Individuals new to foreign exchange trading may be bewildered to find that their forex broker may work in some amazing ways. In fact, several companies offering forex trading services are not brokers in the usual sense at all.
Traditionally a broker would work for you as a customer, placing your buy and sell orders for you through their dealing desk and charging commission (for securities trading transactions) or making their money from the spread (the difference between bid and ask prices) for currency trading. At one time orders would be placed by telephone. Now they are placed online, with you in full control of your account.
But regular forex accounts require significant account balance. Usually the minimum deposit is somewhere from $10,000 to $50,000. Now that forex trading can be done from home, there are a great number of new services springing up with lower deposit limits, offering forex mini accounts. But their business model is not necessarily the same as traditional brokers, and this can have consequences for you.
So nowadays, there are other types of firms that operate in different ways in order to provide services to the smaller investor. Most of these do not have dealing desks of their own.
Forex NDD (No Dealing Desk)
Brokers without a dealing desk cooperate with external liquidity providers to ensure prices and match clients' trades. Because there is a range of liquidity providers, the real spread tends to be small but the broker may expand the spread to give themselves a better profit margin.
Forex ECN (Electronic Communications Network)
ECN brokers provide a marketplace where many market players including banks, market makers and ordinary traders can see to have their trades filled. Orders will be entered in the name of your ECN provider for anonymity. Spread is typically small but the ECN will in many cases charge a matching fee per transaction.
Forex Market Makers
When you have an account with a market maker, your transactions are not being matched by external providers but by the market maker themselves. This means that they take the opposite position and offer their prices to you, although of course these prices relate to the current price in the market. They will then offset their risk by taking an equivalent position to yours in an ECN or other environment.
Since they are not actually placing your order in the market, market makers are not brokers in the true sense of the word though most traders use the term forex broker loosely and include them. Others believe that the separation between market makers and bucket shops is not clear and rather avoid them.
Forex Bucket Shops
Bucket shops work a little like market makers but they do not offset their risk and may have very little connection to the real spot currency market. When you deal with a bucket shop you could be said to be betting against them. They oppose your trade and they win if you lose. Like commercial bet takers, if you are profitable they tend not to want your business and will probably close your account, giving back your money to you. They certainly won't provide you with additional features, like forex signals. Obviously, as with a forex signal service they would help you to win against themselves, so you can't expect such a suicidal behavior. So the best thing to do is to find a reliable forex signal provider.
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