What a Forex Broker Does
Description: A brief look into the role of a forex broker in trading.
A broker in the financial trading world is normally the intermediary between a trader and the market in question. The responsibility of the broker is to provide the trader and investor with market-related information as it happens and, equally, carry out the trader’s trading decision into the market. In general, the operations of brokers are virtually the same regardless of industry being covered.
What does a Forex Broker Do?
A forex broker’s duty is to provide forex traders and investors with information related to trading the currency market, and also provide the platform needed for the trader to carry out trading activities. The company provides the trader with all the updates in terms of current market condition, current price, conversion rates, analytic tools, news feeds, etc.
Major Types of Forex Brokers
There are several types of forex brokers but, where retail traders are concerned, there are two major types of brokers to choose from: the Market Maker brokers and the Electronic Communications Network brokers. These two suit different types of investors differently, as they have varying characteristics.
Electronic Communications Network (ECN) Broker
The ECN broker provides the trader with direct access to the interbank markets; however, the trader needs to come up with higher deposits in order to trade with this type of broker. This makes it an unsuitable choice for individuals that do not have the minimum balance required. Most ECN brokers require that traders come up with as much as $1000 in order to open even a micro account.
Market Maker broker
Market Maker brokers normally take the opposite side of their clients’ transactions, hence the name. 80% of forex brokers are market makers. This type of broker suits individuals with low deposits, as some of them allow traders to trade with as little as $5. Broker manipulation is also very rife in this category of brokers. This is why traders have to be very careful regarding which market maker broker they sign up with.
How Forex Brokers Make their Profits
Generally, forex brokers do not make money from a client’s trades. They typically make money through the gains from spreads charged for most open positions. The two broker types mentioned above make money differently, though. The ECN broker collects commissions for trades opened. This partly explains their emphasis on a well-funded account. Market makers make money from the spreads, and also make money when their clients lose money, since they are a counter-party to the client’s trades. People erroneously think this is wrong, but it is not. Whatever money the market maker broker loses to you is made back through the different hedged positions they hold in other places.
While using a market maker broker, there is no need to worry about manipulation as long as the broker does not have a scam history. You can always check other platforms once in a while for discrepancies in price, candle formation, etc., so, as soon as you notice anything different from what is being shown on your platform, look for a new broker immediately.