In the last decade, the online retail trading business grew exponentially. The more people had access to Internet and stable Internet connection, the more traders came to the Forex market.
Smartphones further amplified this trend. As a matter of fact, anyone with a smartphone connected to the Internet can easily trade the Forex market.
All brokers have a mobile trading platform or offer the MetaTrader one. However, the more traders come to the Forex market, the stiffer the competition among forex brokers becomes.
As such, brokers try to differentiate themselves in various ways. The simplest and more accurate way to look at a brokerage house is to understand how it makes its money.
Brokerage Houses Business Model
There are different ways that a brokerage house uses to make its money. It depends a lot on the way the business is organized. From this point of view, Forex brokers are dealing desks and non-dealing desks businesses.
Dealing Desks or Market Makers
When a broker is a market maker or a dealing desk entity, it effectively creates a market for its clients. In other words, if the clients buy or sell a currency pair, they don’t do that effectively on the interbank market.
These brokers use advanced software to mirror the Forex market moves. Then, they simply trade in the opposite way than their clients.
While this is not illegal, is unethical. But, brokers do have a point in doing that.
Statistically, over ninety percent of the retail traders lose their first deposit. Even after that, the chances will stay against the retail traders.
As such, brokers have bigger chances to profit from this. A business modeled as a market maker is a profitable one. As a matter of fact, there are big brokers, good ones, that run businesses like this.
Again, the issue is an ethical one.
Non-Dealing Desks
Non-dealing desk brokers are closer to the true nature of a brokerage house. However, not all of them.
Technological advances lead to the costs for accessing the interbank market liquidity to drop. Brokers used the STP (Straight Through Processing) and ECN (Electronic Communication Network) to set up their businesses properly.
A pure STP or ECN broker will route all their clients, orders to the liquidity provider/providers. There, the best quote wins.
For this, the broker charges a commission. And, a spread.
However, this is not as profitable a business as market making. As such, most of these “non-dealing desks” are, in fact, hybrid ones.
Namely, they route “some” of their clients’ orders, while keeping other in-house. They follow both a market making model and a non-dealing desk one. They even have their own model to decide what orders will route and what will stay in the house.
A true broker is a pure ECN one. Unfortunately, this comes at high costs for the retail traders. But, there are businesses that, for a minimum deposit that is bigger than the usual, and higher commissions, offer this kind of opportunity for the retail trader.
Conclusion
Most brokers make their money betting against the clients’ orders. While this is unethical, is a profitable business model.
As time passed and competition becomes even stiffer, brokers will have no choice but to align their interests with clients’ interest. Only in doing that, they’ll be a true brokerage house.
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