Forex or Foreign Exchange is the biggest financial market in the world. The Forex market deals with over $5 trillion in daily transactions making the currency market the largest, more than the future and equity markets combined.
Forex market refers to the buying, selling, exchanging and speculation on currencies. The market is made up of banks, commercial companies, central banks, investment management firms, hedge funds, retail forex brokers and investors and it operates on two levels, interbank and over-the-counter.
The interbank market is where large banks trade currencies in between themselves for balance sheet adjustments, hedging and on behalf of their clients while the OTC markets is where individuals trade with the help of online platforms and brokers.
Forex brokers are firms, companies or financial institutions that facilitate the trading of currencies through their trading platforms where people can buy and sell foreign currencies. These brokers mainly earn through bid-ask spread or transaction fees and with the increase in competition in the forex market and the increase in volume, the transaction costs have gone down. Forex brokers facilitate trading in all major currencies and currency pairs in the world and also allow people to trade in the currencies of emerging markets like India.
Types of Forex Brokers
All forex brokers offer the same service of facilitating trading of currencies but go about it in their own ways of doing it. All brokers operate in different ways which can have significant effect on your trading experience. Here are the different Types of Forex Brokers:
- No Dealing Desk
As the name suggests, these brokers don’t have a dealing desk and operate by acquiring leading composite quotes from quote providers which allows them to have the required liquidity in the forex market. These brokers execute transactions and fill orders as per the requirements of their clients based on these quotations and charge their clients a commission fee or widen the bid spread to earn returns.
- Market Makers
Market makers provide a two sided market to their clients which originate from an expert forex trader who operates as a part of their in-house dealing desk. Market makers purchase currency on their bid side and sell it to the clients on the quoted price by the client thereby acquiring the other side of the transaction from their clients.
Market maker offer instant trades, fixed spread and no rollover fees making it a faster and cheaper approach to trading.
- ECN (Electronic Communications Network)
This is an online trading platform where market makers, banks, traders and individuals enter offers and bid for currencies. Here, you get direct price rates from international banks and as these are just online platforms they cannot go bankrupt unlike Market Makers.
- Straight Through Processing
STP brokers are more flexible to the needs of their clients. They operate on same rates as that of interbank market rates and use custom algorithms to determine the best way to complete a trade for the client and choose whatever method between interbank market and trading against the client gives them the most profit.
All these methods achieve the singular aim of providing the service of forex to the clients with the difference being in the methodology used by the brokers to achieve the most profits for them and the best deal for their clients.