have access to the Meta Trader 4 and Meta Trader 5 platforms, as well as StereoTrader, as well as Admiral Markets Meta Trader Supreme Edition free of charge.
IC Markets
This is a popular Australian online stock broker. It has been operating since 2007 and has been operating under the ECN model since then. It is supervised and regulated by the Australian Securities and Investments Commission. The broker boasts instant order execution and customer service. It also has accounts that are designed for scalpers, day traders, as well as algorithmic trading machines. It has been gaining popularity among European traders for some time, as it is not tied to financial rules from Europe.
IG Markets
Among the best brokers in the industry is IG Markets. It is regulated by the FCA, as well as licensed by the FSP and ASIC. Its advantages include its long tenure, as well as the large number of CFDs it makes available to investors. Trading costs are relatively high, however, with a leverage of 1:200, as well as a minimum deposit of £250. However, this is a reputable broker that can be relied upon.
FP Markets
This is a broker regulated by ASIC. It is headquartered in Australia, and the broker boasts several years of experience. It offers more than 60 currency pairs, major indices, thousands of stocks and global commodities. It also offers spreads starting at 0.0 pips on various investment tools, including Meta Trader 4 and Meta Trader 5, as well as WebTrader.
The broker started out as a DMA, passing users’ orders directly to the liquidity providers it worked with. It also has separate accounts, which does not allow the broker to use customer funds in the market.
CMC Markets
This is an established, listed and respected broker in the UK that has adapted to the ever-changing view of online brokers. It is listed on the London Stock Exchange.
The platform the broker provides is designed for both beginners and advanced traders. The broker offers a variety of financial instruments and, moreover, relatively low transaction costs.
XM
It is a global organization with 3 companies registered in Cyprus, Belize and Australia. It’s a global service used by more than 3.5 million customers from 196 countries.
Types of forex brokers. How to choose a good forex broker?
Currently, there are many brokerage companies on the Internet, which makes the competition high. Below are the criteria that everyone should consider before setting up an investment account.
The basis is regulation
Currently, brokers are subject to relatively strict regulations. In the EU, every Forex and CFD broker must be licensed. If a broker has a license in one EU member state, it can legally operate throughout the EU, and without one, it should not offer its services at all.
The most popular regulatory bodies in the EU are:
- CySEC – is the Cyprus Securities Commission,
- KNF – the National Financial Supervisory Authority,
- Germany’s BaFIN.
Other regulators include:
- FCA of the UK,
- ASIC from Australia,
- CFTC of the United States.
Regulators supervise brokers and check compliance with the law. A user of a particular broker can file a complaint with them. The relevant authority conducts an investigation, which in some cases can even lead to the issued license being revoked.
Regulators set the rules under which a broker is allowed to offer its services, and check that they are followed. For example, the European Securities and Markets Authority limits the level of leverage on CFDs that a broker is allowed to offer to retail clients to a maximum of 1:30 for major currency pairs, 1:20 for secondary pairs and commodities, and 1:2 for cryptocurrencies.
Trading fees and withdrawals
In most cases, forex brokers make money on spreads – the difference between the rates of specific pairs. Although the trader does not actually pay a single trading fee, he should check the amount of such spreads beforehand. They are quoted in pips. A pip is one ten-thousandth of a unit, for example, of the US dollar. This may seem like a small number, but in large volumes the difference is noticeable. Even if a trader pays nothing in the form of a direct fee, he or she will be paying spreads for each contract entered into.
Forex brokers also have different pricing rules from the payout range. Sometimes the fee is set as a percentage, and sometimes by a certain minimum fixed amount.
Minimum contribution
Especially at the beginning, the minimum deposit limit is important. Sometimes the amount is not specified, so you can open an investment account without a deposit. Otherwise, $100 or more must be deposited before the first transaction. It’s worth considering how much money is to be used for the initial deposit.
Offer current assets
In most cases, forex brokers offer standard currency pairs, such as EUR/USD. If a trader wants to invest in more exotic currency pairs, he should make sure that the broker he chooses has them on offer.
Type of broker
The main thing to know is that there are dealing desk and no dealing desk brokers in the forex market. The former means that the broker is a market maker. In terms of practice, this means that the broker creates a counterparty for the trader’s transactions. NDD brokers, on the other hand, pass orders to the market, especially to a group of large banks. If an investor chooses a regulated, reliable broker, it doesn’t matter what type of broker it is.
Customer service at the broker
Especially for beginners, it is important to choose a broker with proven and reliable customer service. Beforehand, an investor can check the website because of the possibility of contacting the service provider – for example, by e-mail, chat or telephone. You should also consider your language skills. In most cases, operators offer support in English. Some brokerage companies offer support 24 hours a day, 7 days a week, while others operate only on weekdays during limited time.
Testing on a demo account
The most popular forex platforms are Meta Trader 4, Meta Trader 5. Some brokers provide their own software for trading on the stock market. They are usually easy to use and intuitive, but it is best to test them on a demo account. It is also advisable to find out in advance whether it is possible to open a demo account, although currently all reputable brokers provide this option.
Broker reviews
Before choosing a particular broker, you should check reviews about it on the Internet. In most cases, investors give opinions when they are not satisfied with the services of a particular broker. Therefore, it is worth finding out what you can count on and how the broker treats its customers.
How to file a brokerage account?
Knowing the types of forex brokers, it is worth finding out how to deposit an account with the broker of your choice. The important thing is that this can be 100% done online and takes no more than a dozen minutes.
When opening a forex account, the trader will have to sign a brokerage agreement with the selected broker. Be sure to read its contents carefully, and if in doubt, it is worth asking for details before signing the contract.
What documents are needed to open a forex account?
To open a forex brokerage account, you will need either an ID card or a passport, with which the trader can confirm his identity. The broker may also ask him to send a scan of the document. It may happen that the broker will need to confirm his residential address, for example, by providing proof of payment for electricity or internet. In addition, a scan of both sides of a credit or debit card may be required to open a Forex account.
Read also: Forex trading app
With such data, the broker allows individual traders to make Forex transactions. When deciding on the best broker, it is best to be guided in particular by your financial capabilities and needs. It is worth taking into account what amount you intend to play with, how much time you can devote to it, as well as how much risk you are willing to take.
Currently in the forex market there are many good brokers whose services are worth using. Beforehand, it is best to find out what types of forex brokers there are, in order to choose the one that will most suit the individual needs of each client.
What are the characteristics of a good forex broker?
A good forex broker must, first of all, have a license, which will certify its dies and the right to practice. The license is issued by certain state authorities that supervise the financial market.
Reputable brokers use segregation of funds. This is the separation of assets between the client’s money and their own. This type of action makes it possible to safeguard capital. It is worth learning about the deposit bank. This is the place where the broker keeps his clients’ funds. The choice of the bank is important, as it determines whether the money is safe.
English is the most popular language in the Forex market. Moreover, the execution time of orders is of great importance, as well as the very way of advising clients, the financial instruments available, and the Forex platforms provided by the chosen broker. A good way to find the best broker is to read reviews about it on the Internet.
Which brokers are best to avoid?
A broker’s license is key. Such a broker who does not have a license or is registered in a so-called tax haven should not be considered under any circumstances. Also, an overly attractive offer should make a prospective investor anxious, as it could get him into trouble. Exercising caution in choosing a broker is very important. Various “super bargains”, pushiness, solicitation of risky activities, should immediately exclude the broker. It is best to check it well beforehand by verifying reviews about it on the Internet. It is also worth testing the broker on a demo account.
Choosing a forex broker
It is worth knowing what types of forex brokers there are. This knowledge will allow you to choose the right broker, and thus the trader will save time and money on setting up accounts with different brokerage companies. Choosing the best broker is not easy, as there are many elements to consider. Of course, in the forex market anyone can make money, as it is characterized by great accessibility. Besides, you don’t need to have complex knowledge about it. It is enough to have a minimum deposit, which is required by a particular Forex broker.