Fx currency market: brokers classification

Broker (Fx Broker) provides intermediary services for retail client – trader. The essence of Fx broker mediation is to provide the trader with access to the service of access to the international currency market, as well as directly to trading platforms. Forex brokers may differ according to several classifications.

The main criteria for a particular broker are:

  • the presence of a regulator
  • the speed of order execution
  • the size of the spread
  • the ability to use automatic software for trading.

Bank – is a financial institution that provides intermediary services in the market of Bank Fx trading. The main difference between a Bank and a dealing center is that the dealing center often performs client transactions on its own behalf and at its own expense. In general, the client’s benefit is a loss for the dealing center. In the case of a broker-bank, the conflict of interests between the client and the bank is not so expressed, since the sources of income of the broker’s bank are much wider than those of the dealing center. Another advantage of Fx banking is the availability of all licenses and often more reliable regulation than that of conventional brokers. Also, broker banks can participate in interbank trading themselves and have a greater number of reliable liquidity providers.

NDD (Non Dealing Desk) is a technology for executing orders on the currency market without the participation of a dealing center. When using NDD technology, customer requests are executed automatically based on the selection of the best prices from competing liquidity providers. NDD is a general concept that includes STP and ECN technologies. In other words, any broker that organizes direct and automatic transfer of quotes from the liquidity provider to the trader and trading orders from the trader to the liquidity provider is an NDD broker. The main goal of NDD technology is to increase the speed of execution of trading orders, thus reducing the time of market slippage and completely eliminating the possibility of such a phenomenon as requotes.

STP (Straight Through Processing) – end2end processing of trading orders. When using STP technology, all quotes and transactions are transmitted by the broker directly without the participation of the dealer. But the main difference from ECN is that when using STP, the influence on the financial transaction is excluded not only from the intermediary broker, but also from the person in principle, to increase the speed of the transaction. When trading using STP technology, the broker or intermediary can either charge a commission for each transaction separately, or add their own share to the market spread.

ECN (Electronic Communication Network) – is a network that supplies the broker with the best quotes selected among all market participants to reduce the spread to the minimum possible. When the broker provides the trader with access to the ECN network, the broker itself ceases to participate in the execution of orders. It only acts as a connector between liquidity providers and retail customers, getting fixed commissions for their service. The main essence of using ECN technology is to avoid exchange mechanisms and manipulation by an intermediary broker. Trading currencies using ECN technology requires specialized software.

MM (Market Maker) aka liquidity provider – is a financial institution that assumes the risk of purchasing and storing currencies and securities on its accounts in order to organize their subsequent sale. Liquidity providers are mainly large financial organizations or banks that trade currencies and securities on a large scale. Also, a market maker can be an intermediary broker who, under an agreement with the exchange, undertakes to hold spreads that do not exceed the specified amount for a certain time.

BB (B. Broker) – is a broker that provides services for trading. Trading is the fastest, but at the same time the most risky, way to make a benefit on the international financial markets. The essence of trading is to correctly determine whether the price of the selected asset will rise or fall, that is, to be able to predict the market. Assets can be currencies, raw materials, precious metals, shares of the world’s leading issuers, as well as stock indexes. Trading uses specialized software provided by the broker.

When servicing clients, brokers and dealing centers offer execution of orders in the Instant Execution and Market Execution types. Let’s look at each of them separately.

If we talk about the speed of order execution, the type of order execution does not determine the time of its execution. The speed of order execution for this type depends entirely on the mechanism selected by the dealing center. Simply put, the transaction is concluded as follows: a trade is opened at the quote that the trader sees in the terminal when clicking the Buy or Sell button, or it is not opened at all.

How does this happen in life?

You expect to open a buy transaction, click the Buy button in the terminal, and see the 1.5000 quote. Your application gets in the queue for processing, because you are not the only client of the broker and a lot of clients have submitted an application before you.

If the quote has not changed during the time when the queue reached your request, the broker will open a deal at the price you have stated (quote).

If the quotes have already changed and gone down, let’s say to 1.4995, the broker will buy the contract at the price of 1.4995, and sell it to you at the asking price of 1.5000. Then everyone is happy. After all, you got the deal at the right price, and the broker executed the request and earned it.

Problems will arise if the quotes change in the opposite direction, i.e. go up.

You sent a purchase request to the broker at the price of 1.5000, and at the time of execution of the request, the quotes rose to 1.5005. In this case, it is not benefitable for the broker to buy at a higher price so that you can sell at the request price. They will simply not execute the order, return you a response that the quotes have changed and offer to choose a different price.

This broker’s message is called a “Requote“. In the Instant Execution order execution system, “requotes” are the main drawback. After all, if the price changes quickly, which is not uncommon in the financial markets, then the estimated price level of the opportunity to open a deal is likely not present.

When choosing to execute orders of this type, you should understand that the broker will fulfill your request and this is an advantage. But not at the price that you see in the terminal, but at the price that will be on the market after the order is processed, i.e. at the time of order execution.

This is a disadvantage

The Market Execution type also doesn’t say anything about the speed of order execution, although it can work faster than Instant Execution.

Consider the above example with a purchase at 1.5000, the tool is of course the same.

You give an order to the broker to execute the order, it gets in the queue for processing and as long as the queue reaches it, the quotes change. And it doesn’t matter which way.

If at the time of order execution the quotes fall to 1.4995, you will get a deal at this price, which is more benefitable — you bought cheaper than you expected.

If the price rises, say to 1.5005, the order will be executed at this price, which is less benefitable for you.

But if, say, on the news, the quotes flew to 1.6000, which was your goal for benefit-taking, then the order will open at this price.

Here you are unlikely to earn, rather the opposite. In other words, the market Execution type of order execution is a rapid price change. Here, unlike Instant Execution, there will be no requotes, which means that you will not be able to think whether you need a deal at a new, changed price. The order will be executed at the current market quote, which is often not the most benefitable for you.

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In this version of the broker’s operation, operations take place inside the broker. The system implies minimal operating expenses or their absence, which are presented to the trader as the most favorable trading conditions with a minimum сommission.

However, the situation may turn out so that there are more buy or sell orders than the opposite ones.

In this case, the broker uses two main methods, the first of which is to become a counterparty yourself, taking the risk on yourself.

The second opt. is to search for an external counterparty.

In the first case, when the broker itself becomes a counterparty, there is a conflict of interest – if the trader earns, the broker loses, and Vice versa, the loss of the trader becomes the broker’s benefit. Today, there are many myths, stories, and opinions about this.

Only a lazy one didn’t already wrote about brokers fraud and law violation. Meanwhile, these are only myths and conjectures that are usually not very literate and inexperienced beginners. The method of internal clearing, at the expense of their own funds, is quite often used by brokers as a customer service mechanism. There is no denying the presence of real scammers in the brokerage environment, especially in the already mentioned segment – Fx. But this is the subject of a separate article.

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