The Fundamentals You Need to Know about Forex Brokers
Even if some know it as currency trading broker or retail forex broker, for the commercial and nowadays trading, the forex broker is an intermediary that is buying/selling some specific goods, getting a commission in return. Therefore, the forex broker is some a salesman of commercial products. Some think that the name originates in French, but its origin remains blurry.
Let’s start with the basics: what’s a broker?
The broker played an essential part in derivatives, commodities, equities and even the real estate or insurance have been benefiting from it. Ever since the beginning of the world, brokers used their phone for the job. Clients have always been calling on the phone their brokers who would buy/sell specific goods in their client’s name, getting a percentage-based commission in return.
The internet has been here for a while now, and soon enough brokers started to let their clients use accounts and sell/buy through electronic platforms or various computer applications.
Back in the days, the broker was working at a particular agency (known as the brokerage house) and was seen as an individual member of this profession. More often than not, the term “broker” refers now to the brokerage.
What about retail forex?
Retail forex is the main idea for individual traders nowadays. Typically, it was the big clients (importers, banks, exporters or multinational corporations) that would trade the foreign exchange on the internet market. They would have to trade currencies for financial reasons, avoiding international currency exposure.
Most of the time, the dealers are trading the retail forex, and many of them are individual or small investors. Some call these firms “retail aggregators.” It was the end of the ’90s when the retail forex trading has become more and more popular, and the internet-based financial trading sure helped. In the 90s, the retail forex brokers and dealers help the small traders to make an entrance into the markets which were only allowing the large-scale business or financial organizations to hit the market.
Retail forex brokers let the traders make an account with a fixed amount of goods, allowing them to trade them online using the trading platforms based on the internet. The spot currency market is used for a significant part f the trading, but some brokers are also using derivate products (options or futures).
Many individual traders like the forex trading as brokers allow them to sell/buy with limit accounts. It’s what gives the traders the ability to borrow capital to make a trade. They’re going to expand the principal for trading, even up to 50 times their money in the beginning.
What do brokers and dealers do?
Many retail forex brokerages are playing the part of dealers, and they offer liquidity for traders by going to the other side of the trade. Brokers get some money like so as they charge a fee through the bid-ask spread. When we didn’t have the retail forex brokerages, no personal trading amounts less than $1 million were allowed to go into the market.
It was 2000 when retail brokers started to provide online accounts to the private investors; they would roll prices from the most important banks and Electronic Broking Services (EBS) system. The brokerages started to offer retail service as they would gather several small trades, managing deals in the interdealer market (ruled by the banks). The “actors” in the interdealer market were open to ensure liquidity for the excellent price as the trade volumes got large. Typically, the bid-ask spreads are higher in the case of retail customers as opposed to the interdealer market. However, it seems that they get smaller when the trading volume is rising.
What other services do brokers provide?
Not only that the brokers are going to help their clients sell/buy all sorts of goods, but they may also provide auxiliary services that relate to this sort of business. Here are some examples:
- Charts for the asset price
- Programs and advice on trading
- Information, research services, and news feeds
- Manage the accounts in a professional way
The clients get the services for free or pay for some of them.
The dealing/no dealing desk part
Most of the time, retail forex traders are capable of getting into the market only with the help of a broker. There are two main ways that forex brokers are using:
- The “dealing-desk” trading is one way. The brokers work as dealers but play the opposite position of the trader. The chances are that the traders are going to pay higher spreads on average in this type of trades. The broker can also fill the orders whichever way that he likes.
- The “no dealing desk” trading is when the traders obtain straight access to the interdealer market. However, they are going to pay for this sort of service. Sometimes, they may also have to deal with broader variable spreads, and it all depends on how the market is doing.
What does the client need to do?
Forex broker is supposed to make it easier for the client to get in touch with the banks that are buying/selling currencies. They run their business on specific rules and processes.
Even if the forex industry has developed so much in the last years, for the right amount, the forex industry had no regulations whatsoever. It’s why you should stay away from the forex brokerages that aren’t well known. You can always check the forex brokers on the National Futures Association to see which one is legit.
The very first thing you need to do is to see if any U.S. authority regulates the forex broker and all the regulates brokers are going to display the information on their website. For instance, you can go to fxdailyreport.com to see their suggestions on the most respected forex brokers out there. Not only that you’re going to get useful information on the reliable forex brokers of the moment, but you can also get some advice on the cryptocurrency exchange, stocks, commodities, finance or business.
Some final recommendations
Forex brokers provide basic service for the markets, and they’re essential for the retail forex traders. As they started their business in the retail area, brokers sure created this chance that was lacking for the individual traders.
The computer, the mobile phones, and the internet make it all possible and traders are capable of opening an account and hit a market that only banks, financial institutions, or large companies used to have access to. Thanks to the brokers, some services help the assisting traders to get a clear idea on the price movements and also obtain profits.