Trading with Brokers
Let's talk about trading with brokers. Foreign exchange brokers, unlike equity brokers, do not take positions for themselves; they only service banks. Their roles are:
- To bring together buyers and sellers in the market;
- To optimize the price they show to their customers;
- To execute the traders’ orders in a quick, accurate and faithful way.
The majority of the foreign exchange brokers execute trades by phone. The phone lines between brokers and banks are dedicated, or direct, and usually the broker installs them free of charge. A foreign exchange brokerage firm has direct lines to banks around the world. Most foreign exchange is executed through an open box system, which is a microphone in front of the broker that continuously transmits everything he or she says on the direct phone lines to the speaker boxes in the banks. This way, all banks can hear all the deals being executed. Because of the open box system used by brokers, a trader is able to hear all prices quoted; whether the bid was hit or the offer taken; and the following price. What the trader will not be able to hear is the amounts of particular bids and offers and the names of the banks showing the prices. Prices are anonymous. The anonymity of the banks that are trading in the market ensures the market's efficiency, as all banks have a fair chance to trade.
Brokers charge a commission that is paid equally by the buyer and the seller. The fees are negotiated on an individual basis by the bank and the brokerage firm.
Brokers show their customers the prices made by other customers either two-way (bid and offer) prices or one way (bid or offer) prices from his/her customers. Traders show different prices because they "read" the market differently; they have different expectations and different interests. A broker who has more than one price on one or both sides will automatically optimize the price. In other words, the broker will always show the highest bid and the lowest offer. Therefore, the market has access to the narrowest spread possible. Fundamental and technical analyses are used for forecasting the future direction of the currency. A trader might test the market by hitting a bid for a small amount to see if there is any reaction.
Brokers cannot be forced into taking a principal's role if the name switch takes longer than anticipated.
One of the advantages of trading with brokers is that they might provide a broader selection of banks to their customers. Some European and Asian banks have overnight desks so their orders are usually placed with brokers who can deal with the American banks, adding to the liquidity of the market.
To continue learning about foreign exchange systems, click on the link below.
Return from Trading with Brokers to Foreign Exchange Systems.
And to skip it and go straight to get a deeper sense of what forex is all about, click on the link below.
Return from Trading with Brokers to Foreign Exchange Center.