Now you already have knowledge about forex, let start to learn history retail forex trading. And it’s time for the next education about the ins and outs of forex and CFD brokers.
In the previous chapter, we learned all about margin in forex trading. But to continue to start the journey in forex, maybe you are still rather confused.
About how to find a broker that suits the needs of individual traders. In this chapter, we will explore the history of retail forex trading, following the chapter in broker 101.
Expectations for learning in this chapter will give you insight before choosing a broker when you start for your journey to become a forex trader.
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History of retail forex trading
You are now familiar with forex and maybe you can’t wait to start hunting for pips. But there is one condition that must be met before you start trading and generate income. You must first have a real account at a broker, you need to register them.
But, one thing you should know, that not all brokers are good. There are some brokers whose performance and service are poor, there are also brokers whose performance and service are satisfactory.
So before you decide to determine your choice to a broker, there are many things to consider.
Before discussing in more detail about the broker and the ins and outs, we will do a flashback, look at the history of retail forex trading.
Retail traders exist because of an online forex broker.
So, without this forex broker, we as retail traders will not be able to trade online.
In the 90s, online forex trading was not as easy as now, wherein that year the transaction fees charged to traders were very large.
And in that era, foreign exchange trading was still intervened by the government.
However, with a variety of considerations, the government began to provide rules on the “Commodity Exchange Act” and “the Commodity Futures Modernization Act”.
By making these rules, it has opened the door for online forex brokers.
Along with the rapid development of internet technology, and almost all people can access it, to have an account at a broker has become even easier.
And since then until now, many new forex brokers have sprung up and hope to be able to take advantage of the benefits of forex trading transactions that are increasingly crowded and in demand.
The number of brokers throughout the world is very large, maybe hundreds or even thousands.
And this is a challenge for us as retail traders, which we must be observant and smart in distinguishing which brokers have a good reputation and integrity and which brokers are cheating.
In choosing a broker also may not be careless, there are many things to consider, including :
- Support and service.
- Review from traders
- Company Profile, etc.
Not all brokers are good and get positive reviews from traders, there are brokers called bucket shops who are enemies of retail traders because these brokers often commit fraud that causes losses to traders.
Dealing desk vs no dealing desk broker
Choosing a broker similar to you will choose a restaurant as a place for you to eat.
The first thing you do is to check the food menu available at the restaurant.
If you have a taste on the menu, you can continue to eat at the restaurant.
Although all are brokerage companies, each broker has different services and ways of working.
Broadly speaking, brokers are divided into two types:
- Dealing desk (DD)
- Non-Dealing Desk (NDD)
The dealing desk is also referred to as a market maker.
Furthermore, no dealing desk is divided into:
- Straight Through Processing (STP) and
- Electronic Communication Network + Straight Through Processing (ECN+STP).
The image below provides an illustration of the types of brokers
Dealing desk broker
Forex brokers who carry out operations through their dealing desk take profit from spreads and become liquidity providers of the client. This type of broker is also called a bucket shop or market maker.
Dealing Desk brokers, in general, make a market for clients, meaning, they will often oppose the trader’s position.
For example, when traders buy, the dealing desk will sell, so if a trader gets a loss that is the profit for the broker.
Maybe you will think there is a conflict of interest, but really not. The dealing desk broker holds both buy and sell quotes.
Which means they fill both positions carried out by the trader, this is actually equally risky, as is done by individual traders.
Because the market maker broker controls the price is also followed by a little risk from their offer on a fixed spread.
Trading using this dealing desk broker service the client will not see prices at the real interbank market rate.
But there is no need to fear excessively, the competition of each broker is very tight and the price difference is very little compared to the prices on the real interbank market.
The image illustration below shows how a dealing desk broker works.
Example trade with dealing desk broker
For example, you buy a EUR / USD pair of 100,000 units at a dealing desk broker.
To fill your position the first broker will look for a position that matches your position from another client, or another way is to skip to the liquidity provider, for example, a sizeable entity that is ready to buy and sell in the financial market.
By doing this they have no risk and profit from spread because it does not have to be against your position.
However, when a condition occurs, there are no orders that match your position, they will take positions opposite to your position.
It should be understood that different brokers also have different policies for risk management, you should understand your broker’s policies.
No dealing desk broker
In retail forex trading, there is the type of broker no dealing desk.
What is this no dealing desk broker? as the name implies this type of broker does not go through a dealing desk for orders placed by their clients.
This means they do not take opposite positions with their clients’ orders and all orders will be forwarded to the liquidity provider.
The image illustration below provides an explanation of how a no dealing desk broker works.
No dealing desk or also can be abbreviated as NDD, like a bridge that connects two areas, in very harsh conditions.
NDD can take a very small commission and sometimes only from price markup by increasing the spread.
NDD broker can be as STP or STP + ECN.
What is the STP forex broker?
STP is an abbreviation of Straight Through Processing. So STP broker is a broker who throws client orders to the interbank market as liquidity providers.
Some brokers claim they are ECN brokers but actually are STP brokers.
Usually, STP brokers have many liquidity providers, where each liquidity provider gives their respective price quotes.
Example trading with STP broker
For example, you trade with an STP broker that has three liquidity providers, each of whom gives a quote as shown below.
Their system will seek to ask quotes and bid quotes from the best price to the worst
You can see that liquidity provider C gives a bid price of 1.3000 which is the lowest price for Sell high position.
And the best price for the Ask price from liquidity providers A and B where at 1.3001 which is the best price for buy low positions
If you are following the best price, the bid/ask quote would be 1.3000 / 1.3001.
But what is the value that will appear on your trading platform? of course not.
After all, the broker is not a charity company, however, they want to get profit.
Your broker will not sort through the quote and give it away for free
Because brokers are also companies that have profit goals, they will compensate for their problems, your broker adds a small markup that is usually fixed.
Depending on the broker’s policy, if they add 1-pip markup, the offer that you will see on the trading platform is 1.2999 / 1.3002.
Thus you see that there is a spread of 3 pips, from the initial 1 pips widening to 3 pips.
Example trading in STP broker
For example, you make a Buy of 100,000 units of EUR / USD at 1.3002, your order is sent through your broker’s trading platform and then transferred to the Liquidity Provider A or B.
If your order is approved, Liquidity Providers A or B will have a Short position of 100,000 units of EUR / USD 1.3001, and you will have a Long position of 100,000 units of EUR/USD at price 1.3002.
From the price difference, your broker will earn 1 pip.
So do not be surprised if most STP brokers have variable spreads, because of changes in quotes from liquidity providers.
If likely the spreads from liquidity providers widen, then there are no other choice STP brokers will follow these changes.
In other words, the STP broker will also widen the spread.
There may be STP brokers that offer fixed spreads, but most of them have variable spreads.
What is the ECN broker?
ECN is an abbreviation of Electronic Communication Network, an electronic network service from forex brokers to connect traders with liquidity markets directly.
The liquidity market in question is market players such as banks, retail traders, hedge funds, and even other brokers.
When a trader uses this ECN broker for forex trading, he will get the same price as the price listed on the market.
ECN account is considered to provide more profit for traders compared to another type of broker like an STP account.
ECN forex brokers also allow their clients to see Market Depth.
Depth of Market displays the buying and selling of orders from other market participants.
ECN brokers will usually take a commission as their compensation in providing ECN services, because of the nature of the ECN it is not possible to take spread
Advantage ECN broker
ECN forex brokers are a type of future investment and as a company that offers online trading..
Their difference from regular or ordinary forex brokers is that ECN brokers work closely with institutional liquidity providers to let retail customers have direct access to them.
The broker provides the possibility of trading currencies without the participation of the dealing center.
ECN forex brokers give traders access to various financial institutions and banks because this technology is embedded in the electronic communication network from the transaction desk.
ECN technology is designed to be more sophisticated to ensure high internal liquidity, the possibility of closing transactions, exempting internal rates, and much more.
Disadvantage ECN broker
ECN technology is designed to be more sophisticated to ensure high internal liquidity, the possibility of closing transactions, freeing internal rates, and more.
A large minimum deposit also affects the selection of brokers, while their ECN broker has a large minimum deposit so seldom traders choose ECN accounts.
The historical development of retail forex trading began in 2000 when major changes in technology provided easy internet access.
After getting to know the history of retail brokers, we will further study all the advantages and disadvantages of DD and NDD brokers.
In the next chapter, we still will learn related to the broker.
Are you ready to start trading?