5 Types of FOREX Brokers
There are many types of forex brokers in the market. Knowing them is very important, especially if you are new to foreign currency trading. This will help you weed out fraudulent or illegitimate brokers from the professionals. Also, different brokers have different styles of doing business in this type of market. It is important to choose the right kind of broker that will help you feel comfortable with your trading decisions. Foreign currency brokers are largely classified by their trading styles and market access.
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1. Book Makers
Book makers are forex brokers whose profits are dependent on the spread or the difference between the sell and buy prices. This type of broker does not have access to the actual foreign currency market and it is considered illegal in many countries, including the United States. Book makers are also known as spread betting companies or spread bettors. Neophyte traders should be cautious when dealing with this type of broker.
2. Bucket Shops
Like book makers, bucket shops do not have any connection or access to the actual currency market. These dealers make money through currency options and futures. In essence, they will book or trade against the position made by retail traders. Although there are many bucket shops available online, the legality of such shops is uncertain so it would be better for first-time traders to avoid them.
3. Retail Market Makers
A huge percentage of online forex brokers are classified as retail market makers. Small business brokers usually do not have direct access to the forex market and they make use of intermediaries in order to make a trade. However, big retail market makers have direct access to the market. If you are a greenhorn trader, you should consider getting the services of retail market makers because they require smaller amounts of money for you to start trading and they are also legitimate in most countries, including the United States.
4. Institutional Market Makers
The only difference between a retail market maker and an institutional market maker is the amount of money that they require before one can begin trading foreign currencies. If you have big money to invest, then you should consider using institutional brokers because they have close connections in the forex market.
5. Market Operators
Market operators, also known as institutional forex brokers, are not only directly involved in the forex market but they also represent about 50% of all foreign currency trading. It is worth noting that this type of broker is not appropriate for beginner or individual traders because market operators only cater to banks. In fact, a group of about 200 large banks control the forex market. If someone tells you that he has direct link to the interbank currency market, then that person is either lying to you or committing fraud because only banks are involved in interbank forex.
Since there are countless trading companies and online forex traders, it is very important for new traders to understand completely what type of broker they are dealing with. Having this knowledge will give you an idea on how profit is attained in a legitimate forex trading system.
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