Types of forex brokers: ECN - STP - NDD - DD
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In the global market, major forex traders, such as banks, use an electronic communication network ECN to trade. However, most retail customers must use a forex brokerage, of which there are 2 types: When the retail forex market began, most forex brokers dealing desk broker dealing desk brokers that transacted directly with their clients.
Hence, there was no price competition dealing desk broker a customer's order. A liquid investment is one that can be sold quickly for a readily ascertainable market price. Liquidity is generally commensurate with the size of the market and the number of trades dealing desk broker a given time period. However, customers of dealing desk brokers do not get this liquidity, dealing desk broker even any liquidity at all, since the dealing desk broker sets the prices, which will usually be worse than the market prices that the broker can trade directly on an ECN with other counterparties.
A dealing desk broker profits by earning the spread between what he can obtain from the ECN market in which he trades and the spread offered to his clients, which is why most dealing desk brokers do not charge a commission. Nonetheless, traders are probably paying more — in some cases, much more — for the wider spreads than the commissions charged by ECN brokers. Dealing desk broker FX brokers allow their clients to trade directly with a network of counterparties who provide liquidity.
ECN brokers typically offer a spread of a pip or less, with price competition being depended on the number and activity of the ECN participants. Bid and ask dealing desk broker are the best prices offered on that particular ECN. Generally the commission charged is per million traded "per MIA". Dealing desk broker is in contrast to dealing desk brokers, also known as non-ECN brokerswho only list the bid and ask prices that dealing desk broker are willing to transact.
ECN brokers do not earn the markup, since they are not a direct counterparty, so they must charge a commission. Because of the conflict of interest, brokers in the futures industry are forbidden to act as market maker to their clients.
However, forex brokers are still permitted to act as market maker to their own clients, which is what a dealing desk broker is.
Consequently, there are several disadvantages when dealing with a dealing desk broker. The primary disadvantage is that there is no price competition for dealing desk broker placed with the broker, so the trader will either pay more or get less from the trade.
The price difference dealing desk broker known as slippage and tends to occur more frequently with larger contract sizes, larger orders, dealing desk broker when the market is rapidly changing.
Some requoting will always occur, because of the time it takes to execute the order, even electronically, but dealing desk brokers can requote simply to increase their own profits. Indeed, many dealing desk brokers 1 st trade in the ECN market before they fill their customer's market order, thereby delaying execution even more. Ballooning pip spreads is a widening of the bid and ask prices during volatile markets.
Ballooning pip dealing desk broker will tend to be greater when dealing with a dealing desk broker rather than an ECN market, since there is always competition in dealing desk broker ECN market. On the other hand, the dealing desk broker will react quickly by increasing the pip spread to reduce his own losses.
Stop harvesting is increasing or decreasing prices to take out stop orders. In a competitive ECN market, this would be difficult, but can easily be accomplished by a dealing desk broker. The trader has no idea what he is being charged for the trades. Some brokers also offer rebates. Rebates are a marketing tool to attract customers, but any subscribing customers will ultimately pay for the rebates through higher transaction costs, especially with a dealing desk broker.
Rebates are generally paid by an introducing broker IB that opens an account on behalf of a forex dealing desk broker in exchange for a commission paid by the dealer to the IB. A forex dealer may have several Dealing desk broker working for it, so the IBs compete for customers, which is why some of them offer rebates.
Another disadvantage of dealing desk brokers is that they generally use in-house developed trading platforms, which usually offer fewer options. There is a great deal of fraud dealing desk broker the forex market, so it would behoove the new forex investor to check out the broker thoroughly. Because the forex market is largely unregulated, forex brokers do not have to be members of the NFA, but they can register if they want to.
Here you can find out about the firm, its main principals, and about any dealing desk broker actions against the firm and their resolutions. It is highly recommended that you do not do any business with any broker who is not a member of the NFA. Otherwise, it would be difficult to check the background of the broker, and little you could do if the broker turned out to be less than honest.
Other good ways of checking a broker is by talking to other forex traders through the many forums dedicated to foreign exchange. The NFA has specific registration categories for the dealing desk broker who are permitted to offer forex trading. A futures commission merchant FCM is an NFA registration category for individuals or firms that may offer both futures and FX currency trading as a counterparty.
A FCM is permitted to legally collect client money and to accept buy or sell orders on futures and Dealing desk broker contracts. The FCM is also responsible for issuing account statements, holding client funds, and clearing trades with the futures exchange, if applicable. Their main purpose is to acquire clients for larger brokers who actually act as the dealer dealing desk broker provide access to ECNs. Basically, an associated person is a salesperson dealing desk broker one who manages salespeople.
Neither IBs nor APs are permitted to collect or hold customer funds. The Commodity Futures Modernization Act of CFMAenacted in Decemberreasserts that the CFTC has clear jurisdiction and authority to investigate forex scams by both regulated dealing desk broker unregulated companies, and to prevent them from offering or selling foreign currency futures and options contracts to the general public through legal action.
The CFTC has issued a number of advisories and consumer alerts to better educate the public about forex scams and how to avoid them. Some of these links are listed below. The CFTC emphasizes that advertisements promoting investment opportunities which are claimed to be both high dealing desk broker and low risk opportunities should be viewed with skepticism, especially since investments that pay a higher return are also highly risky, since, if they were not, then everyone would invest in the opportunity, which would lower the returns.
Consumers should also be skeptical of any employment opportunities in forex trading where easy profits are claimed. The Administrative Sanctions in Effect List contains the dealing desk broker of firms and individuals that currently have registrations and trading sanctions in effect as a result of administrative and statutory disqualification proceedings.
The Reparations Sanctions in Effect Lists contain the names of individuals or firms who have not paid awards which were levied against them as a result of reparations proceedings. The Proceedings Bulletin contains information about administrative and injunctive enforcement actions and statutory disqualification-from-registration proceedings.
Another way to compare brokers is to see how profitable their clients are. A new CFTC rule requires that forex brokers disclose the percentage accounts held by the firm that have been profitable in previous quarters. The funds of retail customers held by most forex brokers dealing desk broker not guaranteed, nor are they segregated dealing desk broker the funds of the firm. If the firm goes bankrupt, you will probably be just a general creditor, and may not get all, or any, of dealing desk broker money back.
Unlike the funds in a bank account or a dealing desk broker brokerage account, no government organization guarantees the funds. More information can be found about futures commission merchants FCMs through monthly financial reports that they must file, within 17 business days after the end of the month, with the CFTC's Division of Clearing and Intermediary Oversight.
Selected financial information from these reports is published at www. After finding reputable brokers, you need to gather more information about how they do business, whether they are readily available to answer questions or to resolve complaints. You can do this by reading their website material, by calling them on the telephone to see how quickly and how well they respond, and by getting advice from the many forex chat rooms, including those provided by the broker.
Although almost all forex trading is done over the Internet nowadays, sometimes Internet connections don't work, or the company's trading platform isn't working the way it should or the way you think it should, so it is very important that they also provide telephone service. Many forex dealers allow funding an account with a credit card, but this should be avoided.
Most forex trades are already highly leveraged, and by using credit card debt, leverage increases further, since the trader is using borrowed funds for margin. Most brokers offer regular, mini- and micro-accounts that require trades in specific lot sizes. A regular account trades regular contracts with lot sizes of dealing desk brokerdealing desk broker of currency, so if the broker allows a legally maximum leverage ratio dealing desk broker A pip is equal dealing desk broker 10 units of currency with k lot sizes.
You can generally buy or sell as dealing desk broker lots as you have leverage for, so a mini-account allows smaller increments. Micro-accounts have lot sizes of currency units, so even less money is required to trade a micro-account, allowing even greater control over the amount of currency traded dealing desk broker 1 transaction. Note, however, that micro-contracts are usually only offered by dealing desk brokers, who should be avoided because of their disadvantages.
Managed funds are accounts in which the broker does the trading for the investor for a fee. Many brokers, especially those with international offices, also have accounts for other currencies for traders in other countries. The most important criteria in dealing desk broker a forex broker after assuring yourself that they are reputable is:. The best way to dealing desk broker these criteria is to dealing desk broker practice accounts with several brokers, which most offer, and trade for about a month in each account.
Practice accounts allow you to trade forex using live market data and using the company's software, but without using actual money.
It is important to dealing desk broker with such an account, because forex transactions can be confusing, and using the software will take some learning, especially to use the software proficiently. Practice accounts are a good way to test your ability to actually enter transactions, and that you understand them. If the software doesn't allow you to do something, this may indicate that you do not understand something correctly. Or it could be a bug in the software. Either way, you must determine what the problem is before you risk real money.
If you are going to begin trading with a mini-account, which is highly recommended, then you should also start with a practice mini-account. This will give you a better idea of actual profits and losses, both from trades and from interest. The major problem with demo accounts is that the broker may influence the transactions favorably so that the client seems to be making money, where in a real account, many of the transactions either would not have occurred or the result would dealing desk broker been less favorable.
This is particularly true with dealing desk brokers, since they set their own prices. You dealing desk broker also consider that demo accounts frequently are more profitable because the trader is not fearful of entering transactions.
When real money is on the table, the trader is much more cautious, which often lowers profits or increases losses. A good way to compare actual trading is to open dealing desk broker mini-accounts with several brokers. Because mini-accounts dealing desk broker very small deposits to open, most people should have no problem opening several accounts to quantify their actual profits, losses and broker fees with each broker, and measure their responsiveness. Dealing desk broker also helps if one of the brokers goes bankrupt.
Dealing desk broker least you won't lose all of your money because you placed it with one broker. Inevitably, the trader will have some problems with the trading platform, not only because the trader may not fully understand software, but also because the software itself may have bugs. Because money may be at stake, it is important that the trader should be dealing desk broker to resolve the issue quickly, and the fastest means of doing that is through telephone and chat support. While most currency trades are done over the Internet using the broker's trading platform, it is important that they also provide telephone support, because if anything goes wrong with your computer connection or your computer, you won't have any other way to initiate trades, set limit or stop-loss orders, or close out a position, which can lead to large losses over time.
Chat is useful if you have a problem. It has more immediacy than email, but is usually easier than the telephone. Many problems, especially with the trading platform, require interaction, and chat provides the best method for resolving these kind of problems, since you can chat while actually using the trading software.
Many brokers provide other services to supplement trading activities.