Types of Forex Brokers

November 28, 2024

Written By

Ngwa Emmanuel

Are you looking to dive into the world of online Forex trading? Choosing the right Forex broker is key! With various types of brokers out there, it can be overwhelming, but fear not – we’re here to simplify it all for you. By the end of this article, you’ll be an expert on the different Forex broker types, ready to make a confident choice for your trading journey. Let’s break it down in a way that’s easy to understand and get you on the path to success!

Retail and Non-Retail brokers

Before we move forward with our focus on Forex trading, it will be important you understand the difference between Retain Brokers and Non-Retail Brokers. Brokers like FP Markets, Vt Markets, Ultima Market, and TopFX are good examples of retail brokers as they serve individual clients who trade securities for their own personal accounts. These clients are often referred to as retail investors or traders. Retail brokers offer services tailored to the needs of individual investors, providing trading platforms, investment research, and other tools to help clients make informed decisions about buying and selling stocks, bonds, mutual funds, and other financial products. open an Account with FP Markets

On the other hand, a non-retail broker would typically refer to brokerage firms that cater to institutional clients, such as hedge funds, pension funds, and other large-scale investors. Non-retail brokers also facilitate trading activities, but they focus on meeting the specific requirements and trading strategies of these institutional clients rather than individual investors.

So, when distinguishing between retail and non-retail brokers, it’s primarily about the type of clients they serve rather than the services they provide in general.

What are the types of forex brokers?

To keep things simple, it is first a good idea to understand that retail forex brokers come in two types: dealing desk (DD) brokers and no dealing desk (NDD) brokers. These can be further categorized into STP/ECN brokers who come under non-dealing desk brokers like FP Markets and market makers who fall into the dealing desk category. Now let’s take a closer look at each type of FX broker.

ECN forex broker

An ECN broker is a type of foreign exchange brokerage that uses an Electronic Communications Network (ECN) to match buy and sell orders in the currency exchange trading market like Vt Markets. The ECN is essentially a computerized trading system that automatically matches various orders between buyers and sellers in the forex (foreign exchange) market.

An ECN forex broker offers a true matching order execution system where the brokerage charges a small commission fee on each trade like TopFX. It’s different from conventional trading, where the raw spreads are inflated artificially to cover broker costs. If you are looking to trade forex with tight spreads, then ECN forex brokers have spreads from 0.0 pips without any mark-ups like FP Markets.

STP forex broker

STP (Straight Through Processing) is a forex brokerage model that involves sending client orders directly to the market without passing them through a dealing desk. An STP forex broker is similar to an ECN broker, where all client positions are passed directly to the market through interbank exchange houses or liquidity providers such as banks and we see firms like VT Markets also offering such accounts

ECN brokers are considered to be more transparent. ECN brokers only route orders to the interbank market, whereas STP forex brokers can route orders to any of their liquidity providers such as banks or interbank exchanges. ECN brokers always charge a commission on trades, whereas STP brokers can charge commissions and gain from the spreads.

Market maker forex broker

Unlike ECN and STP brokers, a forex market maker is a broker that doesn’t cover positions on liquidity providers and is obliged to pay for the client’s beneficial trades with its own money. Therefore, any client earnings can equal broker losses which many believe creates a conflict of interest. The general term for them is B-book brokers. it should be noted that many of the brokers nowadays are B-Books brokers

Market makers earn money by adding a spread mark-up. This means that they can often have spreads that are higher than NDD brokers, which may be an issue if you are a forex scalper. On the other hand, they do not usually charge a commission fee. They can also offer fixed spread accounts, mini/micro lots and have smaller minimum deposit requirements.

DMA forex broker

Another type of forex broker that you will come across is the DMA broker. Without trying to complicate things further, DMA, or Direct Market Access, is a type of trade execution where traders are offered direct access to the interbank, enabling them to place trading orders with liquidity providers (LPs).

Usually only available to institutional traders, DMA forex brokers give you access to multiple levels of liquidity displayed in real time. You’re able to trade on prices sourced from global banks and top tier liquidity providers with no additional mark up.

You can view pricing available on either side of the order book and have the ability to place orders within the top of book spreads. Keep in mind, this doesn’t necessarily mean that the top-of-book prices will always be better than a brokers standard pricing as factors such as size of trade and time of day can impact the tightness of the bid/ask spread.

There’s usually no spread mark-up to pay, rather just a standard commission. It is quite common for some of the larger brokers to give you discounted commissions based on your trading volume. Generally speaking, the more volume that you trade, the more you can save on trading costs.

Hybrid Brokers

Hybrid Brokers Some brokers may offer a combination of dealing desk and no dealing desk execution depending on the client’s preferences or the type of account chosen. These brokers may provide both fixed and variable spreads and offer a choice between market maker and ECN execution.

Which type of forex broker is best?

The DMA forex broker (Hybrid Brokers) is ideal for serious traders looking for maximum transparency and control. Full market depth exposes traders to multiple levels of liquidity that allows them greater insights into the market and control to trade on the best bids and offers sourced directly from the brokers liquidity providers.

However, DMA accounts can have high entry requirements, and not all brokers provide them. This is where an ECN forex broker can be a great solution. You sort of get the best of both worlds as they are easily accessible yet still have very favorable trading conditions including deep liquidity pools and no dealing desk interference. This means you can trade forex with tight spreads, minimal slippage and full transparency.