Before you finally start trading, you have to find a broker first. And finding a broker isn’t as easy as it sounds. For one, there are many fraudulent brokers around and you want to avoid them as much as possible.
More importantly, there are different kinds of brokers. Choosing the right kind of broker is very important since brokers function differently from each other.
We’re going to focus on Dealing Desk Brokers. Let’s dig deeper into these kinds of brokers.
What are Dealing Desk Brokers?
There are forex brokers that operate through Dealing Desk broker, and they make money via spreads and by providing liquidity to their clients. They are also known as “market makers.”
In other words, these brokers literally create a market for their clients. How do they do that? What they do is they take the other side of a client’s trade. At first, that sounds like there’ll be a conflict of interest, but there really isn’t.
These market maker offer both buy and sell quotes. This means that they are filling both buy and sell orders for their clients. That means that they are indifferent to whatever the decision of an individual client is.
In addition, you can find very little risks for market maker to set fixed spreads, since they control the prices where the orders can be filled.
Further, if you are trading with a dealing desk broker, you will not see the real interbank market rates. This doesn’t mean that you’re at risk. The competition among brokers is extremely tight, and this compels dealing desk brokers to offer rates that are either close to or the same as the interbank rate.
How does it work? An example
To illustrate how dealing desk brokers work, we’ll give you an example.
Suppose you place a buy order for EUR(euro)/USD(US Dollar) for 100,000 units with the dealing desk broker. In order to fill you, the dealing desk broker will initially try to find a matching sell order from some other clients. It can also pass your order to its liquidity provider.
Liquidity providers are sizeable entities that buy or sell a financial asset right off the bat.
When they do this, they minimize risks while they earn from the spread. They also don’t have to take the opposite side of your trade.
On the flip side, if they fail to find any matching orders, they will be compelled to take the opposite side of your trade.
One little caveat: different brokers have different risk management policies. The lax policies you see in one broker may not be same with another broker. Better make sure you check this out with your broker before doing any transactions with them.
Other types of brokers
Dealing desk brokers are just one type of broker. There are other types that you may want to consider before you start trading. These include No Dealing Desk brokers, which can be further divided into sub-categories of brokers.
Overall, you will have to decide which kind of broker makes you feel more comfortable and secure about your trading transactions.
