A good broker is one of the pillars of a successful trading career. This is why traders must carefully scrutinise the various types of brokers available in the industry, to pick the best possible option.
Achieving success in the forex market is hard. It becomes even more difficult when you choose a forex broker that is hell-bent on ensuring that none of their customers can enjoy consistent profits.
Many traders run with the consensus that brokers with acronyms like ECN, NDD, and STP are the best.
Do you know the meaning of these acronyms?
In this article, we will clear up the confusion, burst a few myths and help you make more informed decisions.
Next, there are 3 main types of brokers in the market, ECN brokers, Market Maker, and No Dealing Desk (NDD).
⭐ ECN Brokers
ECN is an acronym for Electronic Communication Network. ECN brokers technically take orders from clients and send them directly to a pool of liquidity providers. The quoted prices displayed by ECN brokers are some of the best you will find as they come from multiple institutions and market participants.
· No price manipulation by the broker
· Lower spreads
· Faster trade execution
· All trading strategies allowed
· No requotes even during high volatility
· Large initial deposits usually required
· Commissions charged
· Spreads are variable and can be higher at intervals
ECN brokers are often looked at, as the Holy Grail of brokers in forex trading. The general term for them is A-book brokers. Unfortunately, this is a misconception that highlights a prevailing lack of understanding of how the market works.
Many traders believe that ECN brokers are the best because orders are matched up with the opposites at all times. This is not the reality.
The forex market is different from the stock market. There is no central exchange, so it is impossible to have all EURUSD buy trades, for example, matched by EURUSD sell trades.
This false and widely-held understanding of ECN brokers in the forex trading community suggests that customers of all ECN brokers cannot favour a specific direction for any currency pair. Imagine a scenario where 80% of the traders have long positions on the EURUSD? How will the trades be matched up?
ECN brokers in forex only send your order directly to a liquidity pool. This pool will contain banks, institutions and other brokers. The brokers do this to get better prices and more favourable spreads. ECN brokers also do not bear any risks on all client positions. So, when you make money, the liquidity providers pay the profits.
ECN brokers typically make money from commissions. However, some of them also make money from spreads by offering slightly higher values than what they receive from the liquidity providers.
Forex brokers understand the fact that traders trust any broker with the acronym ECN affixed to their brand name. Hence, many of them do whatever it takes to be addressed as a “True ECN” broker, including getting regulation in shady countries.
The brokers that are regulated in stricter jurisdictions try to navigate the red-tape by using terms like Straight Through Processing (STP) or Direct Market Access (DMA) to suggest that they are an ECN broker.
It is all clever marketing. If you decide to go with an ECN broker, remember that your trades are only sent to a larger pool (for the real honest brokers). They are not matched to the orders of other traders.
If your reason for choosing an ECN broker is for fear of broker manipulations only, it is not enough. There are other types of honest brokers that will not engage in any manipulations.
⭐ Market Makers
Also known as B-book brokers, a market maker does not send your orders to a larger liquidity provider. They internalise the risk for all opened positions, which means they have to pay from their pockets for all positive trades.
· Low initial deposits
· Fixed spreads
· No commissions
· Flexible leverage
· Price manipulation is possible
· Fixed spreads might still be too costly
· Scalpers may not be welcome
· Requotes and slippages frequent during high volatility
Market makers have a poor reputation in the forex world because of years of misinformation. Unscrupulous market maker brokers exist, but they are not all bad. Many of the most respected forex brokers in the world today, including Mitrade, are a part of this group.
Yes, they make money when you lose, but the most reputable ones never go out of their way to make you lose money. They provide the best possible prices, ensure fast execution, honour all your market or pending orders and pay your profits when you initiate a withdrawal.
More than 75% of traders will lose money every year. This means that reputable market makers can make more profits than other types of forex brokers without lifting a finger. Why will they have to cheat?
Even when you choose ECN brokers (or similar), your order will go to the liquidity pool created by banks and other institutions. These institutions “make” the market. So in reality, you are still trading with market makers, just on a larger scale.
So, there is nothing wrong in choosing a market maker broker if they meet all other requirements, without the cons mentioned above. A huge positive with such brokers, is that there is no fear of false marketing. You know what you are getting.
⭐ No Dealing Desk
No Dealing Desk (NDD) in forex means that the broker operates an Electronic Communication Network (ECN), Straight Through Processing (STP) or Direct Market Access (DMA) model. Such brokers route your orders through larger liquidity providers.
· Price comes from liquidity providers
· Trades are executed fast
· No requotes
· Low spreads
· Trading costs can be prohibitive for retail traders
· Low leverage options
No Dealing Desk (NDD) brokers are the same as most ECN brokers. The acronym NDD is sometimes used by brokers that do not want to fall foul of any regulatory requirements by claiming ECN status. The bottom line is that such brokers will send all your orders to a pool of liquidity providers, instead of internalising them.
Keep in mind that many NDD brokers still run a market-maker model where they keep smaller orders in-house but send larger orders directly to the liquidity providers. There is nothing wrong with this business model as it allows the broker to make more money while taking only half the risk.
Now that you know all the types of brokers available, you should be able to make the right decisions.
The following factors should guide you:
A reputable market maker broker trusted worldwide and regulated by the ASIC like Mitrade is a better option than a self-styled ECN broker operating from a small island-country. It is also essential to confirm that a broker is legally allowed to serve customers in your location.
● Deposit protection
What happens to your capital if the broker goes bankrupt? Only choose brokers that keep trader deposits in segregated accounts and also have an insurance policy in the event of bankruptcy.
The best brokers offer competitive spreads and swaps. Ensure you are comfortable with the spreads and swaps charged by any broker regardless of their classification. For brokers that charge commissions, confirm that their pricing is favourable for you.
● Trading instruments offered
Mitrade offers more than 100 tradable instruments including currencies, indices, commodities and cryptocurrency. Not many brokers can match this. So, before you fill out an account, ensure that the broker has all your best pairs.
● Compatibility with your trading strategy
Some brokers try to discourage certain types of trading, including scalping and hedging. Is your trading strategy allowed on your chosen broker?
● Minimum and maximum deposit requirements
If you can only afford a $500 account, don’t choose a broker with a $1,000 minimum deposit. In the same vein, a broker that cannot accept your $500,000 account may be too small for you.
● Deposit and withdrawal options
Flexible deposit and withdrawal options make it easy to manage your account. The best brokers have more than three funding options.
● Customer service
Some forex brokers have a high entry barrier for customers and will not spend as much time on pleasing the average retail trader. Others, on the other hand, will allocate resources for acquiring and retaining all kinds of customers, making them more retail-friendly.
When choosing a broker, do not make the mistake of judging them based on the results you have generated on their demo account. A demo account is only perfect for getting to grips with a trading platform. The real execution time, spreads and commissions can only be verified on a live trading account.
When you find a broker that ticks all the right boxes, test them with a fraction of your intended deposit. If you are fully satisfied, you can make more substantial deposits.
Brokers are more than their designated acronyms. When analysing the different types of brokers, do not be deceived by smart marketing. Focus on the factors that matter to ensure the safety of your trading capital and any profits you have made. The best brokers will provide an environment that allows you to focus on your trading.
Mitrade, Trading Simplified!
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