Thursday, 5 July 2012

STP Forex Brokers

Have you ever noticed that most Forex brokers advertise their price spreads above all other factors? While this is an important factor to consider when trading, it is merely one piece of the puzzle that must be examined.

Certainly, a more important factor is the ability to execute trades at quoted prices around major market news events such as the monthly NFP report. As a trader who looks to profit from short-term price moves, you may not be able to execute your strategy whether manual or automated. One reason is the fact that a broker may act as the buyer of a Forex pair while you play the part of the seller. Sound like a mutually beneficial contract?

At its essence, this relationship pits the trader against the broker as one participant's interests are opposite of the others. Simply stated, if your trade is profitable, the broker realizes a loss. Employing a Dealing Desk model is not inherently evil (to put it jokingly). Some may argue that Dealing Desks provided a service for those individuals who traditionally did not have access to the Forex market due to high barriers in the form of excessive charges and substantial deposit minimums. When Dealing Desks fail to perform their intended role of providing liquidity for retail Forex trades, the problem usually can be attributed to a breakdown in the firms' risk management guidelines and/or systems. If not properly managed, a Dealing Desk can become a huge liability for a broker if steps have not been taken to offset excessive position risk. As a trader, are you willing to take this risk?

True STP brokers take the Dealing Desk model employed by most of world's largest Forex firms and stand it on its head. How? The former always operates under the premise that the interests of both the client and the broker are aligned. The STP broker wants it's traders to, in the words of Spock, "Live long and prosper". This is the case since the STP broker only makes money when a client executes a trade. In order for this to be a profitable venture over the long term (and even the mid term), the broker wants to create an model where traders will use their appreciating account balances to generate an ever increasing number of revenue producing trades. This highlights my earlier point of why having interests that align is sensible to traders and non-traders alike.

A true STP broker will not discriminate against short-term trades as the firm is merely acting as an agent charging a fee for order execution and clearing. Until recently, the ability to transact directly with banks via the interbank market was reserved for large institutions. Finally, the trading public can choose to compete on a level playing field.

For more information please visit, Divisa Capital LP ("DCFX") is an investment house that provides spot foreign exchange trading services to a diversified client base that ranges from financial institutions through to private individuals.

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