A forex trader needs to choose the right kind of a broker in order to realize the desired benefits from the investment. The world of Forex trading has expanded a lot of late and to make an investment that ultimately brings financial profits to your account, selection of the right kind of broker is one of the most important criteria for success. In this article, we explain four different kinds of forex brokers while explaining in detail the advantages and disadvantages associated with each type. This knowledge will help you to select the right kind of a broker according to your trading style while minimizing the prospects of a loss-making deal.
A Book or No Dealing Desk (NDD) Broker
Also known as direct market access/ straight-through processing (DMA/STP), this type of broker is one of the popular choices among investors when it comes to investment in foreign exchange. NDD essentially acts as an intermediary between the trader and the foreign exchange market. You will pay the broker the fee for the execution of the order, and the revenue model adopted by NDD primarily depends upon the satisfaction of its clients. This essentially means that the focus of the NDD brokers is to provide the best services and products to the trader while ensuring maximum satisfaction for their services. If the clients of the NDD brokers are happy, then they will again place the order through the broker who will continue the cycle of earning for its business model. Therefore, NDD is a kind of broker where you get surety that you will avail the best services and offers because it is in the mutual interest of both the parties to act in the interest of each other.
B Book or Dealing Desk broker
This type of broker is also known as a market maker, and the best way to understand the working model of a dealing desk broker is the fact that it is the counterparty in all trades you make. When you place an order, it will not go to the foreign exchange market directly; rather, your broker will first accept it and then fill the order on your behalf. In case you lose in the market, the loss will be translated into a gain for the dealing desk broker.
Also the dealing desk broker has access to your investment account, levels of the stop-loss you have chosen, and other important parameters of the trading process. The broker can also manipulate the speed of the execution of your order in order to gain more profits by exacting loss on your investment. Obviously, there is a conflict of interest as a dealing desk broker will only gain when you lose in the market. This is the reason why the trading fees charged by the dealing desk broker are comparatively lower than the no dealing desk broker. They also provide high leverage in order to lure investors, but you’ll be in loss if you are new to the field of trading and have an account with Dealing Desk Broker.
C Book or Hybrid Model
As the name suggests, the hybrid model combines the working mechanism of the first and second types of brokers discussed above. For the small traders, this hybrid type of model will work as a market maker, while in case of larger orders or agencies, they will act as intermediaries. In terms of the profit potential, the hybrid model is like combining the best of both the worlds, but from the perspective of the trader, the model of the market maker is not an optimum decision to go with.
As a new investor to the field of foreign exchange, you must make sure that you do not fall for dealing desk kind as they can manipulate things in a number of manners in order to maximize their profit. For the large agencies/orders, this hybrid model will work as an intermediary by acting as a link between the investor and the foreign exchange market. By offering good products and services to the fat customers, the C book model can attract good profits and recurring business will ensure that they will continue to do well in the business for a long time.
The name clearly defines the meaning of the term – a scam broker is in the market to scam investors. These kinds of brokers are in constant search of unaware investors, and by promising them quick and healthy returns on their money, scam brokers cheat the investors. Many red flags clearly indicate the operating mechanism of these scamsters. For example, if some broker offers you five times or ten times return in just a week or month, then you should get the point that the offer is too good to be true. Most times, people become a victim of a scam broker when they want to make a large amount of profit in no time. We must have control over this kind of quick fixes, and as an investor, we need to understand that the true potential of the investment can be realized only in the long term. Markets have their cycles of going through up and down, and patience is the very first virtue that you must have as an investor to realize long-term benefits from trade in foreign exchange.
While choosing the broker, keep in mind the investment goals you have assumed for yourself. Also, consider the risk appetite you have for your investment and then accordingly decide on selecting a broker that will help you to realize your investment potential rather than impeding it.