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.