Because access to the Internet opens access to trading with a Forex broker, there has been a rush of Forex brokers to the market. This means there is a real need for education when choosing a Forex broker to trade with because not all Forex brokers are created alike. Some are downright scams.
In this article we will talk about the difference between the two major distinctions between Forex brokers: those who are known as dealing desks and those who are considered no dealing desks.
Dealing desk Forex brokers
A dealing desk broker, also known as a ‘market maker’, makes profits by creating trade opportunities for their clients. What this means is that if you go along on a pair, they will match your position with other clients who are going short, and vice versa. If necessary, the broker themselves will take the short position. This might sound like a recipe for disaster or possibly something that is illegal, but what is really going on is that the dealing desk is providing liquidity in the market, ensuring that all clients have an opportunity to trade their positions.
Because they have so many open positions on both sides of the trade, they are able to hedge their risk while providing clients opportunity to buy or sell a particular currency pair.
The way most dealing desk brokers make their money is by setting a spread, which is merely the difference between the bid and ask price for a currency pair. that difference goes in the broker’s pocket.
No dealing desk brokers
This category of Forex broker does not take the other side of the clients trade, but always matches long and short clients together. They make connections between Forex traders, and in return, charge commissions as a fee. No dealing desk brokerages are essentially matchmakers.
What kind of Forex broker should you choose?
Most people who trade for living are concerned about tight spreads, since it allows them to mitigate losses and to take profits earlier. For instance we were once trading with a dealing desk broker several years ago whose spreads were costing us hundreds of dollars per trade… to paint a clearer picture, imagine entering a trade where you are already down $800. Your tendency is going to be to stay in that trade until you at least reach zero dollars, which is risky because you may be holding onto a trade longer than you should. Counter that example with the broker who offers a tighter spread for that same pair, which may allow you to enter the trade for as little as 100 or $200… now you have many more trading options at your disposal in a much better chance of a profitable trade all things considered.
The good thing about market makers, however, is that they offer fixed spreads, but the fact that they fill orders on a discretionary basis and that they may have larger spreads, turn some traders off.
No dealing desk Forex brokers, on the other hand, have variable spreads or commissions, but orders are automatically executed and prices reflect genuine liquidity rather than the artificial quotes of a market maker brokerage.
Who can you trust?
No reputable Forex broker wants to run traders out of business! Why would they? They only make money if people are trading. This is not to say that some brokers are not better than others, but the best way to choose a broker is to read reviews, go with somebody who has a good reputation in the industry and is regulated, and is known for executing trades quickly. We recommend these Forex brokers to affiliates, and feel strongly that they are a good place to start if you are also interested in trading currencies online.