What is a forex broker: All You Need to Know

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A broker is a person or company that buys and sells financial securities on behalf of his clients. He is the middleman who facilitates transactions between sellers and buyers. Brokers work in different industries including real estate, insurance, finance, etc.

In forex trading, the role of forex brokers is very important. Without them, individual retail traders would not have been able to participate in forex trading. Apart from playing a major role in facilitating trading, they are also very helpful with trader education, forex analysis, etc.

Who is a forex broker?

A forex broker is a financial investment firm that gives its clients access to a software trading platform where they can buy and sell currency pairs. There are hundreds of online forex brokers who offer online currency trading round the clock on weekdays; that is, 24/5.

The forex market is the virtual marketplace where participants from all over the world buy and sell national currencies. It is currently the largest market in the world with over $6.6 trillion in daily trading volume. The market is structured in such a way that access to the market is tiered as follows:

Forex Market Participants

At the topmost level of the forex market is the ‘interbank market’; where the big banks and investment firms trade large volumes of currencies among themselves. At the mid-level are the smaller banks, just below them are the market makers, forex brokers, and Electronic Communication Networks (ECNs). At the bottom level are the individual retail traders who trade the least volumes.

Forex brokers interface the retail traders with the forex market via market markers, liquidity providers, etc. Each forex broker functions according to the brokerage model deployed. Generally, they present traders with a trading platform where they stream the quotes on currency pairs. Traders place their orders and wait for the price direction which decides whether they have made a profit or loss. 

The role of forex brokers

Below are some of the services offered by forex brokers:

Access to the market

The only way a retail forex trader can trade forex is through forex brokers. They have made it very easy for anyone to start forex trading from the comfort of his home or office. All you need is an access device, trading capital, and some trading knowledge.

To commence trading, you need a trading account with funds in it. Brokers have made the process of creating a new account, verification and funding the account seamless.

Offering trading platforms

A trading platform refers to software that provides an interface for a forex trader to place his orders. Depending on the provided platform, traders can also monitor the forex exchange rates, analyze the charts, and perform other functions on the platform.

Order execution

Orders are instructions given to brokers by forex traders to buy or sell a currency on their behalf. The process of accepting and fulfilling an order is known as order execution. The forex broker is in charge of executing all orders placed by the trader. Most brokers state that they execute all orders in less than a second.

Leverage

Leverage allows forex traders to open positions that are much higher than their deposits. For example, on leverage of 1:100; a forex trader can open a position worth $100,000 with a deposit of $1,000.

Market analysis tools

To assist their clients with making trading decisions; many forex brokers provide market news and analysis. Some hire in-house market analysts who monitor the markets and provide traders with daily tips, market insights, and forecasts. Others partner with financial research and analysis companies like TradingView, Claws & Horns, etc.

Customer Support

All brokers provide support to their clients whenever they need it. Some provide different support channels such as web chats, phone lines, emails, and even social media. They help customers in setting up accounts, account verifications, payment processing, and other services.

Types of Forex brokers

Forex brokers are grouped based on the brokerage model they operate.

Dealing desk (Market makers)

Also known as B book brokers; they provide liquidity and execute clients’ trades as counterparties. When a trader places a ‘buy’ order, the broker becomes the ‘seller’ and trades against the client. So, the trader’s loss is the broker’s gain, and vice versa.

No-Dealing Desk (NDD)

This refers to brokers who do not have dealing desks; rather they source forex quotes from multiple LPs, aggregate them, and present the best bid and ask prices to their clients. NDD brokers may choose their own execution model. 

Straight-Through Processing (STP)

An STP broker routes all clients’ orders to liquidity providers (LPs) for execution. A Liquidity provider is a financial institution that supplies ‘buy’ and ‘sell’ orders in the forex market. Most STP brokers work with a pool of LPs for better pricing and faster trade executions. 

STP or A book brokers only act as agents between forex traders and the LPs. They may mark up the spreads to include their trading fees or they may charge a commission. Depending on the setup or order size, they can choose an LP or a combination of LPs to execute client orders. They do not intervene in the execution of client orders.

Electronic Communication Network (ECN)

These brokers give forex traders automatic access to the forex market by connecting them to a pool of Liquidity providers through the ECN server. This way, traders can view the different prices from several LPs in order to choose the best prices. ECN brokers only earn commissions on trades and do not intervene in pricing or trade executions. 

ECN trading involves the use of modern technology to link traders to other market participants irrespective of order size. These orders are then automatically matched and executed at the best prices.

Direct Market Access (DMA) broker

As the name implies, brokers that operate the DMA execution style give forex traders direct access to the forex market to place their orders. Traders can view different currency quotes from the LPs before placing their orders.

The DMA broker only acts as an agent that sends the trader’s orders directly to the order book of the exchange without intermediaries. It is rewarded via commissions for each trade. Traders enjoy pricing transparency and faster execution times. 

Hybrid

Hybrid brokers combine dealing desk and No-dealing desk brokerage models at will. Some brokers deploy both models by fulfilling low-volume orders in-house while large orders are routed to liquidity providers for execution.

With a Hybrid model, the broker can assume a counterparty to a client order, offset the order with another trader, or forward the order to LPs. In other words, they combine the A book and B book brokerage models. 

10 things should know before choosing a Forex broker

Regulation and compliance

A good broker should be licensed and regulated by a government authority. This ensures that forex traders’ funds are safe. Several regulatory authorities exist in different countries. The regulators are grouped according to their efficiency and trust.

Tier 1 regulators

These regulators have the most stringent requirements and supervision. Brokers licensed under these regulators are reputable. Some of them are:

  • Australian Securities & Investment Commission (ASIC).
  • Financial Conduct Authority (FCA) in the UK.
  • Investment Industry Regulatory Organization of Canada (IIROC),
  • Commodity Futures Trading Commission (CFTC) of USA

Tier 2 regulators

These regulators are strict but lower than that of Tier 1 regulators. Brokers under these regulators are trusted. Below are some of them:

  • Financial Sector Conduct Authority (FSCA) of South Africa.
  • Dubai Financial Services Authority (DFSA).
  • Israel Securities Authority (ISA).

Tier 3 Regulators

The licenses issued by these regulators are easy to obtain. There is no strict supervision. Some are them are as follows:

  • Financial Services Commission (FSC) Belize.
  • Financial Services Authority (FSA) Seychelles
  • Vanuatu Financial Services Commission (VFSC).

Margin and Leverage

Margin is the deposit required before a trader can open trade positions bigger than his capital. It is measured in percentage. Leverage is the ratio of a trader’s deposit to his purchasing power.

For example; on a margin of 5%, a trader can open a trade worth $20,000 by depositing just $1,000. In this case, it translates to a Leverage of 1:20.

All forex brokers provide leverage and margin to all their clients. The leverage ratio ranges from 1:1 to as high as 1:3000. In some jurisdictions, leverage is restricted to defined limits by the regulatory authorities. For example, retail traders can only trade with a maximum of 1:50 in the USA.

Trading platform and tools

This is the software application that serves as the gateway to the forex market. Traders can monitor price quotes, and view and analyze the currency charts as well as other tasks. Upon registration, clients are given access to the broker’s platform using ID and password.

Platforms are available in any or all combination of the following forms:

  • Online or web-based
  • Downloadable desktop applications
  • Mobile apps

Some of the popular trading platforms are MT4, MT5, and cTrader.

Trading fees and costs

Every broker must have its sources of revenue to remain in business. Each broker decides its charges. They charge the following fees:

  • Commission: ECN brokers charge a commission when you open or close a trade.
  • Spread: Most brokers mark up the spread to include their fees.
  • Rollover fees: When a trade position remains open overnight, it incurs fees that are paid or deducted from the client’s account.
  • Deposit and withdrawal fees: Most brokers do not charge deposit fees but fees charged by payment processors are passed to traders. Withdrawal fees are charged by many brokers.
  • Inactivity fees: Many brokers will charge a monthly fee if you do not trade for a while; generally 3-6 months.

Account types

Most brokers use account types to distinguish between new, intermediate, and pro traders. Sometimes, accounts can be based on the trading platform or trading capital.

Generally, accounts are divided into retail and professional accounts. Below are the popular account types:

Retail account types

  • Standard account: This is the regular account for forex traders. Standard lots of 100,000 units are traded.
  • Mini account: This is for the newbies who do not want to invest much. It uses 1/10 of the size of a standard lot.  
  • Micro account: Limits trade size to a micro lot which is equal to 1000 units of currency.

Islamic account/swap free

This account does not incur rollover fees when left open overnight.

PAM/MAMM accounts

These are managed accounts suitable for investors who want experts to trade on their behalf.

Professional account

As the name implies, it is strictly for qualified experts. The account offers higher leverage and better trading conditions.

Demo accounts

These are funded practice accounts that simulate the trading platform. Traders incur no losses on this account.

Deposit and Withdrawals

Every broker offers at least one deposit and withdrawal option. Some big brokers offer more than 30 options. Depending on the broker, each deposit or withdrawal option has its own completion time and fees.

Here are the payment options:

Credit or debit cards

You can use your card to fund your trading account. MasterCard and Visa cards are the most popular choices. Deposits are usually completed instantly while withdrawals may take up to 2 weeks.

Bank wire transfer

This involves funding your trading account by making a transfer to the broker’s bank accounts. It takes 2-5 days to complete a bank transfer.

Online payments

These include payment using e-wallets like Skrill, WebMoney, Neteller, FasaPay, Perfect Money, etc. Processing times are instant but may take about 24 hours depending on the payment processor and network. 

Crypto

Some brokers accept payments with Cryptocurrencies like BTC, ETH, XRP, and USDT. Crypto payments are instant.

Trading instruments

This refers to the financial assets that can be traded on the platforms. They include currency pairs, CFDs in stocks, indices, commodities, and cryptos. It wholly depends on the broker and what it offers.

Broker Customer Support

Every broker has a way of assisting its traders when they run into difficulties. Always check if the broker is readily available to render assistance using a medium that suits you. Support can be available through emails, phone calls, or web chat.

Education and resources

Some brokers go further to assist their traders with multiple resources for training and market analysis. Some brokers have developed a complete trading academy and also provide in-depth market analysis regularly.

Choosing a Forex broker

Follow the rules below to choose a broker:

  • Write down your requirements and list your priorities and expectations from your ideal broker.
  • If you have no broker in mind, start with an internet search of forex brokers and read user reviews.
  • Make a list of a few brokers from your research. Then, start checking their websites one after the other.
  • Find out the regulatory authorities and protections offered.
  • Check the account types available, maximum leverage, payment options, minimum deposit, etc.
  • Note the trading fees and non-trading fees charged.
  • Test the trading platform provided and its features.
  • Take a look at the customer support services.
  • What trading resources are provided by the broker?
  • Compare and make your choice.

Risks of forex trading

Below are some of the risks confronting forex traders:

  • Leverage: commonly referred to as a double-edged sword because it can multiply your profits as well as your losses.
  • Counterparty risks: There is a risk of default or manipulations from fraudulent brokers.
  • Volatility risks: Exchange rates can move rapidly which may cause losses to the trader.

Forex Broker vs. Stock Broker

A forex broker provides platforms for trading currencies while a stock broker provides platforms for trading company stocks. Here are some differences: 

  • Stock brokers allow traders to own the company shares they buy while forex brokers allow traders to bet on the exchange rates without actually owning the currencies they trade. 
  • Forex is traded 24/5 while a stock can only be traded when the stock exchange on which it is listed is in session. 
  • The leverage offered by forex brokers is higher than that of stock brokers. 
  • The trading capital required by stock brokers is higher than that of forex brokers.

Forex Broker vs. Crypto Broker

A crypto broker or crypto exchange allows its client to buy, sell, or store cryptocurrencies while forex brokers enable the trading of currency pairs. Below are some differences: 

  • Crypto brokers offer on-the-spot buying and selling of cryptos using fiat currencies or other cryptos, etc. Forex traders do not offer on-the-spot currency deals. 
  • Crypto brokers allow traders to purchase any available crypto and transfer it to an external wallet address. Forex brokers only allow you to withdraw in your account currency.
  • Forex brokers operate 24/5 while crypto brokers operate 24/7. 

Frequently Asked Questions (FAQs)

Do I need a Forex Broker to Trade Forex?

Yes, a retail trader needs a broker to trade forex. However, it is possible to trade forex even without a broker. For example; a tourist, importer, or anyone who needs foreign currency can trade forex through banks, bureau de change operators, or at the airports.

Can I Become a Forex Broker?

Yes, but it requires extensive knowledge and experience in finance. It also requires huge capital for company registration, licenses, developing a trading platform, advertisement, etc.

How do I interact with a forex broker?

All the brokers have an online presence. You may interact with them by visiting their website, sending emails, calling their support lines, or live chat; if it is available.

What is the difference between a forex broker and a forex trader?

A forex broker provides the platform where a forex trader registers and trades forex.

Final Verdict

A forex broker is an online company that facilitates forex trading by providing trading platforms for traders to place their orders. They provide access to the forex market; execute orders and offer a host of other services.

To choose a broker, check out all the provided services and ensure that they meet your needs. Understand the risks associated with forex trading and equip yourself with knowledge, trading, and risk management skills. 

Written by

Jason Paine is a forex trader, researcher, and tech enthusiast. He is passionate about financial markets and cutting-edge technology. With a dynamic 16-year trading career, he's on a mission to guide fellow traders. Having navigated diverse forex brokers, Jason shares his insights at Brokersway to bridge the gap between traders and the right brokerage.

DisclosureAt Brokersway we're committed to delivering unbiased information. our opinions are our own and are not influenced by the payment we receive from our advertising partners. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation of how we make money.

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