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.
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| FX Brokers |
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