Types of forex brokers that traders must know and how to choose it?


Basically, there are two types of forex brokers, namely brokers with Dealing Desk, Non Dealing Desk, and Hybrid. 

Dealing desk brokers are sometimes called 'market maker'. Whereas non dealing desk brokers can be further divided into Straight Through Processing (STP) brokers, Electronic Communication Network (ECN), and a combination of STP or ECN. 

There are also types of forex brokers based on legal legality that can be divided into two. Both are regulated brokers and unregulated brokers. Check out the full description here. 

Types of Forex Brokers:

1. Dealing Desk (DD)

Dealing Desk brokers benefit through spreads. These Dealing Desk brokers can be said to create their own markets and exchange rates for clients.

Maybe it seems there is a little manipulation, but it really isn't. They still provide sell and buy options, and no matter which later will be chosen by the trader.

However, if you trade in a Dealing Desk broker type, then make sure you deal with a Dealing Desk broker who is registered (regulated) as a brokerage company and has a good reputation.

Good regulations are: NFA/CFTC (United States), FCA (United Kingdom), and ASIC (Australia). Dealing Desk brokers are often referred to as dealers.

The advantages of Dealing Desk brokers are usually located in the facilities they offer, such as high leverage up to 1: 1000, interest free, small spreads or fixed spreads, attractive bonuses, and the possibility of easy deposits and withdrawals through third parties.

However, the disadvantages, because this broker is a market maker, then traders actually do not see real foreign exchange rates that occur in the interbank market. In addition, both large and small dealers also often take positions opposite to traders.

For example, you open a EUR/USD buy position of 1 standard lot. To full fill that order, the Dealing Desk broker will first try to find sell orders in pairs and the same size from other traders. In this way, they minimize risk.

However, if there are no other matching orders, they will open a position opposite you. Every forex broker can have a different risk management policy, so even if you know a broker is Dealing Desk, for sure you can ask the broker first about whether they did this or not.

There are two types of Dealer Brokers:

a. Big Dealer,
This type of broker usually has a good reputation and is legally registered (regulated), and not located in a remote or unclear place. Just as you play in casinos, you should look for large casinos like in Macau or in Las Vegas.

Because if you get a profit, then the broker is certain to be able to pay your winnings, and the deposit of your investment funds is safe.

In this regulated Dealing Desk broker there is a supervisory body (generally from the local government) that aims to control or guarantee that the broker has carried out his duties well and does not deceive the customers.

b. Small Dealer or Bucket Shop,
This type of broker is a broker that you must avoid, because they have a large potential to manipulate transactions or act fraudulently, so you will easily experience a defeat that should not have happened.

Generally broker Bucket Shop does not license as it should, and only licensed as a normal or other company. This often outwits prospective customers who are still lay. Characteristics of Bucket Shop brokers:
  • Registration is very easy and impressed carelessly and without adequate verification.
  • Located in unclear places or just pocketing a license from an unclear offshore country.
  • There are big bonuses whose purpose is to attract customers to want to place their funds which in the end is to be eaten by the cheat. Be careful with brokers who offer things too bombastic or bonuses that look very attractive, because the bigger the bonus you need to be aware of more carefully. Instead of being trapped and you will experience losses that are not worth the bonus offered.
  • A number of dealer brokers set limits or prohibit certain trading techniques such as scalping and martingale. However, there is also a Bucket Shop that allows all kinds of trading techniques because in the system an automatic script is installed which can hinder the technique / the script is usually called a Virtual Dealer.
  • The conditions offered by broker Bucket Shop are often outside the normal conditions of the actual market conditions, such as too high leverage (eg 1: 1000), low spreads that do not make sense (for example: 1 pip fixed even 0 pip fixed, even though in the real market spread is always changing every second).
  • Most certainly allow money transfers with third parties or individuals.

Cheating things that are usually done by a broker type Bucket Shop are:
  • Manipulation of quote prices.
  • Excessive requote. Requote is when you want to make a transaction at a certain price, but the platform instead proposes different price options.
  • Slow order execution; if it is hit by Target Profit or TP it is difficult to execute, but if it is hit by SL or Stop Loss it is easily executed.
  • Servers that are often down. If the server has a problem, then of course we cannot trade. It could be, we can't even close the opened trading position.
  • Do not want to admit profit transactions unilaterally on the pretext that your trading is invalid.
  • Fund withdrawals are often restrained or cannot be done.
  • Incorrect statement. Be careful with statements from broker Bucket Shop that often give false and misleading statements about their system, such as stating that they are brokers of ECN or STP type. Therefore check for important regulation so that you know that the broker has received oversight from a bona fide body not to cheat traders.
  • Also be aware of the awards they claim. The award does not guarantee the broker is safe. First check which institution gave the company rating and search on Google or another website for the credibility of the rating company.

2. Non-Dealing Desk (NDD)

Non Dealing Desk broker literally means "without going through the dealing desk".

This type of forex broker is what really becomes a bridge between traders and the interbank market. Spreads in Non Dealing Desk brokers cannot be fixed because they must always adjust to market prices, and are usually larger than DD broker spreads.

If you don't install a spread, they can also charge commission deductions per lot for traders. NDD brokers generally do not trade against a trader's position. NDD broker types are generally divided into two, namely Straight Through Processing (STP) brokers, Electronic Communication Network (ECN).

a. Type of Straight Through Processing (STP) brokers.
The Straight Through Processing (STP) system forex broker transfers orders from traders to their liquidity providers who have access to the interbank market. STP brokers usually have several banks / financial institutions as providers of liquidity, and each can have different bid / ask quotes.

For example, an Straight Through Processing (STP) broker has three liquidity providers, each of which has a different rate, so at one time the system will sort the best rate and then distribute it to your platform. Straight Through Processing (STP) brokers usually benefit from spreads charged on every transaction made by traders.

This spread is added to the price rate provided by the liquidity provider. Therefore, spreads on Straight Through Processing (STP) brokers are usually variable spread / floating spread, not fixed.

b. Type of  Electronic Communication Network (ECN) Broker
As the name, Electronic Communication Network (ECN) brokers allow clients to interact directly with participants in the Electronic Communication Network market, including banks, hedge funds, other brokers, and other traders.

Traders at ECN brokers can also sometimes see the "Depth of Market", or buy and sell orders from other market participants. Because the system is like this, ECN brokers usually ask for large deposits and charge commissions per lot traded.

3. Hybrid Broker

This broker is a combination of the types of Straight Through Processing (STP) or Electronic Communication Network (ECN) and Dealing Desk broker. Generally Hybrid brokers have a rule in throwing orders or based on the type of account used.

One thing to note here is that some bro who claim that STP / ECN can actually use a hybrid model. Sen accounts or mini accounts that offer orders with lots of 0.1 or lower, usually cannot be sent to the liquidity provider or to the market because it is too small, so it is run on a DD.

If there is a larger volume order, then they will run according to the STP / ECN model. Actually it's difficult to know whether a broker is a Hybrid type or not. You can only know this by trying it yourself.

Types of Regulated and Unregulated Forex Brokers

To provide a legal foundation and provide security guarantees for traders, many countries have certain regulators to regulate forex brokers. Regarding regulation, forex brokers are generally divided into regulated and unregulated brokers.

However, even among regulated brokers there are differences in quality between each other. This is because there are differences between each regulator regarding the strictness of the controls and guarantees for traders. Which regulator is good?

1. Elite Class Regulator
The well-known and well-executed tasks, namely elite class regulators, are the United States (NFA / CFTC), Germany (BaFIN), Swiss (FINMA), and Japan (JFSA), followed by British (FCA), and Australia (ASIC). The advantage of regulated brokers is to guarantee the security of your funds.

Brokers with the strictest regulations of the NFA / CFTC of the United States must meet stringent requirements and monitor periodically from the authorities, making it very unlikely for them to cheat or escape their clients' funds.

Even if the broker-broker later went bankrupt and went bankrupt, the regulation had provided a system that allowed all or part of the client's funds to be returned.

2. Middle Class Regulators
Middle class regulators which include New Zealand FMA / FSP and regulators in the Euro area. In the Eurozone, MiFID law applies as "passport", so that a broker that has been regulated in a Euro member country, the license can also be used in other Euro member countries.

Included in the Eurozone regulator are AMF France, CONSOB Italy, MFSA Malta, CySEC Cyprus, and others.

In brokers with middle-class regulations, the requirements and monitors carried out by regulators are relatively looser.

However, the security guarantees are also inadequate. An example is the mass bankruptcy of several forex brokers in early 2015.

At that time, several brokers regulated by the British FCA and the New Zealand FSP were victims. One year later, clients from UK FCA regulated brokers were able to request a refund of part of their funds (some of them could not return because brokerage funds had run out), but there was no news from the FSP in New Zealand. In other words, the licenses of middle-class regulators guarantee the existence of a broker, that the broker is not a fake forex broker. However, security of funds is lacking.

3. Offshore Regulators
MFSA Malta and CySEC Cyprus are often considered the most loosely regulated compared to the other regulators mentioned above.

However, there are still far more loose ones, namely regulators in offshore areas such as Seychelles, British Virgin Islands, Belize, St. Vincent and the Grenadine, and so on. Even if a broker says he holds regulations, but if the location is in these places, then it can be considered the same as unregulated.

Offshore forex brokers can only be said to be guaranteed by the company, because monitoring from regulators is generally very very loose. If the broker goes bankrupt or runs the client's funds, there is no guarantee that the client's money can return.

Whereas a forex broker without a license is in doubt the existence of the company is real, especially if they do not provide a clear address.

However, there are also many countries that have no regulations or regulators about forex, such as Montenegro and Russia. Russia at the end of 2014 enacted a forex law, but until the beginning of 2016 it was not yet effective, so most brokers from Russia had not yet been regulated.

While in Canada, each region ('province') has its own regulator, so the national regulation is rather ambiguous.

Well, will you use a regulated broker or not? it's up to you. Unregulated brokers are usually lighter in terms of registration, deposit and withdrawal, but their security and sustainability are questionable.

Whereas registration, deposit, and withdrawal brokers with bona fide regulations are usually complicated because they are related to anti money laundering laws, but clients will get extra security guarantees.

Which Type of Forex Broker Choose?

With the many types of forex brokers, which of us as traders must choose? Well, for that, there are some things that should be looked at. Anything?

1. Broker Regulation Status
The regulatory status of a broker is often synchronized with the security of your funds at the broker.

Thus, brokers with elite class regulation as mentioned in the previous section are brokers with the highest prestige, followed by brokers with middle-class regulations, offshore regulations, then brokers do not regulate. However, actually each of them has advantages and disadvantages.

The better the quality of regulation of a broker, the more complicated the registration, deposit, and withdrawal process.

For registrations in United States brokers or brokers that connect with European banks such as Dukascopy and Varengold, for example, when registration can be requested also various files that must be sent by post to their office.

This is far different from the registration process for middle class offshore regulation or regulation brokers that can be done entirely online and can be completed in just a few minutes.

For this reason, many traders choose forex brokers with mediocre regulation rather than elite class regulation or unregulated brokers.

If you are interested in investing in the amount of tens of thousands to hundreds of thousands of US dollars, it would be better to register with a good regulated forex broker. But if you only want to invest small-medium, then brokers with intermediate level regulation can be more practical.

2. Transaction Fees
No matter which broker you will register, there will be transaction fees charged to your forex transactions.

In general there are two types of transaction costs: spreads and commissions. A forex broker can only charge spreads, commissions, or even both.

Spreads are usually a number of pips which are added to the ask / bid prices that apply when buy / sell is done.

Whereas commissions are usually calculated in US dollars per lot traded. The amount of spread and commission at each broker varies, so you can adjust it to your trading style.

3. Deposit and Withdrawal Method
A good forex broker will allow you to make deposits and withdraw funds easily and as quickly as possible. However, related to Indonesian traders who apply to foreign brokers may be more complex than those who register with local brokers.

In general, there are four types of deposit and withdrawal methods from forex brokers, namely by bank transfer, credit / debit card, e-payment, and third parties. 

Bank transfer if it can be run through a local bank, it will be very easy; but if you have to bank wire overseas, it can take days and the bank pieces are high.

The next alternative, using a credit / debit card can be done instantly, but the bank discount will be large. The favorite option at this time is with e-payments such as PayPal, WebMoney, Neteller, Fasapay, and the like.

This method tends to be preferred because all transactions can be done online, fast, and with a relatively lower cost discount. In addition, there are transfers via third parties such as local exchanger, where the transfer fee can be zero and in terms of speed is superior.

However, the latter two choices are often doubted by security.

4. Trading Platform
In online forex trading, the most important device is the trading platform. Therefore, you must ensure that the trading platform can facilitate your trading style, be easy to use, and have the features you need. One of the most popular trading platforms in the World is Metatrader MT4/MT5.

In addition to the full charting and technical indicators, this platform also allows easy use of VPS and trading robots. But in addition to this platform there are also many other variations of platforms, such as cTrader, SIRIX, and others that can be specifically created by the relevant forex brokers.

Because of the large variety, it is better to try trading on a demo account on the trading platform provided by the forex broker before committing to investing in large funds.

5. Price Execution
Forex brokers should allow traders to transact at prices that match prices on the interbank market and with almost instant speed.

This is because the quality of execution will decrease if prices do not match or execution is slow. The difference between a few pips can determine whether trading will be profit or loss, especially for scalpers.

Because of this, forex brokers compete with each other in presenting the best price quotes and the smallest latency. You also, you should choose a broker that can guarantee the quotes of the best prices directly from the liquidity providers, and be able to execute prices sharply.

6. Customer Service
Forex brokers are not angels, so of course they also have deficiencies and in relations with them, you can just encounter some problems.

Therefore, it is important to choose a broker whose customer service (CS) is responsive and able to guide well. The forex broker CS must not only be active when registering and depositing, but must be prepared to help solve your problems afterwards, including also guiding withdrawal of funds.

Well, there are some types of brokers in forex. Because there are differences from the various types of brokers as traders, you have to know it and you also have to choose the type of broker so that later you will not regret the wrong choice of broker.

Read also: The basic criteria for choosing a good and reliable Forex Broker.