PowerFlow Forex Expert Advisor

5 Types of Forex Brokers You Need to Know About

By Alexander
In Forex Basics
Oct 10th, 2011
54 Comments
4396 Views

A large part of Forex trading success has to do with the broker aspect. Now we will not talk about the regulatory aspect of broker business; we will probably do that in subsequent articles. But we will try to talk a little bit about broker pricing issues, which inevitably will lead to a discussion about brokers and how they can be classified according to the kind of price quote structure they deliver to traders.

Forex brokers can be classified based on the pricing structure and market access they provide to their clients as follows:

What that all mean?…Read on!

Electronic Communication Network (ECN) Brokers

ECN brokers can be called: “give it as it is” brokers. The price quotes seen by their traders are the same as those processed by the banks on the interbank foreign exchange market. There is no dealing desk interference with the price quote structure and that is why ECN pricing represents the most transparent system of delivery of price quotes to Forex brokers. This service comes at a cost, as most ECN brokers will either charge commissions on trades (in addition to spreads), or require that the trader maintains a large account balance, or both.

Straight-Through Processing (STP) Brokers

This term is now used to also include non-dealing desk brokers (NDD). STP brokers pass on their clients’ orders straight to the liquidity providers on the interbank Forex market as soon as they receive those orders. Traders who trade financial news releases are less prone to receiving re-quotes when they use the services of an STP broker. Delays in getting orders processed are also eliminated. STP brokers make their money from the mark-up of the spreads they are given by their liquidity providers; they do not make their profits from other traders’ losses as is the case with market makers.

No-Dealing Desk (NDD) Brokers

This term can be used to encompass STP, ECN or STP + ECN brokers. With NDD brokers, there is no dealing desk and orders are passed on straight to the liquidity providers for execution. NDD brokers make their money either by increasing the spreads when there is increased volatility, or by charging commissions.

Dealing Desk (DD) Brokers:

These brokers are also known as market makers. Most Forex brokerage businesses in operation today are market makers. Market makers usually offer fixed, low spreads, which is a selling point of their business. However, they usually do not offer direct quotes from the liquidity provider to their traders. They “make the market”, or put another way, they offer price quotes which are slightly different from what comes in from the liquidity providers. More often than not, they take contrary positions to the trades placed by every single trader. Using market makers can undo a trader, as anytime the trader makes profit; it is bad business for the DD brokers. There have been complaints of traders being “stopped out” deliberately by DD brokers, even when on other trading platforms, the prices never got to the stop loss points set by traders. This phenomenon led the US regulatory agencies to sanction a well-known DD broker operating in the US. There is also the issue of slippage and re-quotes, which are very common with DD brokers.

Direct Market Access (DMA) Brokers

DMA brokers offer trades direct access to liquidity providers to place orders. By definition, all ECN brokers are direct market access brokers. Traders get five digit pricing, strictly variable spreads and market executions, with an option of having depth of the market (DOM) book access.

From what has been listed above, it is pretty obvious that traders get the best deal if they do business with ECN, NDD or STP brokers. Examples are Dukascopy (€1,000), FxPro XTrader account ($1,000), FXCM Active Trader account ($50,000) and ForexYard Insitutional Account ($50,000).

Happy broker picking but before read article called: “Forex Broker Scam: 5 Tips about How to Identify a Scam Brokerage“.

P.S.: What’s your favorite type of broker? Let me know in the comment section.

P.P.S.: Like the post, please spread the word and share it with others. Thank You!

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54 Responses to “5 Types of Forex Brokers You Need to Know About”

  1. -fx says:

    Hi Alex, to be honest I found this blog first time today. The first post took me to the next and I am here for past 30 or so minutes. I would say that you are doing a great job.

    Best regards

    -Himanshu from FA

    • Alexander says:

      Hello Himanshu,
      Thank you for your kind words. Hope, you will visit my blog again:)

      • Jorge says:

        Alex, he’s a hard guy to get hold of (Re.Himanshu) – it’s pretty impressive that he likes your works :) He seems to be trading 24/7 that guy!

  2. Raymond says:

    Hi Alex,
    Favorite type of broker would have to be a NDD Broker. Great blog by the way!
    ~Cheers,
    Raymond

  3. Alphonsus Izunobi says:

    My favourite is alpari.co.uk wat type of broker are they? pls can you help me with examples of ECN, STP, NDD, DMA brokers with mobile trading please. Keep up the good work

  4. I will say the same as Himanshu. Great article Alexander… Thanks for that…

  5. All have their +s and -s… what you need is an HONEST broker, regardless of type. Don’t be fooled by the “no dealing desk” brokers – a machine can use artificial slippage to rip you off far more consistently than a human being can! Personally, I have an account with one of each.

    • Alexander says:

      You’re right, Andrei. That’s why the best way to choose Forex broker is individual reviews and feedback of real people. As it is done on your forum, for example.

  6. jephthah chikezie says:

    hi Alex, I think this is one the most educative piece i’ve read on forex brokers. how come there more scam brokers out there than genuine brokers. do you know of any broker that accepts less than $1000 for opening?
    thanks for the good job!

    • Alexander says:

      Thank you, jephthah.

      There are a lot of brokers that accept less than 1000$ as first deposit, but all depend on your location and purposes from Forex trading.
      I’m in process of releasing Forex brokers guide where you will find a list of brokers that are good for automated Forex trading.

  7. hey Alex keep up the goo work you have a nice blog. If you could tell me what type of broker XTB is and give me your opinion is brief? thanks !

  8. Lawrence Sarker says:

    Hi Alex,
    I’m really appreciated to visit your site. It’s obviously an useful site for the Forex Traders of all levels.

    As a newbie, would you guide me & tell me the name of some good brokers ?thanks.

    I’m already subscribed to blog though…..

    • Alexander says:

      Hello Lawrence, personally I prefer Armada Markets. Really good broker for trading using EAs.

      • Lawrence Sarker says:

        Hi Alex,

        Though it’s really a late reply ….thanks for your kind suggestion…..do you have any other broker to consider as a good broker? thanks!

  9. Daniel says:

    thanks for the great job. I am trying to research on Forex trading & your up coming Forex guide will be most welcome. between FXCM, apari & FXCC which is the best for a retail trader in East Africa? any other suggestions?

  10. Dan says:

    Nice site

  11. HGlobal says:

    Hello
    Dear Alexander,Thanks a lot for your site
    I am trader with 5 years full time experienced.I am ready to give you mid-day signals .About 50-100 Pips per day with more than 80% hit the TP
    I am ready to corporate with you too

  12. Ian says:

    I think this is a good post, and it helps relieve confusion about the different forex broker models. I would like to stress the following:
    1) The model used by a broker is best determined from the legal agreement you sign when opening an account, NOT the marketing materials on the broker website. There are brokers who market themselves ad ECNs but state clearly in the legal agreement that they ate s market maker who profit from your losses.
    2) The regulatory body for the USA requires that US brokers divulge the profitability of their clients. This is a good resource. For example, it shows a market maker like Oanda has among the most profitable clients, and an ECN like FXDD has among the least profitable clients.

  13. Herb says:

    Hi Alex,
    there are still some things i do not understand:

    ENC brokers are mostly described as the brokers that pass orders straight to the interbank market. in your post it’s the STP ones. In any case, if they really pass every SINGLE order, how can they guarantee a price and execution?
    As far as I understand it happens in accumulated trances after sell and buy order have been offset already. In this case the broker would take a risk but also the chance to get better prices. He also still would be a market maker.

    What I also don’t understand is what happens at the dealing desk.

    Thanks,
    Herb

    There are brokers that are market makers but claim to be a NDD broker.

    • Alexander says:

      Hello Herb,
      ECN / STP broker place the trades from clients without intervention. For every trade they charge a small commission. Usually 3-7.5$ p. 100K traded. As their profit is the commission there is no conflict of interest between the broker and the trader.
      Dealing Desk brokers (DD) do not charge commission but instead use a markup to the spread and usually trade against the client. Resulting in trading restrictions and all sort of manipulations. As they trade against the client they have no interest that the client makes money in the long run because the clients profit is their loss.
      And yes, some brokers claim that they are NDD, ECN, STP brokers but they are not. That’s why it is very important to know how to choose a brokerage company.
      Regards,
      Alexander

  14. bossauce says:

    This seems like insanity your basically betting money against the house and showing them your cards before they decide whether or not to call.

    Lets say you actually hit it big the chances of ever seeing that money beyond a pixel on your comp screen are nill.

    Why is this industry so unregulated?

    • Alexander says:

      Major players are happy with these market conditions. So, small fish as retail traders are not taken on count.

    • LL from Melbourne says:

      Love your comment and it makes me cringe about the industry as such. Funny how the screen tends to freeze when a trade is going my way and I try to close it. This is a great blog that I only just discovered today. I just wish that there was more education about the workings of brokers and market makers before we lose the farm.

      • Alexander says:

        Thanks a lot for kind words. It will continue showing the real face of brokers as well as providing with content worth to speak about.

  15. Chris says:

    Hi Alexander, I have to say you did a very good job setting up this website. I am a beginner, practicing on the Forex market using MT4 and nearly ready to go live :)

    I’ve been reading lots of information lately, tons of reviews and blogs, forums…,but nowhere that I found a site where information sounds truthful and convincing like here. At the moment I am on a search to find a good MT4 broker to sign up. I’ve read hundreds of reviews on so many FAKE review sites and I don’t know who to trust really. Almost all of these sites are there for advertising purposes, but not for the real thing to show what real people really think of a particular broker. I’ve seen Alpari mentioned above on that page, and I have to say I’ve read so many bad reviews that put me off going to them.

    I would really appreciate if you can recommend some good broker, who is a bit more honest than the others. I am a just one small, normal every day guy, who have almost no money, and want to try his luck in this fields, but I don’t want to be cheated as I have nothing really to play with so if the broker take it from me by cheating, then I stand no chance. I’ve got my strategy ready, and now I need to find a good broker, hope that somebody with your experience can point me to the right door.

    All I need is for you to mention couple of names and then I can make my choice. I have subscribed to your blog and looking forward for some great info in the future.

    Once again, great job and thank you in advance for your help.

    Chris

  16. Anna says:

    Hi Alex, love your blog. Just discovered it today. I’m interest in forex and this could really help me a lot. Thanks so much.

  17. Robert says:

    How can you tell when you tell if the broker is telling the truth when you are actually trading? Is it slippage, spreads, account amount?

    • Alexander says:

      Robert, all depends on strategy what you choose. If you use scalping, it’s very important to have spread less than 1 pip and zero slippage. Account amount is not important as for me.

  18. Jason says:

    Hello all. I have done extensive research and am very close to opening an account with FXCM with Trade Station as I have read very negative things about MT4. Does anyone here have any experience or have any useful information about FXCM? I have researched until my eyes are crossed. Thanks in advance

  19. cyclone says:

    Hello Alex. I’ve heard my own share of losses and scams online in general, and really looking for something that works. In desperation I signed up with xforex.com but didn’t succeed, going live after a very short lived demo trading.

    I guess I went blindly into it. It wasn’t until today that I decided to read reviews about them and so on, and they don’t look good. Then I came across your website, gladly, hopefully it will help me.

    What is your opinion on them, have you any experience at all with xforex and would you recommend them?

    Also, would you advise a newbie like me to go for Armada Markets? Please help me out, i’m tired of putting in and getting nothing out.

    PS: Thanks for the wonderful article.

    • Alexander says:

      Hello, thanks for kind words. It would be great if you share this article between your friends. I have had no experience with xforex. Armada Markets exchange account is good one due to low spreads on EUR/USD (below 0.5 pip) and other major pairs.

  20. Cyclone says:

    Ok. Thanks for the reply

  21. Peter says:

    Who have you traded with in the past Alex?

  22. Efendy says:

    Hello Alex, I’m a newbie like the other else in FOrex. Like every body, we are very afraid if the broker which we joined in is a SCAM…
    so it will be very helpful if you really release Forex brokers guide so that it will be very helpful for newbie like me to choose one.

    By the way I just joined Paxforex a couple weeks ago… Do you have any information about this Paxforex wether it is a good or scam broker?

    Thanks

    • Alexander says:

      Thanks for your kind words. Have never heard of Paxforex. I have one forex broker guide that can be shared with readers in the nearest future.

      P.S. I advice you to try Armada Markets broker.

  23. Cardinal says:

    Hi Alex,
    Thank you for your very good job. Am a novice to Forex and i would like to try it. Please, i need your help on how to trade, do i need to give my money to money manager to trade for me cause i don’t know how to trade. Your kind advice is highly appreciated. Thanks.

  24. ron says:

    Hi alexander,
    First of all i would like to thank you and greet you for being trully honest with your listners like me and others and thanks a lot its very less seen when a writer answers each and every reply :) .
    i cannot tell you what value this precious piece of information holds for me .
    you are doing a great job Alex thanks for keeping us enlighten and showing us the right path
    :-)

  25. shahid says:

    hi alex dude …..this was awesome great work dear keep it up ……and plz share some more detail information abt scandle and other things happening in forex….

  26. Kewyang says:

    Hi, I’m using Fxprimus ECN premier, is it a real ECN broker or just STP?

  27. David says:

    Hi Alex, I am in England and trade Forex, I recently opened a account with Hot Forex (STP) and have started to have problems with my orders (eg no connection when I attempt to place an order). Any ideas on a suitable trustworthy STP broker?

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