Photo courtesy of www.forexgps.com

A foreign exchange broker is a person, or a body, that puts sellers and buyers together in the currency market.  Usually, this is for a fee or a commission. In the foreign exchange market, there are two types of brokers: the electronic communication networks and the market makers.

Electronic communication networks, or ECNs, pass on currency prices from a number of participants in the market (like market makers and banks). These ECNs then display the bids, those that they consider the best, to the different trading platforms. Brokers who are of the ECN type can also work counterparty to foreign exchange transactions. Rather than on a basis of pricing, ECNs operate on a basis of settlement. ECNs profit by charging their customers with a commission (fixed) for every transaction that they process. Because ECNs do not take a role in making prices, the risk of price manipulation is reduced for traders who retail foreign exchange.

Market makers are the type of brokers who set the bid prices, and asking prices.  Then they display these prices to the public on quote screens. This kind of broker comes prepared to process transactions with their customers at those prices. Market makers’ customers can range from retail foreign exchange traders to banks. Market makers set the exchange rates in a way that it is in their best interests. This type of brokers profits via their customers’ “spread”. The “spread” refers to the difference between the asking price and the bid.

In the currency market, the type of broker that you get to help you can impact your performance in trading significantly. Thus, it would be wise to consider the disadvantages and benefits of each type of broker first before deciding on one.  This way you can find success in the foreign exchange market.

The ‘foreign exchange market’ commonly known as ‘Forex’ is easily recognised as one of the world’s most popular trading platforms, trading up to $2 trillion each day. There are various reasons for the popularity of this market, which in turn attracts a various types of traders and investors ranging from high end businesses to very small to medium speculator businesses. The foreign exchange market deals with the trade of foreign currencies from one investor to another. It deals with traders from all around the world who are investing their own currency in order to buy a foreign currency that may be of either higher or lower amount in value. It works in a way in which, for example if a business is trading their higher value currency for that of a foreign currency that equals the value. The business is then able to buy/ import foreign goods with the foreign currency and sell it at their own higher value currency.

With Forex the trading market has no congregating market platform and therefore investors can trade over the counter anywhere they want. The trading counter is open 24 hours a day, 5 days a week providing a good amount of liquid to ensure that you are not making a loss. This also ensures that analysts from large banks and other firms are not as able to influence the market as much. This is because Forex un-enables those to alarm people by breaking news that a stock has been ‘overbought’ thus decreasing the value of the stock, because investors are able to keep track themselves. Furthermore with Forex you cut out the middlemen, therefore you do not have to waste time and money waiting for an order form to be filled out, because it has to pass between two or three middlemen. Instead investors can deal directly with the market maker and have their order form filled out imminently, and without a high amount of costs. Finally Forex is largely unique because the volume of trading is extremely high and therefore the margins of profit are high too. As a result it is thought that having a start up investment of £2,900 you can have up to £800.000 in buying power every day.