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Folks new to forex trading may be dumbfounded to find that their foreign exchange broker may operate in some surprising ways. Actually, some companies providing foreign exchange trading services are not brokers in the classical sense at all.

Conventionally a broker would work for you as a client, placing your buy and sell orders for you through their dealing desk and charging commission (for stock exchange transactions) or making their revenue from the spread (the difference between bid and ask prices) for forex trading. At one time orders would be given by telephone. Now they are placed online, with you in absolute control of your account.

But normal forex trading accounts require significant capital. Typically the lowest deposit is anything from $10,000 to $50,000. Now that forex trading can be done from home, there are a lot of new services springing up with lower deposit limits, offering forex trading mini accounts. But their business model is not necessarily the same as traditional brokers, and this can have implications for you.

So these days, there are different types of companies that operate in different ways in order to provide services to the smaller investor. Most of these do not have dealing desks of their own.

Forex NDD (No Dealing Desk)

Brokers without a dealing desk are in contact with external liquidity providers to ensure prices and match clients' trades. Because there is a selection of liquidity providers, the real spread tends to be small but the broker may expand the spread to give themselves a reasonable profit margin.

Forex ECN (Electronic Communications Network)

ECN brokers cater a marketplace where many market users including banks, market makers and retail traders can see to have their trades filled. Orders will be entered under the name of your ECN provider for anonymity. Spread is typically small but the ECN will frequently charge a matching fee per trade.

Foreign Exchange Market Makers

When you have an account with a market maker, your trades are not being matched by external providers but by the market maker themselves. This means that they take the other side of the trade and offer their prices to you, although of course these prices relate to the current price in the market. They will then offset their risk by taking an equivalent position to yours in an ECN or other environment.

Since they are not actually placing your order in the market, market makers are not brokers in the true sense of the word albeit many traders use the term forex broker loosely and include them. Others believe that the difference between market makers and bucket shops is not clarified and prefer to avoid them.

Forex Bucket Shops

Bucket shops work a little like market makers but they do not cover their risk and may have very little connection to the real spot foreign exchange market. When you trade with a bucket shop you could be said to be betting against them. They oppose your trade and they profit by your loss. Like commercial bet takers, if you are successful they tend not to want your business and will presumably close your account, returning your funds to you. They of course won't provide you with additional services, like forex signals. Obviously, as with a forex signal service they would help you to win against themselves, so you can't expect such a suicidal behavior. So the best thing to do is to find a reliable forex signal provider.

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