Forex brokers play a vital role in the forex market by facilitating the buying and selling of currencies, especially by individual retail traders. The global forex market is generally decentralized, so many online forex brokers operate at different levels within the market.
On the surface, all forex brokers appear to offer the same service. But, their methods of operations differ. This difference matters to forex traders and may influence their choice of a broker. Different criteria can be used to classify forex brokers. In this article, we will explore the various categories commonly used to group forex brokers.
Market access and trade execution model
Dealing Desk (Market makers)
This is a forex broker that actively creates the ‘bid’ and ‘ask’ quotes for each currency pair. Market makers do not obtain their exchange rates from external sources; rather they make the market according to the market forces of demand and supply. In order words, they create the liquidity in the market.
When orders are received, the market maker broker executes them by matching bids and ask orders. Where there is a liquidity shortage, the broker takes the opposite position by trading against the trader. In some cases, they may hedge the position with a liquidity provider (LP).
Key features
- Makes the market by creating buy and sell quotes to the trader.
- executes clients’ orders as the counterparty.
- makes money from the bid-ask spread
- can offer fixed spreads
No Dealing Desk (NDD)
These types of forex brokers do not fix the bid and ask prices; rather they source it from market makers and liquidity providers (LPs). Some NDD brokers may then mark up the spread to include their charges while others aggregate raw spreads from different LPs and then present the best quotes to the traders.
Straight-through Processing (STP)
This refers to the order execution style where client orders are routed to the LPs for execution at the best rates without any interference from the broker. The broker is either compensated via marked-up spreads or commissions. STP forex brokers do not trade against the forex trader and there is no conflict of interest.
Key Features
- Good pricing as it is mainly aggregated from several LPs.
- High liquidity
- No spread manipulation.
- Fast order executions.
Electronic Communication Network (ECN) forex broker
ECN brokers use advanced technology to connect forex traders directly to the forex market. The ECN server is like a hub where multiple market participants are connected. This eliminates all intermediaries as traders are interfaced with LPs, market makers, banks, and other market participants.
It features raw spreads from various ECN liquidity pools. All orders are directly matched without broker intervention.
Key features
- Very fast order executions
- Allows all trading strategies like scalping, hedging, etc
- Brokers can only be compensated through commissions on trades
- Access to deep liquidity with unlimited participants.
- Unlimited trading volume
Direct Market Access (DMA) forex brokers
DMA brokers give traders direct access to their liquidity pool. Most DMA brokers already have partnerships with the LPs, so they aggregate clients’ orders and forward them to their LPs for execution at the best rates. Pricing is also obtained from the LPs, aggregated, and presented to the trader on the platform.
Key Features
- Unlike ECN, DMA liquidity is limited and market participants are known.
- Limited access to market depth.
- DMA brokers may mark up spreads or receive commissions on trades.
- Provides a structured trading environment.
Hybrid forex broker
This type of broker combines both dealing desk and no dealing desk execution models at will. Ideally, orders from small volume traders are matched either with other orders or by the broker assuming counterparty. But, large volumes are routed to the LPs for execution.
In most cases, various account types are designated for each type of operation. For example; Standard accounts are for hybrid executions, Premium accounts are for STP executions and ECN accounts are for ECN executions.
Key features
- Brokers may offer fixed and variable spreads.
- Brokers can create execution styles for different traders.
- Customer profiling in the form of multiple account types.
- Improved liquidity even for exotic currency pairs.
Based on Regulations
To operate legally in a country or region, a forex broker needs to be licensed and authorized by a financial authority or regulator within that region. These regulators stipulate the operation guidelines and supervise the activities of brokers within their jurisdiction.
Regulated forex broker
The forex regulators are further grouped into Tiers according to supervisory stringency.
Tier 1 regulators are very strict with high standards. Forex brokers find it very difficult to obtain and maintain licenses from these regulators. It is generally safe to trade with these forex brokers. Some of them are:
- The Financial Conduct Authority (FCA) in the UK.
- Australian Securities and Investments Commission (ASIC)
- Commodity Futures Trading Commission (CFTC) in the United States
Tier 2 regulators offer strict supervision and high regulatory standards, but they are lower than those of tier 1 regulators. It is equally safe to trade with tier 2 regulators. Some of them are:
- The Israel Securities Authority (ISA)
- Financial Sector Conduct Authority (FSCA) of South Africa
- Dubai Financial Services Authority (DFSA)
Key features of regulated forex brokers
- Registered investment firms with verifiable physical addresses.
- Abides by the strict rules imposed by the regulators.
- Offer protections like segregated accounts, investor protection, etc.
- They usually have professional websites that feature important services like market analysis, trading education, etc.
- Dedicated client support desk that operates 24/5.
- Some of them offer multiple trading platforms.
Offshore Regulated Forex Brokers
As the name implies, these forex brokers are regulated by Island nations where there is little or no supervision of the activities of forex brokers. It is very cheap and easy to obtain an operating license from an offshore regulator. Most offshore brokers do not offer any form of protection to the forex traders. Generally, industry experts warn against trading with these brokers.
Some of them are:
- Vanuatu Financial Services Commission (VFSC)
- Financial Services Commission of the British Virgin Islands (FSC BVI)
- The Financial Services Authority of St. Vincent and the Grenadines (FSA SVG)
Key features
- Offer high leverage
- bonuses and promotions are available
- Only third-party platforms are provided.
- Allow anonymous transactions.
Unregulated brokers
These are online brokers that are not licensed or supervised by any authority in any country. They are not under any obligation to follow any rules or guidelines. It is very risky to trade with these brokers because they can disappear at any time with your money.
Most of them claim to operate the ECN brokerage model and have won several excellent awards; all claims are false. A large number of unregulated brokers only exist on the Internet; they have no physical addresses or even phone numbers. They cannot be trusted because many of them are operated by scammers.
Key features
- Their websites are usually scanty or poorly designed.
- No dedicated customer care with phone numbers, social media contacts, or web chats.
- They offer unbelievable bonuses.
- They mostly prefer anonymous payment methods like cryptos and e-cards.
Based on the platform type
A trading platform is a software program provided by forex brokers for forex traders to place their orders. It interfaces the trader with the broker. Trading platforms can be simple or complex and can come as online-based, desktop applications, or mobile apps.
Forex traders can be classified based on the platforms they offer to their clients. Below are the popular groups:
Meta Trader 4 (MT4) brokers
The MT4 is currently the most popular trading platform that is widely used in the forex market. It was launched in 2005 by ‘MetaQuotes Software Corp’; a Cyprus-based software company. MT4 is the first choice of most brokers and traders because of its speed, flexibility, scalability, and other great features. It is free and available on the web, desktop, and mobile apps.
Key Features
- Multiple charting in up to 9 timeframes
- Allows multiple order types including risk management tools.
- Traders can automate their strategies using trading robots known as Expert Advisors (EAs).
- Provides access to multiple services like VPS, trading signals, etc.
Meta Trader 5 (MT5) Brokers
MT5 was launched in 2010 by the same company that developed the MT4. Unfortunately, due to compatibility issues, the MT5 has not replaced the MT4; although it has more features. In fact, many brokers offer both the MT4 and MT5 leaving the broker to make his choice of platform. Some traders are stuck with the MT4 because the indicators, EAs, and tools that were designed for the MT4 cannot work on the MT5.
Key Features
- Traders can view the ‘depth of the market’.
- More indicators, timeframes, and pending order types when compared to the MT4.
- Charts can be viewed on 21 timeframes.
- More trading tools, indicators and several features can be added via plugin apps developed with the MQL5 programming language.
cTrader
This platform was launched in 2011 by ‘Spotware Systems Ltd’; a Cyprus-based software company. It is a complex platform that comes with multiple tools for trading and analyses. It is perfect for ECN trading as well as other execution models. cTrader is available on the web, desktop, and mobile apps.
Key Features
- Traders can view level 2 pricing
- Comes with sophisticated charting, multiple indicators, etc.
- Supports the development of trading robots via ‘cTrader Automate’
- Traders can participate in social trading via ‘cTrader copy’
Proprietary trading platforms
Many well-established forex brokers develop their own proprietary trading platforms. The platforms can be simple or complex depending on the needs of the broker. Some proprietary platforms come with powerful features, customized services, market analysis, and even trade automation.
Key features
- Most proprietary platforms are all-inclusive; they support the onboarding of new clients, verifications, payments, market analysis, and trading.
- May support customized functions; for example ‘easyMarkets’ platform features ‘dealCancellation’; a tool that allows traders to outrightly cancel a losing trade up to 6 hours after opening the position.
- Customer support service in inbuilt.
- From the platform, you can view market news, analysis, etc and even request for withdrawals.
Based on the Broker business model
‘A book’ forex broker
This is a broker that accepts the market risk but offloads or transfers it to a third party; usually a liquidity provider. When orders are received from a forex trader, the broker hedges the trade by opening the same position with the LP; so if the trade results in a profit or loss, the broker is unaffected. This is similar to STP but not the same.
Key features
- The broker remains counterparty to the trader’s position.
- ‘A book’ brokers are compensated by commissions or marked-up spreads.
- Better pricing since it is obtained from third parties.
- High liquidity.
‘B book’ forex broker
These brokers execute client orders as counterparties to trades. The broker bears the market risk. Sometimes, the broker can transfer the risk to another market participant by matching a sell order with a buy order. B book is the same as a market maker or a dealing desk broker.
Key features
- There is a conflict of interest because the trader’s profit is the broker’s loss.
- Orders are executed in-house.
- Faster order executions.
- Requotes or slippage are likely.
Hybrid forex broker
This broker combines the A book and the B book brokerage model in its operations. It is at liberty to create the bid and ask prices or source it from its LPs. Hybrid brokers can act as counterparties to a trade, match a bid order with another ask order, or hedge an order by opening the position with its LP.
Key features
- There may be a conflict of interest
- Fast executions.
- Gives opportunities to over-diverse account types and other services.
- Enables brokers to manage risks more effectively.
Other forex brokers
White Label Brokers
These brokers provide forex trading services in partnership with a third-party provider. The core services are rented from providers while the traders enjoy seamless services. The White label broker sells its services with its logo and full branding but the products are actually sourced from a third party.
Ideally, a white-label broker can simply apply to an existing big forex broker that offers white-label solutions. When approved, it can now use its existing trading platforms, liquidity, etc., and offer services as a new broker. This is cost-efficient for new brokers as they leverage existing infrastructure. The parent brokerage assists the new brokerage in solving complex problems, maintenance, and other needs.
Key features
- Comes with advanced trading tools and platforms that can easily be rebranded.
- Efficient and cost-effective.
- Offers high-quality services just like experienced brokers.
- Provides multiple trading instruments and quality support.
Prime brokers
Prime brokerage is a basket of services offered by the biggest banks to large clients like hedge funds, pension funds, etc. The service may cover lending of securities, trade clearing, cash management, transaction facilitation, risk management services, research, etc.
Key features
- Prime brokers are very large financial institutions.
- Provides multiple services to large financial institutions.
- Enables large institutions to outsource some of their financial activities.
- The required minimum capital is high.
Institutional brokers
These are brokers who buy and sell currencies on behalf of institutional traders like banks, hedge funds, investment firms, etc. Institutional brokers include central banks, commercial banks, insurance companies, mortgage firms, brokerage firms, etc.
Key features
- Offer services that are unavailable for retail traders like forex forwards.
- Only large volumes of currencies can be traded.
- Orders are executed at the interbank forex market.
- Forwards, swaps, etc are available.
Comparison table: Dealing Desk vs No Dealing Desk
Dealing Desk
No Dealing Desk
Creates the ‘bid’ and ‘ask’ prices
Aggregates prices from Liquidity providers (LPs)
Executes clients’ orders as counterparty
Acts as agents in order executions
May transfer risk by hedging large orders with an LP.
Routes all orders to LPs for execution at the best prices.
Offers fixed and variable spreads
Can only offer variable spreads.
STP vs ECN Forex Broker
STP broker
ECN broker
Aggregates spreads from LPs and displays the best prices.
Shows full transparency and Depth of market.
Routes orders to LPs for execution
Orders are directly matched between ECN market participants.
No anonymity
Provides anonymity to the trader in the market.
Brokers may incorporate fees into the spread or charge commissions.
Only commissions can be charged.
Lower startup capital and trading fees
Higher startup capital and commissions.
What type of forex broker should I choose?
With hundreds of online brokers on the internet, choosing the right forex broker has become a difficult task. There is no perfect formula for choosing a broker for all; it depends on several issues such as your location, budget, trading strategy, trading knowledge and experience, etc.
Generally, choose a broker that has good and efficient customer service, a good reputation or regulation, a compatible platform with your access device, low trading fees, etc.
Here is a brief guide for the type of broker to choose:
Regulated forex broker
Except there are any cogent reasons, always choose a Tier 1 or Tier 2 regulated broker. These brokers offer greater transparency, user protection, and genuine brokerage services. No matter your level of trading experience or strategy, it is best to choose regulated forex brokers to avoid forex scams, spread manipulations, or problems with fund withdrawal.
Unregulated and Offshore forex brokers
These brokers are often regarded as high risk and it is not advisable to patronize them. However, some traders like taking high risks and need high leverage. Regulated brokers charge higher trading fees and may require documentation and taxes.
This is why unregulated brokers are still flourishing in their business. Many of them are patronized by experienced traders in the US, Canada, Europe, etc where regulations restrict leverage. Unregulated brokers charge low trading fees, offer high leverage, and process payments using Cryptocurrencies or other anonymous payment processors.
If you understand exactly what you are doing and the risk involved, you can choose an unregulated or offshore-regulated forex broker.
Dealing Desk (DD)
This type of broker may be suitable for beginners because they offer low minimum deposit and high leverage. You can learn how trading works with little risk.
Some experienced traders especially Scalpers may prefer DD brokers who offer fixed spreads. This way, they can estimate their trading costs before entering a trade knowing that it will not change no matter the market movements.
STP broker
If you are a regular forex trader without complex strategies, then a Tier 1 or Tier 2 regulated STP broker is recommended for you. You do not need to worry about counterparty risk, high trading fees, or commissions. Most trading strategies are supported and startup capital is usually low.
ECN broker
This broker is best for you if you are a professional forex trader with large capital and trade large volumes. Sometimes, the commissions are high and the leverage is low, but if you trade huge volumes, you can remain successful.
Trading Platforms
The MetaTrader platforms are great for newbies as well as professionals. They have all the features required by both regular and sophisticated traders. If you plan to trade with an EA, make sure that you choose the right platform for it.
cTrader is offered by few forex brokers when compared to the MetaTrader platforms. You may also go for cTrader if you prefer it. When it comes to forex trading and being successful at it, trading platforms have just a little role to play.
Frequently Asked Questions (FAQs)
I am a beginner. What type of Forex broker should I choose?
Go for a Tier 1 regulated broker that offers multiple accounts as well as a trading academy for beginners.
Tier 1 regulators ensure that brokers protect the interest of traders by imposing strict rules like account segregation, leverage restriction, etc. You can start with a demo account and practice trading until you have perfected your trading strategies.
When you are ready for live trading, go for a mini or standard account and pay the minimum deposit. As you progress, you can think of ECN or other account types.
I am a professional forex trader, what type of forex broker should I choose?
A regulated broker that offers ECN or STP execution is best for you.
Most regulated forex brokers have specific accounts for pro traders. Make sure that the broker offers the platforms that you are familiar with and trading fees that are affordable.
I have years of experience, what type of forex broker should I choose?
Choose a regulated forex broker that offers services that support your trading style.
For example; if you are an MT5 trader that uses EAs, VPS, etc. Then, go for a tier-1 regulated broker that supports MT5 trading with ECN or STP executions.
I live in the USA, What types of forex broker should I choose?
You should choose a CFTC or NFA-regulated forex broker.
However, if you do not like the NFA FIFO restriction or you want a leverage above 1:50, then, you may choose an offshore forex broker. But do not forget that trading with offshore brokers is very risky. So, it is not recommended.
Final Verdict
Forex brokers can be classified according to how they execute trades, how they are licensed, the platforms they offer, and the brokerage model they operate. Regulated brokers are legit and duly supervised, offshore brokers have little or no monitoring while unregulated brokers have no license at all.
The most popular platform classifications are MT4 brokers, MT5 brokers, cTrader brokers, and brokers who offer proprietary platforms. STP brokers route orders to LPs, ECN brokers connect traders to the market while DMA brokers aggregate orders and move them to their partner LPs.
Choose a broker based on your strategy, budget, and other personal needs. Regulated STP brokers are best for standard forex traders but high-budget pros may prefer ECN brokers or even unregulated brokers.
