Different Types of Forex Brokers

With so many Forex brokers to choose from, it is certainly no simple task to find the ideal forex broker that suits your trading style and preference. You may have know that foreign exchange is an unregulated market because is not traded on an exchange, which means that the prices you see and get from one broker could vary from those of another. Forex brokers fall mainly into one of two classifications:

1) Market Makers (MMs)

The vast majority of the brokers around are Market Makers (MM). They offer traders the means to trade with and against the broker. MMs offer a single bid/ask price per currency pair. They may offer a fixed spread.

Pros:

- They ususally provide free charting software and news feed.
- Prices are less volatile when comparing them with the ECN brokers.
- They often provide a user-friendly and analytical interface.

Cons:

- They may take a position against you.
- The prices they offer may be worse than ECN brokers.
- They may manipulate the prices and trigger your stops or prevent you from reaching your target profits because they may be have taken a losing position against you.
- Huge slippage of prices usually occurs during data release hours or their platform may not allow the placing of orders during high volatility.
- Most of them discourage scalping by having a minimum stop loss in place or the scalping execution may be very manual or complicated.

2) Electronic Communications Network (ECN) Brokers

The second group are the Electronic Communications Network (ECN) brokers. They offer traders the ability to post their own bid/ask rates. As a result, traders often see multiple bid/ask prices driven not by the broker but fellow spot traders and liquidity providers (banks). They usually offer you a choice of quotes.

Pros:

- You can usually get superior bid/ask prices because they come from several different institutions or banks.
- Spreads between bid and ask prices may be almost zero or tiny at times of liquidity.
- They will not be trading or having any position against you but will instead pass on your orders to a bank or another customer on the other end of the transaction.
- You will be able to offer a price between the bid and ask with a chance of it getting filled.
- If they support stop-limit orders, you can prevent slippage during news by making sure that your order either gets filled at the price you want or not at all.
- Prices may be more volatile which will be better for scalping.

Cons:

- Most do not offer integrated charting.
- Most do not offer integrated news.

Shady Broker Practices

Reorders: These days reorders are pretty much a thing of the past, but if you find that the broker is in the habit of countering trades with alternative pricing, you would be well advised to find another broker.

Slippage: Slippage is a pricing practice used by some broker's to generate an additional pip in profit or two on a given trade. Instead of delivering what's available, the broker boosts rates by an additional pip. If the execution price is consistently higher (in the case of a buy order) or lower (in the case of a sell order), than what is being displayed on your screen, find another broker. This is a difficult practice to document, but if you suspect this is happening to you take your business elsewhere.

Pricing Irregularities: There are two occasions when you will see a spike in rates - a blip on the screen that shows a significant, momentary price movement

1) when a broker purposefully boosts rates to nullify a trader's position

2) when the broker's liquidity provider does the same thing. Like slippage, spikes are difficult to document but if you think you've been spiked, consider changing brokers. Don't buy the argument that this was a programming error or glitch. Spiking is a deliberate means by which some unscrupulous brokers and liquidity providers manipulate the market.