Dive into the world of forex brokers, understanding their basic functioning, types and choosing the right broker!
What is a forex broker? Forex brokers serve as intermediaries between traders and the forex market, facilitating transactions and providing access to the expansive forex market.
Each type of broker has its unique characteristics, catering to the different preferences of the traders. It can include general retail traders or the large financial services firms that trade on the behalf of investment banks or other clients.
Forex brokers can be categorized based on their execution methods and regulatory status.
ECN / STP Brokers or Non-Dealing Desk Broker –
When transparency and trust is your major concern, ECN/STP brokers are the best fit. They pass clients’ trades directly to liquidity providers, ensuring faster execution, True Market Depth and potentially tighter spreads. This model eliminates conflicts of interest, as brokers profit from commissions/spreads rather than traders’ losses. They are typically known as A-Book Brokers.
Following are some top ECN / STP brokers that you can check HERE as well:
Market Maker or Dealing Desk Broker –
Unlike an ECN / STP broker, a market maker does not always pass on the client’s trades to its liquidity providers. Instead, they may offset clients’ winning trades with their own funds or profits from losing clients. While this model carries higher risk, it often results in higher revenues for MM brokers as compared to STP brokers with the same volume, given that most traders tend to lose money. They are typically known as B-Book Brokers.
On the Basis of Regulations –
Besides being classified on the basis of execution, Brokers are highly categorized on the basis of regulations as well. The forex market being global and decentralized, it poses challenges for a single entity to oversee the entire industry. Depending on the jurisdiction, specific regulatory bodies establish standards and guidelines for online brokers to adhere to.
Regulation in the financial realm primarily aims to safeguard investors against fraud and undisclosed risks. However, regulatory standards vary significantly from one jurisdiction to another. Some regulatory bodies are known for their stringent rules and guidelines, while others maintain a more relaxed approach. Major regulatory bodies include – the US Commodity Futures Trading Commission (CFTC), Cyprus Securities and Exchange Commission (CySEC), Australia’s Australian Securities and Investments Commission (ASIC), Israel Securities Authority (ISA), and Japan’s Financial Services Agency (FSA).
Based on regulations, the brokers can be categorized in:
Regulated Forex Broker –
These brokers hold valid licenses from regulatory bodies to operate within specific jurisdictions. The license numbers can be verified on the regulator’s website, providing credibility to the broker. Reputable brokers often seek regulation in stricter jurisdictions where non-compliance with guidelines can result in significant penalties.
Following are some top ECN / STP brokers that you can check HERE as well:
- Fxview
- XM
- Exness
- Vantage
- IC Markets
Unregulated Forex Broker-
Any broker lacking a valid licence to operate within a particular jurisdiction is considered unregulated. There are numerous brokers in this category. Regulation is generally considered a key indicator of a genuine broker, and the absence of regulation raises concerns about the broker’s legitimacy and accountability.
Summary
While not all unregulated brokers are fraudulent, their lack of oversight and accountability can facilitate unethical behaviour. Some operate without licences due to financial constraints, high compliance costs, and a desire for tax avoidance. However, traders should be wary, as dealing with unregulated brokers poses risks such as fraud and inadequate fund protection. Regulatory oversight plays a crucial role in ensuring transparency and fairness within the forex market, protecting investors from potential harm.
In the next line of articles, we will dive into more detail about regulations, unregulated brokers and how we can choose an ideal broker.
