The reason these ambiguities and contradictions is because in many cases it is deliberately avoided telling the truth to potential investors customers.
Having made these clarifications, I realize that I can also be wrong to a greater or lesser extent in my views of different types of brokers, and if in the future I discover more clues that could improve the definition and classification of forex brokers I will go by the due updates on this post.
What is a forex broker?
Let us fast for those who still have not heard refresher. A broker is an intermediary between those who seek to trade forex and forex market itself. It is assumed that the broker who facilitates operator access / trader / speculator / merchant (call it what you like) the currency market.
There are two general types of brokers
The brokers are basically divided into two distinct types: DD and NDD.
Brokers DD.
DD stands for "dealing desk" (operating table). That is, the DD brokers are those operating table.
Market makers.
The brokers Market makers would say they are the purest representatives of the group of DD. Market makers (market makers) are brokers that act as counterparties to the transactions of its customers.
To put it bluntly, the market makers do not place the operations of its customers in the real market nor transferred to any group liquidity providers, but they are the ones who act as a market for the customer. Supposedly, these brokers get their profit spread (difference between purchase rate and selling rate), but actually also and their profits come from the loss of their customers.
It is said that these brokers base their business on the statistics that 95% of traders are losers, which assume the risk of trading against their clients with the confidence that these statistics are met. In this way of working of market makers brokers there is a clear conflict of interest between broker and their clients.
Now, I do not want to spread alarm among readers. It should be understood that a market maker broker does not have to be a swindler (although its business model is questionable). Remember that the vast majority of brokers (many of prestige) that are advertised today and have thousands of customers are Market makers.
Advantages of a market maker broker:
They microbeads. The only way to gain experience in the forex market for those who lack capital is trading through one of these brokers, because you can open accounts with very small amounts and operations with just one dollar.
They typically have fixed spreads and some offer certain guarantees of performance.
Disadvantages of a market maker broker:
Most of these do not allow scalping brokers. In times of high volatility difficult to open and close operations.
With some of these brokers, traders with a winning profile becomes difficult for them to operate, the platform begins to suffer delays, blocks and slippage in the most appropriate (or inappropriate) moments.
NDD Brokers
The NDD brokers (acronym for Non Dealing Desk = No operating table) would become what we might call "real brokers", if you stick to the basic definition of a broker should be an intermediary between the operator and the market.
The NDD brokers do not trade in return for their clients, have no bargaining table, and supposedly transferred immediately and automatically the operations of its clients renowned liquidity providers as are banks, and even allow all operators can trade not only by banks but also among themselves.
There are two types of NDD brokers, brokers STP and ECN brokers.
Brokers STP
STP stands for Straight-through Process = Direct through the process. These brokers allegedly sent our operations immediately and automatically to liquidity providers, usually banks or brokers or other gigantic largest financial institutions form.
Thus, we have the peace of mind that no conflict of interest with our broker.
The advantages of an STP broker would become:
- Less distrust between broker and operators.
- No objection to practice scalping.
The disadvantages of an STP broker summarizes that:
Unable to open microbeads in STP mode, where the amounts are higher deposit and minimum to open an operation is also higher.
The STP brokers make their money from the spread. The spread they get from financial institutions is often very small, and they do is they increase the spread by 1 or 2 pips and this will increase your profit. We must clarify that in a STP account, the spreads are variable being reduced when the market is "quiet" and expand in times of high volatility.
ECN Brokers
ECN stands for Electronic Comunication Network = electronic communications network. The ECN brokers not only intercommunicate operations of its customers with several banks but create a network where all operators of such broker can trade with each other.
We would say that it would become more real and transparent way to trade in the forex market. Platforms ECN brokers have levels deep in their buying and selling prices; spreads are usually very low and variable, but in any case always much lower than the spreads of market makers and brokers STP brokers. In other words, I can say that the ability to operate through an ECN broker sounds to many like celestial music and is often the only acceptable option for many experienced operators.
The advantages of an ECN broker:
Very tight spreads.
Total transparency and market depth.
No prohibition against scalping or against any other strategy.
The disadvantages of an ECN broker:
A larger initial deposit is required to open an ECN account. Although today there are brokers ECN prestige for opening accounts with a minimum of $ 1,000 and open operations 0.1 lot (10,000 units) in leverage 1: 100 (mini accounts).
Commissions are paid by trading volume. But it should be noted that most of the times the sum of the spreads plus commissions always mean lower operating expense in those brokers that do not apply commissions because their much larger spreads.
hybrid Brokers
And finally I want to emphasize that greatly Most brokers are becoming hybrids because they are market makers, STP and ECN at a time.
For example, there are many brokers who are market makers for the microbeads, STP and ECN for minicuentas for Standard accounts. There are some brokers who claim to be STP for all accounts including those microbeads, justifying that they have a very efficient and fast system that brings together small operations of its customers to transfer to banks; as a matter of everyone to believe or not to believe.
There are some brokers market makers (few but there) tell you openly and honestly they are not STP or ECN, and yet not impose any restrictions on scalping either manual or robotic or any other type of strategy.
There are market makers who use brokers minded as Currenex ECN platforms and ECN brokers who have perfected the Metatrader 4 platform (originally not viable for operations ECN).
Anyway, today there are many brokers and so many possibilities that different types of brokers seem confused and mixed, and certain offers and possibilities come to seem contradictory or implausible.
I want to make clear that I do not intend to finish demonize brokers market makers, being that many of them can be very honest despite having negotiating table. If we think coolly should have no reason to try to defraud their customers, because the statistics act on their behalf thus, they can take the occasional minor losses arising from its winning customers with the majority earnings that produce them his losers customers . But ... it is always good to be careful, because the conflict of interest exists.
In fact, if you're just starting to trade Forex, and plan to do your first steps with a microbead, no choice but to trust a market maker broker you have left.
But it is good to know from the beginning how it works more or less this business brokers.
A recommendation a little off topic to complete: Use chats Live Help and Live Support with most brokers' websites to make them all sorts of questions. Many of them will put a speaker in Spanish if you ask, or will tell a schedule where you find someone that you can meet in Spanish; and takes this opportunity to clear all possible doubt. Do not be afraid or ashamed to ask any type of question, because usually they'll respond with clarity and more education.
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