How do Forex trading brokers operate their businesses? How do they earn money? As a new trader, you must know this small, important information. What FX brokers do to operate is all related to the transactions of customers. Below are the most well-known FX broker models that you should know about.
The ECN Forex Brokerage Model
ECN stands for Electronic CommunicationsNetworks (ECN). These brokers are responsible for providing direct marketaccess to its clients. Traders are allowed to access the interbank marketcoming directly from the ECN network of the broker.
With this model, there is no dealing deskavailable and the brokerage only works as agents of clients and the interbankmarket. ECN brokers often transfer actual currency quotes into clients inreal-time. The trades are also executed in the market which means that requotesare reduced and eliminated.
With this model, spreads are mostly verylow and there are even cases wherein there are zero spreads incurred. So togain some income, ECN brokers usually collect some commission from theirclients.
STP Forex Broker Model
STP stands for Straight Through Processing(STP). The brokers in this model are considered as Non-Dealing Desk (NDD),meaning, they operate an automated system wherein the trades are routeddirectly to liquidity providers in determining competitive prices.
The main advantage of this broker model isthe higher liquidity coming from a variety of sources. Because of that, ordersare easily fulfilled. The entire process in this type of model is automated anddoesn’t need to have broker intervention, which in turn eliminates humanerrors, delays, and even costs.
Market Makers Forex Broker
These are the brokers that particularlyoperated a dealing desk model. Most of the time, market makers offer bid andask prices which have a fixed spread. Then, they executed these tradesutilizing taking the other side of the trade of the client.
The main advantage of this model is itsinstant execution of orders. It is not taken into another source, instead, theact is mainly executed by the broker himself. Brokers here also charge a muchlower trading fee and high leverage. Since there are a lot of new tradersnowadays that have the mindset of making money in an instant thru Forex trading, they mainly become the victims of a scam.
New traders are mostly the victim of thesescams as brokers easily get money out of them thru manipulating their tradersand also closing their positions even though they have winning trades. For thisreason, it is highly recommended to trade with a regulated and licensed broker.
Hybrid Forex Broker Model
This model is a combination of twodifferent model operations. Most of the time, different accounts are used andtried together, making it the best brokerage model ideal for newbies andexperienced traders.
Those professional traders who have hugetrading capitals are given special discounts, as well as favorable benefits andtheir orders, were executed at the market. Those small traders, meanwhile, arecapable of using a dealing desk which guarantees instant executions,