What does an fx broker do?
The broker is a company that gives service for the trader, what does an fx broker do?
Forex brokers are parties, as companies, institutions, agents, or individuals where they stand as a bridge between sellers and buyers.
But what products that they transacted? For traders surely already know the forms of forex or foreign currency. In trading activities between the country, there is a currency exchange. This exchange has been going since a long time ago mixed relations economic, between country began to link with each other.
So arguably forex brokers have been around for a long time ago. If watching the increasingly massive development of economic relations between countries. As well as rapid growth in the forex market, of course, forex broker also increasingly on the world.
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Why Traders Need a Forex Broker?
What does an fx broker do? In the forex industry, the forex trading market is dominated by large banks throughout the world. Transacting directly with these big banks is almost impossible for individual traders.
Aside from having to have bridges, transactions with large banks cannot conduct transactions in small amounts. Simply put, the retail transaction standard is out of reach because it does not have large funds for transactions if trades with the bank.
Well, this is where the forex broker takes part. The forex broker will arrange for each individual trader to participate in forex trading. Brokers will forward requests from traders to larger brokers, and so on so that later every trader request can be accommodated in the large and massive forex market.
Forex brokers also provide software and other devices that allow traders to make transactions online via computers, laptops, and various other gadgets. Therefore, traders can access the forex market simply by installing certain programs or through browsers. Traders can make transactions anytime and anywhere.
How Forex Brokers Earn Profits
Each broker has different rules in drawing fees for their services. But in general, brokers can charge commission fees and or spread. Commission fees are deductions in the certain of dollars charged on each volume traded by the trader.
Meanwhile spread is the difference between the selling rate and the buying and selling rate (bid and ask). There are forex brokers that enforce both, but there are also those that only set Spreads only or Commission Fees.
Usually, the spread size depends on the type of currency pair to be traded. Spreads can be worth around 2-3 pips for heavily traded major currency pairs such as EUR/USD (Euro against US Dollar). On the other hand, Commission Fees will vary depending on the type of broker.
Online Forex Broker
In the old days before available internet, traders used the old communication model. Such as via telephone, to make transactions to brokers. But in the current internet era, almost all forex brokers must facilitate online trading so that the trader is not left behind and is considered outdated.
With the development of this technology, there are many conveniences that traders get. In addition to eliminating the difficulties of pre-internet trading and allowing transactions anytime and anywhere. Traders can get real-time trading facilities.
With a special advanced application MetaTrader, traders can monitor prices and carry out order execution directly on the trading platform. In addition, traders are also facilitated with a variety of tools for analysis, news access, and much more.
Regulation and Legality of Best Forex Brokers
What does an fx broker do? The problem for many traders that then arises is how to choose a forex broker among hundreds of online forex brokers around the world.
Since it was still a little, broker choices were very limited, so there was almost no demand for traders to be selective. But with the growing global interest in forex trading. New brokers have emerged with various types, advantages, and disadvantages.
There are good brokers, but there are also those that need to be watched out. Some work professionally, some eat funds from their own clients. Such a situation needs to be well understood so that traders are not wrong in choosing a broker.
One way that can help traders choose a safe broker is to find out info about the broker’s regulations. A regulated forex broker means that he must follow the standards and regulations set by the relevant regulator. This is very important, so the trader did not trap in the dark forex.
Forex broker regulators are generally official financial institutions or departments under the government of a country. The better the regulator, then the rules followed by forex brokers will be tighter.
Brokers cannot operate on a standard that is inconsequential, because there is a threat of punishment imposed if he violates the provisions of the regulator. Brokers can get a warning, be subject to sanctions until the operational permit is revoked.
Well, which regulator of forex brokers is credible? In this case, institutions in developed countries such as the NFA (United States), FCA (United Kingdom), ASIC (Australia) are often the main choices, IFSC also as an offshore regulator.
Types of Forex Brokers
Generally, most traders do not care and don’t know how brokers actually manage every transaction with all their clients. Traders only guess from broker’s claims and the quality of services. There are several types of brokers currently in the forex industry.
But actually, all types of brokers split into two main categories:
- DD or Dealing Desk
- And NDD or Non-Dealing Desk
Basically, Dealing desk brokers operate with their own markets and do not display real exchange rates (prices) as presented on the interbank market.
Although still providing buy/sell execution as options to traders, dealing desk brokers are often suspected of manipulating the prices. In practice, brokers Dealing desk can trade against their own clients because the profit also comes from the position of the losing trader.
A better choice is, of course, a Non-dealing desk broker. Here, each transaction will be forwarded to a larger bank or broker. The profit of the broker really comes from the spread and commission fees, so there should be no trading terms against the client.
In practice, No dealing desk seems more transparent than the Dealing desk broker. There are some differences between dealing desk brokers and no dealing desk brokers.
- First about spreads, usually dealing desk brokers offer fixed spreads, whereas no dealing desk brokers offer variable spreads.
- The second is about the speed of order execution. Dealing desk brokers usually requote, slippage more frequently, this can certainly hurt traders. While no dealing desk will usually always execute orders quickly and without requotes. It’s just that when the market is in high volatility, traders may see an enlarged spread because they use variable spreads.
Do forex brokers cheat traders?
Not all brokers are honest and there are also some fraudulent brokers, “rules” are just tools to attract more traders to open accounts. So choosing a broker must go through a more comprehensive data search by looking at the reviews of traders, a good broker will respond and answer complaints from traders well.
Can brokers steal your money?
Considering that not all honest brokers sometimes have traders losing money stolen by brokers by using malicious action. You can try to submit a claim through settlement negotiations, or through the FINRA (Financial Industry Regulatory Authority) arbitration process by providing the necessary evidence.
How do forex brokers make money
The broker makes money from the spread or commission charged on each order by the trader. There are brokers who take fees with a fixed spread and there are brokers who take the variable spread.
For brokers that take fixed spreads, the value does not change and remains fixed even though the liquidity pool increases. However, for brokers who take the variable spread, at high liquidity, for example, after the news, the NFP spread may widen.
Besides, the broker gets money from education to a number of people who are willing to pay for education through webinars or in classrooms.
Another way a broker gets money is by financing loans, on every trader’s order, they use margin, this margin is in fact a loan from the broker. Maybe this is a bit complicated, brokers through the interbank market they get interest by liquidity market. Because basically the broker works with large liquidity providers.
There are some myths that brokers are taking away clients’ money, with stop loss hunter software, regulated brokers have a minimum fund requirement. So that choosing a broker with regulations can solve this case.
How to choose a forex broker
Choosing a broker is very important for traders. Things that need to be taken into account by traders when choosing a broker are in terms of security, transaction fees, deposit and withdrawal methods, the trading platform used, execution speed, and customer service.
- In terms of security, with regard to broker regulation, choosing a broker that is regulated by an internationally recognized institution minimizes the risk of fraudulent brokers. Well-known regulators like the National Futures Association (NFA) and Commodity Futures Trading Commission (CFTC) in America. Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) in the United Kingdom. Australian Securities and Investment Commission (ASIC) in Australia, The International Financial Services Commission (IFSC) in Belize.
- Low transaction fees are more profitable for traders than high transaction fees, find a broker with a low fee you can compare the transaction costs of each broker.
- Deposits and withdrawals with more payment methods make it easier for traders to process this. There are many payment processors such as Skrill, Perfectmoney, Fasapay, Webmoney, etc, the more variety of payment methods you can choose the one you use every day.
- A trading platform with a user interface that is easy to use and supports more features will be preferable to the usual platform, in this case Metatrader4 is the choice of many brokers.
- Execution speed is very important when placing orders, certain brokers often get requotes, which annoys traders when opening and closing positions.
- Customer service that is fast response and provides detailed explanations on problems faced by traders will provide better customer support than low respond customer service.
What does an fx broker do? As a retail trader, you should be thankful for the existence of a forex broker, who has given access to small traders with low funds to take part in online forex trading.
Because brokers offer leverage, the type of account with a contract value that can be chosen. Micro, mini or standard accounts so that the choice of account type can adjust to the size of the trader’s first capital.
When choosing a broker the main concern is regulation, a broker without having a regulation will have a higher risk level. But that does not mean regulation is the only reason. You also need to see the reviews of traders who have already used the broker’s service.
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