Ever wanted to know how forex brokers perform? How is money made? It would be best if you considered the distinct styles of forex brokers and their various business strategies to address these concerns. Not all forex brokers are made similarly, unlike humans. Others are much more ambitious than most, and some of them are just pure scammers.
Unfortunately, the distinction between the two is not straightforward to discern. Some of the oldest and most common forex brands are infamous for shady and opportunistic strategies. We will address the different types of forex brokers in this article and why it’s necessary to exchange with a genuine ECN broker.
Makers and Spreads of the Market
All forex brokers will inform you that they make their cash off the spread (the gap between the buy and sell price), but only a limited portion of their revenue is directly generated from feeds by several brokers. Then you ask, how do they make money? Just easy. By betting against their customers.
As market makers, these brokers establish the industry. The concern is, the vast majority of forex brokers are currently working in this fashion. If you first start investing, you believe that you are purchasing and selling from other market players: everyone else is losing money while you make money, and vice versa. This is valid to some degree, but this ‘somebody’ is always far closer than you think… it’s your broker!
The percentage of new traders, that’s an actuality, is losing money. They would probably improve and end up being successful if they continued to trade and tackled flaws in their tactics and psychology, but many are not up to the challenge and exit as losers.
Not only are market makers utterly conscious of this, but their whole corporate model also revolves around it. Market makers make profits, straightforward as that, while their consumers lose. Instead of the broker making money as the customer wins and proceeds to sell, they potentially have a vested interest in losing their business! This is a glaring conflict of interest.
The game for market makers is to hire hundreds of new traders, give some cheap, low-standard tuition, or a bonus. And if the new trader is fortunate to start with and gains money from their prize, they will make a much bigger deposit that they will ultimately lose.
Forex STP Traders
STP is brief for Straight-through Processing, STP brokers work simply on the basis that you figured your broker used for market making: they make their money from the spread, and you are trading against other market players.
STP brokers assemble rates from their liquidity suppliers and apply a small discount. You put the order with the broker; the broker moves the order (retaining the small differential in spread) back to their liquidity supplier. STP traders have no stake in you failing because you are trading against other players in the market and not your broker. If you lose money and stop trading, then you’re not making money for your broker anymore.
The STP concept is a big step up from the idea of the market manufacturer, and Vantage FX provides this model with a minimum first deposit of just $100 to all consumers on our regular accounts. Even then, the third brokerage model is cheaper for many experienced traders and scalpers: real ECN.
True Forex Brokers for ECN
The rational inference of the STP paradigm is Real ECN, and the vast majority of experienced and large frequency traders prefer it. The model is almost similar to STP in terms of execution: you compete against other players in the actual forex market but not against your broker.
The primary distinction between STP and true ECN is that ECN brokers do not make spreads of their money, but paying a nominal flat commission fee on each exchange instead. The spaces given on real ECN accounts are razor-sharp, sometimes as low as 0 pips.
There is a zero spread label. This is the very best rate possible right at that moment in the actual forex market. Razor-sharp, zero mark-up spreads, and straightforward fixed fees make ECN accounts the preferred choice for automated processes that are negatively affected by larger spreads for scalpers, skilled brokers, and brokers.
We hope you liked this piece on the various kinds of forex brokers and how they run. In short, the most costly choice for trading is market makers who earn money while their buyers lose, low spreads are just part of the story, some traders have seen a lot worse! On the other hand, STP brokers are a big step-up and a perfect choice for traders who are just starting their trading journey. However, there is only one chance when it comes to extreme technical dealing, scalping, or automated dealing: ECN.