Which type of online broker should you trade with?

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Which type of online broker should you trade with?
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How your greedy broker is making money off you

Did you know that depending on the type of broker you choose you could be having your potential profits wiped out to fees? 

In the market today there are many greedy brokers who are looking to make a quick buck through a broker model that benefits them, not you.

With many brokerage companies for traders to choose from it can be confusing to know exactly which broker to pick. In this article we’ll break down each broker model, so you know which one is best suited to you when trading.

There are two types of broker models which are dealing brokers and non dealing brokers. Each model has their pros and cons and it’s important to carefully assess which model is best suited to your trading style.

Non dealing brokers include:

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STP brokers

An STP broker is a Straight Through Processing Broker, this name is given to brokers that send the orders they receive from clients directly to the liquidity provider, without them passing them through a dealing desk. 

Advantages of STP brokers:

  • One of the biggest advantages of an STP broker is they don’t have a conflict of interest. Unlike dealing desk brokers they are straightforward in their offerings and won’t take the other side of a clients trade. 
  • STP brokers offer more security than dealing desk brokers as client orders go straight through to the liquidity provider. There’s usually no intervention even needed from the broker. 
  • The way STP brokers make their money is beneficial for the trader, as they only collect money on the spreads charged for every trade. This is beneficial as all fees are transparent and you won’t end up with any unexpected charges.
  • Trade orders are usually filled very quickly by the broker. This is of course very beneficial for the trader as it allows you to capitalise on the current market conditions as quickly as possible.

Disadvantages of STP brokers:

  • Sometimes STP brokers platforms can be susceptible to platform down times, which will prevent traders from opening or closing positions under their desired circumstances. 
  • As STP brokers operate on variable spreads they can be slightly more risky than dealing desk brokers as variable spreads are unable to remain consistent and predictable regardless of market liquidity.  This of course means traders can’t strategically plan and manage their money as effectively.

ECN Brokers

An ECN broker uses electronic communications networks (ECNs) to give clients direct access to other participants in currency markets. ECN brokers essentially provide a marketplace where clients can trade against each other.

Advantages of ECN Brokers:

  • The ECN model allows people to trade outside traditional trading hours, this wider availability makes it more flexible for traders. 
  • The fees are generally lower than traditional brokers. 
  • With the ECN model traders also able to access current and past information. Having access to this means there is less likely to be price manipulation, as everyone has access to the same information and no trader can possess an unfair advantage.

Disadvantages of ECN Brokers:

  • ECN brokers usually have higher fees and commissions compared to non-ECN systems. Higher fees can of course affect a trader’s profitability and the amount they take home.
  • ECN brokers are not particularly beginner friendly as they have higher minimum deposit requirements and bigger lots. 

Dealing Desk Brokers:

Where as the non dealing model sends client orders straight to the liquidity provider,  a dealing desk broker holds the trade and does not send them onto the liquidity provider. Also known as money makers, these brokers create a market for their clients and will take the other side of a clients trade. They make money through spreads and providing liquidity to their clients. 

Advantages of dealing desk brokers:

  • As the spreads are fixed they are predictable and allow traders to factor this in when calculating their profitability.  
  • Dealing desk brokers offer low minimum deposits and usually offer free trading bonuses.

Disadvantages of dealing desk brokers:

  • Unfortunately with dealing desk brokers they can take advantage of traders by taking the opposite trade of their client. This represents a big conflict in interest. 
  • Dealing desk brokers do not pass the trade directly onto the liquidity provider and keep trades within their own liquidity pools. 
  • There have been occasions when accounts have been blocked if traders have made a very high profit.

Which model is best?

When choosing a broker it’s best to opt for non dealing brokers. Non dealing brokers are certainly the better fit for most traders as they offer the best bid/ask prices in the market. Having access to a wide variety of liquidity providers, they are able to offer market prices for their clients in exchange for just a small fee.

Between STP and ECN, an STP broker is usually the best choice. STP brokers are beginner friendly as they don’t have a high minimum deposit, making their platform accessible to all traders, regardless of their experience. STP brokers also execute orders very fast and are easy to place. 

Although the STP model is better suited to most traders, if you would still like to decide which option is best for you then you can set up a demo account to get familiar with both platforms, this will help you figure out which model better suits your trading style. If you would like to set up a STP demo account with 4xcube you can follow the link here – https://demo.crm.4xcube.com/signup

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