What is a Forex Broker?
After the 1970s, when the United States dropped the Bretton Woods agreement regarding the USD convertibility in gold, the foreign exchange market grew dramatically. First available only to institutional players due to the high transaction costs and difficulty to access, it all changed when the Internet and online trading appeared. Forex brokers made it possible for the retail trader to join the largest financial market in the world – foreign exchange.
A Forex broker, therefore, is nothing but an intermediary link between the trader and the market. It offers market quotes via its various liquidity providers, and its trading platform reflects the best possible conditions it has to offer to its customers. For this, it charges a fee or a commission, and its interests align with those of the trader.
Types of Forex Brokers
A Forex trading broker is organized as either a dealing desk (also called market makers) or a non-dealing desk. In the first case, the Forex broker literally creates a market by mirroring the quotation from the interbank market and deals the prices to its clients. In the second case, the Foreign exchange broker routes its clients orders to the liquidity provider, and from the liquidity pool the best quote is offered to its retail clients.
Brokers organized like non-dealing houses often offer ECN (Electronic Communication Network) or STP (Straight-Through Protocol) execution. However, different types of brokers exist, as many of them mix dealing with non-dealing conditions, becoming a hybrid Forex broker in the end.
Depending on the type of the brokerage house, different account types exist. ECN accounts, STP accounts, fixed spreads, variable spreads, etc, are just a few examples.
But the most impressive thing about the current Forex brokers is that they ceased to be just a Forex brokerage house. Nowadays, the Forex brokerage accounts give access not only to the currency market, but also to various other financial markets around the world (e.g. commodities – oil, gold, silver; indices – Dow Jones, S&P500; various other CFDs).
More importantly, traders have access to all these markets from the same trading account. As a result, traders benefit from further diversification options for their positions and more trading opportunities.
How to Start Trading with a Forex Broker
The Internet makes it simple for traders to open an account and start trading.
All brokers have an online presence and a website with all the info necessary regarding the types of the trading accounts, the trading conditions, and the steps to take for opening a Forex brokerage account.
The process of opening a Forex brokerage account is straightforward. The application is done online where the trader provides personal details and infomation about their trading experience, provides documents to prove their ID and address, and then chooses the type of the trading account they want.
How Forex Brokers Make Money
The financial instruments offered by the Forex broker (e.g., currency pairs, commodities, cryptocurrencies, indices, etc.), form the Forex dashboard. Each instrument has two prices – the bid and ask price.
The difference between the two prices is called the spread, and it represents one of the ways the Forex broker makes money. It is a fee charged for providing access to the market, and it can either be fixed or variable, depending on the type of the trading account.
For instance, ECN and STP accounts have variable spreads, because the two accounts reflect the actual market conditions. Out there in the interbank market the conditions differ throughout the trading day, from moments with little or no activity to moments of very high market volatility.
As such, the spreads differ too. For example, during an important economic release like the Non-Farm Payrolls (NFP) in the United States, spreads widen on a variable spreads account, and tighten with the decrease in volatility.
A Forex broker having access to multiple liquidity providers can offer better spreads to its clients, whereas a Foreign exchange broker with a single liquidity provider will have wider spreads.
Traders can only use the ask price when buying and the bid price when selling. Thus, by opening and closing a position, they pay the spread charged by the Forex broker as a fee.
Depending on the type of trading account, commissions also exist. In some cases, there’s a commission for each trade, directly related to the volume traded – the higher the volume, the bigger the commission. In some other cases, there’s no commission charged to the trading account, but typically that type of an account offers wider spreads.
Some other ways for Forex brokers to make money exist, but these two are the most representative ones – spreads and/or commissions.
Find out what FXOpen UK is Offering
FXOpen UK is a true ECN broker where trades are matched with the best available price on the ECN. With tight variable spreads, low commissions and a NDD model, we want all our clients to be profitable traders so there is no conflict of interest. With FCA regulation and FSCS protection of £85,000, FXOpen UK is the ideal choice for traders.