For some time thanks to some advice from a friend and my master, a question markI has woken up about how financial derivatives operations gear and especially FOREX. The best advice that I gave on the subject was: “would like to know how to movein the foreign exchange market? “Perfect, tries to inform you of as work inside” andthat was what I did, I started researching a little about the operation of the types ofbrokers in the foreign exchange market.
A little history about the FOREX
The foreign exchange market – FOREX a few years ago, in 1999, Forex trading to the retail (market “retail”) or individual simply did not exist. Trading in the foreign exchange market was more or less restricted, where only operated the big banks, “HedgeFunds” and managers of large estates. The minimum size of operations was generally $ 1,000,000 USD with what we can get an idea at that level moved these foreign exchange operations. However, soon spread the idea about the profit potential of enclosing Forex trading with that increasingly, more people wanted to come into this game, colliding with boundaries that could not operate in the traditional interbank market because large sums of money were not available to work on currencies. There was a growing need for access to foreign exchange markets to investors who had around 10,000 to $50,000 to invest, or even less, so the currency market to the retail was born and opened the door to small businesses. At this stage new currency brokers flourished (and yet they continue to do so) rising quickly to meet this high demand, however, this aspect of Forex trading is very delicate and tries to always be regulated to maximum. Result of this boom, there were all kinds of companies and concepts developed to regulate and control such operations, as well as witnessing the creation of the concept of “market maker” (market maker) many brokers we have today operate with the mechanisms to be “market maker” or typical model “bucketshop”, where we ask ourselves to studying the inner workings of their own mechanismsof purchase/sale operations if these guys actually they have interest in seeing that we have success in an operation or not.
Types of brokers
As we discussed in the last article, FOREX brokers could be classified in the following way: types of brokers classified by the type of operation to market perform.
But… What is a market maker?
The dilemma a market maker broker (market maker) is a company or an individualwho is listed both the purchase price and the selling price of a financial instrumentor raw, distributing the supply and demand and creating a flow of liquidity from themarket to its participants and vice versa. The market for a specific financial instrument can have multiple market makers and each market maker may be for several markets market maker. In the forex market the market makers tend to be banks, institutions, trade currency, companies or set of them, which are always available to buy orsell a given volume of a continuous and regular at a public price immediately.
From the official website of the NFA (National Futures Association – United States),a market maker is defined:
As a professional dealer that has the obligation to buy when there is an excess of sales orders and sell when there is an excess of purchase orders. This refers to the market markers are the counterpart of its customers (investors and traders), i.e., when amarket maker receives an order from a customer, seeks an order that compensates it of another client; in the case of an excess of a particular type, the market maker orders not may be offset this order with the order from another customer, having theobligation to then buy (or sell) the customer or take this operation to the market. This obligation has a volume limit which is obligation disappears, which depends on the regulatory body or legislation affecting the market maker monitor operations to be as fair as possible; because of this limit, a very large order may not be executed atthe same price in different market markets. Market maker name comes from the fact that it provides continuous liquidity and to regulate its customers: for example, there may be a customer of a market maker who wants to buy and this order in turn isabsorbed by the market maker, with what operation outweighs her with the order of another client, acting as a buffer against possible failures of market liquidity (case in which an investor wants to buy (or sell) and there is a counterpart in the market who wants to sell (or buy)), i.e., creates a market among its clients.
No doubt the will above has its advantages and disadvantages, depending on with that type of broker are dealing. Here good fame among customers and regulators have much to say in choosing who we want to operate in the Forex market, thereforealways recommend asking a thousand times and advise well before opening an account with one or the other.
The market makers in the forex market
The majority of trading in the forex market companies are market markers. The majority of commercial transactions in forex are over-the-counter (non-standardised and centralised market transactions) and the market maker providing liquidity to clients buying or selling to their customers. This service of the market maker is compensated by the differential between the price offered by a buyer client and the price offered by a seller client and the market price of (spread), which reduces the transactioncosts for investors.
The market makers are offering to every second of the day firm purchase and sale prices, prices that are refreshed every 30 seconds according to the supply and demand. Then, the investor can accept those prices even when there is an opposing party,because this offer is assimilated by the market makers. They are then ensuring the continuity of the market to participate when necessary. In addition, they must act independently of the operation to suppose him a profit or a loss.
The market makers have to be registered and authorized to operate by institutions such as the Commodity Futures Trading Commission (CFTC), U.S., or European Financial Services Authority (FSA).
The function of the Market Makers
Well, despite the infamous urban that rotates through forums and others should not be forgotten that market makers meet a basic but necessary function is to give access to the market and would be available to the investor or speculator middle (hence the term creator of market). In order to do that, they have to be able to cover all orders that are placed in its trading platform, and do so through the adoption of be the consideration (or what is the same thing the other side) retail operator.
Well, since these brokers will have a contrary position open to all contracts that we opened or closed, implicitly the broker will lose money whenever we have a winningoperation. Imagine that you bought the pair EUR / USD, since it believed that the Euro is going to shoot.
Well, in order to provide access to the market for you, the broker will have to take asell position in EUR / USD so that trade can be made. You always have to think thatour broker if it is market maker will be ‘the other side’. And we must bear in mind that the creator of forex market never, never going to directly tell his negotiating table mechanism, this would be like walking naked down a street crowded at rush hour, since they have only their ranks with a small minority of traders who really understand their business model completely, and therefore the majority of traders will be victim of this opacity or lack of knowledge of the gear of the negotiation.
Non Dealing Desk (without operating table)
In general terms it could be defined to the Non Dealing Desk as the intermediate option between a Market Maker and an ECN broker, the NDD basically operate with similar platforms (sometimes the same) Market Makers but its spread is variable, at times of low volatility is 1 pip less than Dealing Desk but in times of high volatility may be 15 or 20 pips above this due to that the aim of these is to be a little closer to the ECN, i.e., provide only input to the interbank market without interfering with prices or the liquidity of the same. Its main advantages are a lower Spread in times of low volatility and having friendly platforms similar to the Dealing Desk, as disadvantages are higher requirements for opening accounts, a less leverage available and not guarantee execution on the orders.
And the brokers will reach ECN other type of model of business forex broker is called a network of electronic communications (ECN), the agent has a personal interest in knowing that operation are doing.
To understand how this type of configuration, remember that any runner aims to provide access to the markets and the liquidity, simply. A creator of forex market is based on taking the opposite direction to the operation as your make, on the other hand an ECN broker not routing this purchase order trade through its network of communications and congruence with other trade (for example, if you place an order in a particular currency pair, the ECN it would coincide with another merchant that is on the side of the sale of that same pair).
ECN brokers are really the best option, since it is much easier to make money through a broker that offers this type of commercial facility. Since they have no personal interest in lost money and instead only cares to offer a network where can fulfill theirorders to other traders, never had any problem withdraw their profits as you can have with a market maker.
It is as we said of electronic networks collecting the prices published by multiple market participants, showing the best prices among all available. Usually spreads in theECNs have variable amplitude depending on the activity in each pair, shrinking in times of increased activity to such an extent that sometimes there is no practically spread, especially in the Majors (EUR/USD, USD/JPY, GBP/USD, USD/CHF).
The ECNs earn money by charging a small Commission to change clients. Therefore,because its operation scheme, the ECNs have less incentive to manipulate prices acting as simple intermediaries between two parties. However, the volatility of prices inan ECN tends to be higher than in a Market Maker network even though scalping isallowed without restrictions; in fact, given that it is possible to set prices within the quoted fork, we can act as a counterpart to other traders. However, platforms of trading of the ECNs are usually not so showy, not give so many free services (graphics, news) as a Market Maker and its management tends to be somewhat more complex.
Search forex broker profitability studies. All brokers have their advantages and disadvantages depending on as to execute operations that we launched them. NodeName seen balance it could tilt to the ECN, but it should not be forgotten that the MM ifit is a good broker does not have why scare us when choosing it. Find references through your teammates and friends and insurance that can guide you a bit.
Anyway to give you an idea there are any studies by FOREX MAGNATES that may help you make a clear decision in this regard. Herewith a table so that you remove doubts: profitability of accounts of forex Broker and evolution over time.
Da to think. As you can see the number of profitable accounts varies from a brokeror another, with which we orient ourselves with these regular studies carried out.