It is important to know how a broker works in order to be able to trust him, after all, you entrust him with your money, it is normal to know what he will do with it. There are two types of forex brokers, “dealing desk” and “non dealing desk” brokers. Behind these abstruse terms, the reality is ultimately quite simple.
The functioning of the Forex market
To make a profit in Forex, you will need to be lent money, this will allow you to multiply your risk taking through a system called “leverage effect”. Without leverage, it is very difficult to earn money in Forex because the movements of the underlyings are very low compared to equities for example, you will rarely see a pair gain or lose more than 1% in a day, which is however classic with equities, it is said that the volatility of Forex is very low.
However, Forex is one of the most liquid markets in the world, but the volume of each transaction is very high, because the majority of the players are financial intermediaries, banks and large companies, which need to move large sizes on the markets. There is more than 4 trillion dollars traded daily on the markets, but do not imagine that the banks will agree to deal directly with you and your few thousand euros of capital, which is why you must go through a forex broker.
Brokers dealing desk
Brokers dealing desk aggregate their clients’ orders so that they can then transfer a large order to an investment bank by taking a margin on the bid and ask price they offer you. But, very often, if volumes are low, the few individuals do not even reach the minimum size (the lot) likely to interest banks. In this case, the broker dealing desk does not cover itself (the technical term is hedging) and therefore finds itself directly in front of you and benefits from your losses, which places it in a de facto conflict of interest. In the financial markets, in front of a buyer there is always a seller and the gains of one make the losses of the other.
Of course, these brokers are not necessarily a scam, if your trade goes in the wrong direction, it is first because you made a mistake. Brokers dealing desk are most likely to offer you demo accounts, reduce minimum trading sizes, offer you seminars and bonuses and most importantly have a lower net spread (the difference between the purchase price and the sale price). However, your trading strategies may be blocked if they are too profitable. To ensure the best service, we have selected a few trusted brokers dealing desk such as Plus500 via our NMS Label and approved by the financial authorities.
Non-dealing desk brokers
Unlike brokers dealing desk, non-dealing desks do not take a direct position in front of you, the non-dealing desk broker will aggregate the prices offered by liquidity providers (financial institutions, hedge funds or a larger broker) and then execute your orders directly with them.
The net spreads of non dealing desks brokers will generally be a little higher because you will have to pay a commission to your broker who will have allowed you to connect to this network. On the other hand, you will have the benefit of not being in conflict of interest with your broker, who will then have a vested interest in making you profitable so that you are able to increase your volumes and therefore the commissions generated.
The dealing desk has a bad reputation because most of the bad brokers work with a dealing desk, which does not mean that all these brokers are a scam. Indeed, brokers traditionally assume this broker-dealer role, i.e. they can take short-term directional positions to absorb imbalances between supply and demand. This is the case even in the professional markets of the financial world. The choice of broker should not depend solely on this factor, especially since some brokers claiming to be non-dealing desk do have a dealing desk. The services offered, speed of payment, reliability and reputation should be the main criteria of your choice.