How do leverage trading and Forex trading brokers operate their businesses? How do they earn money? As a new trader, you must know this small, important information. What FX brokers do to operate is all related to the transactions of customers. Below are the most well-known FX broker models that you should know about.
The ECN Forex Brokerage Model
ECN stands for Electronic Communications Networks (ECN). These brokers are responsible for providing direct market access to its clients. Traders are allowed to access the interbank market coming directly from the ECN network of the broker.
With this model, there is no dealing desk available and the brokerage only works as agents of clients and the interbank market. ECN brokers often transfer actual currency quotes into clients in real-time. The trades are also executed in the market which means that requotes are reduced and eliminated.
With this model, spreads are mostly very low and there are even cases wherein there are zero spreads incurred. So to gain some income, ECN brokers usually collect some commission from their clients.
STP Forex Broker Model
STP stands for Straight Through Processing (STP). The brokers in this model are considered as Non-Dealing Desk (NDD), meaning, they operate an automated system wherein the trades are routed directly to liquidity providers in determining competitive prices.
The main advantage of this broker model is the higher liquidity coming from a variety of sources. Because of that, orders are easily fulfilled. The entire process in this type of model is automated and doesn’t need to have broker intervention, which in turn eliminates human errors, delays, and even costs.
Market Makers Forex Broker
These are the brokers that particularly operated a dealing desk model. Most of the time, market makers offer a bid and ask price which has a fixed spread. Then, they executed these trades utilizing taking the other side of the trade of the client.
The main advantage of this model is its instant execution of orders. It is not taken into another source, instead, the act is mainly executed by the broker himself. Brokers here also charge a much lower trading fee and high leverage. Since there are a lot of new traders nowadays that have the mindset of making money in an instant through leverage trading, they mainly become the victims of a scam.
New traders are mostly the victim of these scams as brokers easily get money out of them through manipulating their traders and also closing their positions even though they have winning trades. For this reason, it is highly recommended to trade with a regulated and licensed broker.
Hybrid Forex Broker Model
This model is a combination of two different model operations. Most of the time, different accounts are used and tried together, making it the best brokerage model ideal for newbies and experienced traders.
Those professional traders who have huge trading capitals are given special discounts, as well as favorable benefits and their orders are executed at the market. Those small traders, meanwhile, are capable of using a dealing desk which guarantees instant executions,