There are mainly two types of brokers: dealing desks, or market makers, and no-dealing desks and in the following we explore the main differences and provide an 8 point checklist that you have to be aware of when it comes to choosing a broker.
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Dealing desk brokers usually take the opposite site of their clients’ trades. Since dealing desk brokers match their customer buy and sell orders, and then fill the remaining orders, they are also referred to as market makers because they ‘make the market’ for their clients. Dealing desk brokers usually make their money by spreads and not by trading against their clients. Dealing desk brokers often offer fixed spreads because their ability to ‘make the market’ and control prices is very high; in contrast to no dealing desk brokers as we will see shortly.
No Dealing Desk
No dealing desk simply means that these brokers don’t actually take the other site of their clients’ orders, but just pass their orders on to third parties. No dealing desk brokers can be separated into two sub-categories.
Straight Through Processing (STP)
STP brokers just pass their clients’ orders on to a liquidity provider. STP brokers usually make their money by passing their clients’ orders to the liquidity provider with the current best price (meaning the greatest difference between the quoted price on their platform and the liquidity provider’s price). STP brokers rarely offer fixed spreads because they have to deal with varying bid and ask prices from their liquidity providers as well.
Electronic Communication Network ECN
ECN brokers deal with a lot of liquidity providers and aggregate the bid and ask prices to show their clients the best possible price. ECN spreads vary, because liquidity providers are often competing for the best price, and very liquid instruments tend to have very low spreads (often zero spread). Therefore, ECN brokers often charge you a fixed commission per trade. True ECN brokers also provide ‘depth of market’ (DOM) information.
8 things to look for in a broker
The regulation of your broker is often overlooked in the initial stage of choosing your broker, but it can be very important when things go wrong and you have to suddenly acknowledge that the broker you are dealing with isn’t (well) regulated, no one monitors their business and getting your money back ends up in a hassle.
First, you should check where your broker is located because some countries do not require a broker to be regulated or monitored in any way.
This ties in with the previous point. ‘Bucket Shops’, brokers who are based in an unregulated country and, therefore, not monitored and regulated, can be undercapitalized. If your broker does not publish this information and is not regulated, this should make you very cautious.
#3 Segregation of Funds
Another sign that you are dealing with a credible broker and that your money is safe is when your broker offers segregation of funds. Segregation of funds means that clients’ money is kept separated from the broker’s own equity and in case of liquidity issues, clients’ money does not go into the pool to pay off their creditors. Ask your broker if you need more information regarding this topic, they will always answer these kinds of questions, if you are dealing with a legitimate broker.
#4 Comission /Spreads
We have touched this before. Whereas dealing desk brokers (brokers who ‘trade against their clients’) often offer fixed spreads, non dealing desk brokers have varying spreads. Furthermore, ECN brokers have generally lower spreads, but charge you a fixed commission per trade, which can also add up.
So there are 3 possible scenarios:
1) Fixed spreads (but usually higher spreads than when going with varying spreads)
2) Varying spreads
3) Varying, lower spreads plus a fixed commission per trade
There is no ‘better’ here, since the level of spread and how spread changes are perceived by traders are very individual and also depend on the trading style and method. However, it is important to be aware of the difference to make a conscious decision, because spreads can add up over time and really make a big difference.
#5 Deposit / Withdrawl
This is an often an overlooked point, but it can have significant impacts for traders. Funding an account is usually very easy and done within a few minutes, but withdrawing funds and getting your money back is often handled differently. Before choosing a broker, check their withdrawing guidelines, the methods that are available for withdrawing money and the commissions charged. This is done in a few minutes, but it can save you a lot of stress and money.
#6 Minimum Deposit
Especially for new and under-capitalized traders, this is an important topic. Not everyone can start out by depositing $5,000 or more into your brokerage account. Therefore, some brokers only require an initial deposit of $50 or similar. Often, these brokers also offer a higher leverage to enable their clients with less funds to trade bigger sizes.
In this context, it is also important to check the smallest trade size. It can be very frustrating if you deposit a small amount of money, but then you have to find out that the smallest trade size requires you to ‘bet’ your whole account on one trade.
#7 Product Selection
Obviosuly, this is a very important topic, but it still requires to be talked about. Not all brokers offer the same instruments that you can choose from. If your trading style depends on certain instruments, make sure that your broker of choice offers them and don’t sacrifice the instrument choice for other aspects. As you can see, choosing the right broker shouldn’t come with too many compromises.
#8 Customer Service
Another overlooked topic is the customer service. How long does it take to reach your broker? How helpful is their staff and are they really committed to helping their customers? We have years of experience when it comes to dealing with brokers and while some do everything to make their clients happy, others are only concerned of making business.
I, Rolf, trade with ICMarkets and if you are looking for a Forex broker, I recommend you take a look.
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