Many people trade in the forex markets worldwide. In fact, it is one of the most popular instruments. But how much do you know about forex brokers and what they do?
If you are looking to pick a Forex broker, you need to understand how they work. This article covers everything there is to know about forex brokers, what they do and how they work.
Understanding Forex Brokers
Forex brokers are financial service companies that give foreign exchange traders platforms, software, and access to buy and sell these foreign currencies. The transactions always involve a pair of currencies. Traders buy and sell a currency pair based on their prediction of where the value of the currency is headed, while forex brokers offer them a platform to do so.
How Are Forex Brokers Regulated
The Forex trading industry is regulated by the CFTC and the NFA. Traders looking to open a forex trading account can check for available brokers through the NFA website. Legitimate forex brokers are licensed and regulated. It is always a good practice to look up the licenses and regulating bodies of your forex broker before you create an account.
How Do Forex Brokers Work
A forex broker is a middleman that takes orders from a client and conveys it to the market. A broker makes money off of spreads and commissions. Most brokers also offer their clients leverage, which is lent capital. This allows the trader to make trades with more capital than he currently has.
Market Makers
Market makers do not directly carry the clients’ orders to the market. They may place their own order too. They make use of an internal matching system of the traders’ positions. This also allows the broker to hedge their positions in the markets, eliminating supply and demand distortions. This means that the trader is effectively betting against the broker.
Electronic Communication Network Brokers
These brokers are large cap and place the order directly into the market, giving their customers real time prices directly. This does not have any conflict of interest, unlike market makers. They also tend to offer zero spreads and the best trading environment. They offer zero spreads.
No Dealing Desk
These brokers do not have a dealing desk, and there is no influence on the trader’s order, this avoids the manual influence on spreads and execution that dealing desk brokers introduce
Straight-Through Processing
STP brokers allow direct processing of money from the trader to the market, creating a completely transparent, intervention free system. There is no price manipulation.
How do Forex Brokers Make Money?
Forex brokers make money by
- Utilizing spreads, i.e., the difference between ask and bid prices
- Offering premium education, indicators and so on
- Charging certain fees as commission for the execution of each order.
A good forex broker always ensures the safety of their customers’ funds and low fees. In addition, look out for demo accounts, quick deposits and withdrawals, and support. These generally mean that you have a trustworthy forex broker.
