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Sunday, 8 July 2012

Types of Forex Brokers

Types of Business Models of Forex Brokers

When it comes to choosing the right type of Forex brokers, one of the factors that influence your choice would be the business model they adopt. A business model is a sort of guideline the broker follows when they conduct their business. The types of main business models available are the STP brokers, dealing desk brokers, and hybrid brokers. Read on to learn about their differences.

STP brokers refer to straight through processing brokers. As its name suggests, the processing of orders is straightforward, directed immediately to the liquidity provider, which can be a bank, hedge fund, investment corporation, or other brokers (which is somewhat similar to electronic trading systems or ECN that pairs offers and demands without the presence of an intermediary). This means that the intermediary dealing desk that filters orders is absence in the trading. In other words, bids and asks rates by clients are given directly to the liquidity providers. This way, there are no delays in sending the orders, neither will there be re-quotes to the clients, wasting no time or being restricted during the release times of financial news. For STP brokers, the advantage comes in for them when they ask for commissions and profit from spread difference.

The dealing desk brokers are synonymous with market makers as they are in control of when a trade is sold or bought from them, trading against their clients to create the "market" instead of with the real global currency market. Dealing desk brokers profit by trading against their clients, whereby they gain through their client's loss, and vice versa. There are usually delays in processing orders because each trade needs to be manually approved and are often re-quoted to fill the client. However, people do trade against dealing desk brokers because when they do succeed, the broker can easily lose all their money. Unfortunately, 95% of the time, traders lose to these market makers.

The hybrid brokers, on the other hand, are a mix between STP and dealing desk brokers. They may take some aspects of each type, forwarding some of their clients to liquidity providers while keeping some, and might keep some of the trades while sending others to the liquidity providers.

Once you have selected the appropriate business model, it would be wise to compare brokers and test their demo versions before finalizing your choice of a Forex broker. Understand their terms and legal information, and then choose one that you are comfortable and confident with.

See also Forex Brokers lists at www.erforex.com

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