For anyone to be able to trade forex online, they need to register under a forex broker. Forex broker platforms such as Rakuten online trading platform offer traders the chance to trade different currencies online. One of the considerations you need to make before you can trade currencies online is what type of broker to go for. The type of broker you go for affects the transaction fees you pay and also the quality of service extended to you.
It is important for traders to learn about the different brokers they will find online. Brokers can be categorized based on the market access they offer their clients and also based on the pricing structure.
The five types of forex brokers
DD (Dealing desk) brokers
This is type of forex broker also referred to as a market maker. A good percentage of forex brokers in the market fall under this category. This type of broker offer traders low spreads that are fixed. This is their business’ selling point. A dealing desk broker cannot offer a direct quote from liquidity providers. Their price quotes are usually slightly different from what they get from the liquidity providers.
In most cases, a dealing desk broker will take a contrary position to that taken by each of their traders. Working with a market maker is a tricky business because every time a trader makes a profit, the DD broker loses. There have been numerous complaints by traders who say they were ‘stopped out’ by DD brokers deliberately. This happens even when the pricing on other platforms did not get to the traders’ stop-loss points.
ECN (Electronic communication network) brokers
This type of forex broker are also referred to as ‘give it as it is’ type of brokers. When you trade on their platform, the price rates displayed on the platform are the same as those offered by banks in the forex exchange market. This type of broker does not operate a dealing desk which makes ECN broker pricing the most genuine price delivery system to forex traders. Even so, this service will come at a cost to anyone who trades with this kind of broker. Most ECN brokers charge a commission on your trades or will require that you keep a large account balance and some brokers ask for both.
STP (Straight through processing) brokers
This type of broker also does not have a dealing desk. As soon as they receive a trading order, an STP broker will pass their client’s trading orders straight to the providers on the interbank forex market. Forex traders who make use of STP to trade financial news releases will hardly receive re-quotes. Also, this trader eliminates delays experienced when getting your order processed.
An STP trader makes their cut from mark-ups on the spreads they get from their liquidity providers. They do not make money from trader’s losses, which is common with market makers.
NDD (No dealing desk) brokers
This is a term used to describe any other trader who is not a dealer desk trader. This means that this term can be used in reference to ECN +STP or ECN, STP brokers. Just as the name depicts, there is no dealing desk involved when you work with NDD brokers and thus the pricing you trade in is strictly the same as that of the liquidity provider. These types of trader make money from increased spreads or through commissions.
DMA (Direct market access) brokers
This type of broker offers their traders access to liquidity providers to place their currency orders. Actually, ECN brokers are also DMA brokers by definition. Traders using DMA brokers have access to 5 digit pricing, market executions as well as strict variable spreads. They also have the option of having DOM (Depth of the market) book access.
From the five types of brokers listed above, it is evident that the best types of brokers to deal with are NDD, ECN and STP brokers. There are numerous online Australian forex trading platforms with these types of brokers. You just need to take your time to find the best platform for your needs.