Bcapital on Retail Forex Trading and Broker Types

by James on September 22, 2016 · 1 comment

Bcapital on Forex

Trillions of dollars are exchanged on the Foreign Exchange Market (Forex) every day. This staggering volume means that trading currencies offers an extreme level of liquidity that makes it possible for traders to get in and out of the market at will, because for every currency buyer, there is always a seller and vice versa.

Retail Forex trading makes it possible for anyone with an internet connection to trade currencies, provided they have an internet capable device, some trading education and a Forex broker.

Role of the Forex Broker in Currency Trading Transactions

When a trader thinks one currency will increase in value compared to another, he or she will instruct the broker to buy the desired number of currency units of the lead or front currency. The broker does this while simultaneously selling an equal amount of the second or quote currency on behalf of the trader. The broker takes a small fee from every transaction. The broker also keeps a record of the trader’s activities and account balance. Brokers provide training and educational materials in order to make traders able to continue trading.

Market Maker Forex Brokers

One type of Forex broker is known as a Market Maker. When a trader instructs the broker to establish either a long or short position for the trader, the Market Maker instantly takes the opposite position. In the early days of retail Forex trading, this conflict over desired outcomes lead to some abusive practices by market Makers against traders, but through regulation and quite a bit of self-policing, unscrupulous Market Makers have been eliminated. Market Makers’ fees are based on the difference between the buying and selling prices of the currencies in a currency pair. This difference is known as the spread.

Electronic Clearing Network (ECN) Forex Brokers

The ECN serves as a matching service, combing traders who want to establish a long position on a currency pair. They also charge a spread fee and sometimes a commission as well. The trader abuses perpetrated by Market Makers in the early days of retail Forex trading gave rise to the ECN broker. Trading costs are slightly higher with an ECN, but a large proportion of traders feel that the peace of mind of knowing the broker is not taking an adversarial role in currency transactions justifies the difference.

Hybrid Forex Brokers

Some brokers combine the two different broker roles. Market Makers generally have lower minimum account deposit requirements and smaller minimum trade sizes, which is ideal for a new trader with either limited financial resources or simply wanting to test the waters without taking on out-sized risks. For experienced and well to do individuals and institutions, they offer an ECN service. Brokers of this type often offer the ability to trade under both scenarios to the same customer.

In this Bcapital article this firm is described as a relatively new broker that will be offering Forex trading on a regulated Forex trading platform, so potential clients will have the assurance that the company complies with the applicable regulations that various agencies impose to ensure that traders are treated equitably.

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{ 1 comment… read it below or add one }

1 Intelligent Trend Follower December 4, 2016 at 12:51 pm

Neat forex trading article James. It was interesting to learn the difference between ECN and market making brokers. Thanks!

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