Types of Brokers in the FX Markets – What Type of Broker is AvaTrade?
As an individual trader, you do not have direct access to the trading floors or pits of any financial exchanges. The forex market has no physical trading venue, wherever you are, is where the market is. The FX market is a global network of computers that links all the market participants together. Access to the forex trading market can only come through the brokers. Forex brokers play an essential role in the lives of any trader.
- They provide market access using their trading software
- The brokers are the custodians of the traders’ funds.
- Some categories of brokers also make the market by being the interface between the interbank FX market (where the big banks operate), and the retail traders.
Not all forex brokers are created the same. There are differences in the structure and function of each forex broker, especially when it has to do with the individual traders. That is why there are various types of brokerages in the FX market.
What Types of Brokers Are There?
- Market makers, also known as dealing desk (DD) brokers.
- Direct Market Access Brokers (DMA), also called the non-dealing desk (NDD) brokers or Straight Through Processing (STP) brokers.
- ECN (Electronic Communication Network) Brokers
Now let us look at these different types of brokers in more detail, reviewing the pros and cons of each brokerage model.
What is a Market Maker
Most retail traders in the forex market will be working with the class of brokers that are known as dealing desk brokers or market makers. These types of brokers are named market makers because they “make the market” for the retail traders.
Trading Forex at the interbank market requires a lot of liquidity. Retail Traders do not have access to the kind of funding that will generate such a liquidity pool.
This is where the market makers, like us come in. They form a bridge between the interbank market and the retail forex traders.
They do this by buying up large positions from the liquidity providers, which they sell to the retail clients in package sizes that can be accommodated by their small accounts.
Thus, the broker creates a new market aside from the parent market, that can fit the trader’s liquidity positions. Essentially, we are taking the other side of the trade.
The process just described is all done in the broker’s dealing desk department. This is why this class of brokers is known as the dealing desk brokers. The execution of the traders’ orders occurs in-house.
There are many benefits to this type of set-up. These include:
- In-house order execution
- Fixed spreads
- Potential for fast executions if the broker offers low latency servers
- No commissions on trades
- Single price quotations
- Lower entry barrier
What is an STP Broker
Straight-Through Processing (STP) brokerage firms are also known as Direct Market Access (DMA) brokers. These brokers give their traders direct access to the interbank FX market, where pricing and execution is done by the big banks acting as the liquidity providers.
Their product offering is tailored mostly to professional traders who have the experience and liquidity to match the large volumes of trade that are performed at the interbank level. You need a much bigger wad of capital to get involved this way.
What is an ECN Broker
The Electronic Communications Network (ECN) brokers also pass the orders of their clients to the interbank market but do not necessarily channel them to the liquidity providers.
They sometimes transmit orders to other players at the interbank FX market who can take up these offers, such as prime brokers. All ECN brokers are STP (Straight-through processing) brokers, but not all STP brokers are ECN brokers.
Trading on ECN or STP platforms requires a large capital outlay, which raises the barrier for entry. These brokers tend to provide price quotes from several sources, with variable spreads.
Features of ECN/STP Brokers
- Various price quotes are listed.
- All orders of their clients are fulfilled in the interbank FX market; directly with the liquidity providers or other prime brokerages. Therefore, they do not make the market.
- Spreads are not fixed.
- Capital requirements are high, which locks out many retail traders.
- Trades attract commissions on both sides of the trade (i.e. entry and exit).
What Type of Broker is AvaTrade?
AvaTrade is considered a ‘Market Maker’, with its own in-house dealing desk. That is because it makes the market and fulfils all of your trades for you.
This comes with many benefits. Since market makers provide pricing in-house, relative to the cost of those positions as incurred on the interbank FX market, spreads can be kept as low as possible and can remain fixed.
Also, because the market maker is a single source for pricing and executions, the broker can co-locate the execution servers close to the market trading hubs (London or New York).
This colocation reduces latency (i.e. the time it takes to transmit data from the trader’s front end to the back end and back to the trader’s station). Lower latency ensures faster executions.
These executions can become even faster if a virtual private server is used. In this case, the trader’s computer can be linked to the broker’s remote server, thus eliminating factors from the trader’s end, which could delay executions, such as slow internet connections.
Using a market maker that also offers clients a forex VPS is a way to go if faster executions are desired or renting your own is possible too, especially if you intend to engage in automated trading through EAs on MT4.
Does AvaTrade Hedge Trades?
Sometimes, brokers like AvaTrade will hedge trades by outsourcing them to third-party liquidity providers. This is a way for brokers to manage their own risk and exposure, in the same way a trader would.
This process is managed by the in-house dealing desk and does not affect the trader in any way, other than ensuring a smooth and seamless trading experience where all their positions will be filled fast and as requested, with no slippage.
There are many reasons to choose a broker like AvaTrade. AvaTrade has a strong and solid track record in filling orders and in customer satisfaction, as can be demonstrated by the many awards won over the years.
To find out more about us, visit our About us section or simply open an account today.
Broker Type FAQ
- What are the benefits of using a market maker broker?
Because market makers are taking the opposite side of their client’s trades it adds a great deal of liquidity. It can also assure traders that they get filled quickly when placing trades. Market makers also set their own spreads, and because competition in this space is so fierce these spreads are often very good. The market making broker also provides trading software to clients free of charge, and often their price movements aren’t as volatile as the prices quoted on ECN or STP networks.
- What are the benefits of using an ECN broker?
Because an ECN passes all its trades along to the institutions it receives pricing from there is little chance of price manipulation taking place. It is also possible to get excellent spreads from the ECN broker during periods of great liquidity. In some cases, you could get zero spreads on the most liquid pairs like the EUR/USD, USD/JPY, or GBP/USD. Even when there is a spread it is often quite low since the ECN broker gets its prices from a number of sources. Scalpers can do better with an ECN broker too because their pricing tends to be more volatile.
- What are the benefits of using an STP broker?
The STP broker has many of the same benefits as the ECN broker. They will typically offer very competitive spreads since they are getting pricing directly from the interbank market. They also offer almost no chance of price manipulation because they never take the other side of their client’s trades. STP brokers are also the most likely to offer no requites and positive slippage, or better prices than what you’re quoted. Finally, the STP brokers typically have no restrictions on scalping, hedging, news trading, and high-frequency trading.