A forex broker, also known as a retail forex broker, or currency trading broker, in modern financial and commercial trading means an intermediary who buys and sells a particular asset or assets for a commission. Thus, a broker may be thought of as a salesman of financial assets. The origin of the term is unclear, though it is thought to stem from old French.
The role of the broker has commonly been found in equities, commodities, derivatives and even insurance and real estate markets since the beginning of the modern era. And until the dawn of the internet age, most brokers operated by phone. Clients could phone in their orders of trades, and brokers would buy and sell assets on behalf of their client's accounts for a percentage-based commission.
With the advent of the internet, many brokers have allowed their clients to access accounts and trade through electronic platforms and computer applications. A broker in the past was considered an individual member of a profession and often worked at a special agency known as a brokerage house (or simply a brokerage). Nowadays, the term "broker" is often used as shorthand for a brokerage.
A key concept for modern individual traders is retail forex. Traditionally, foreign exchange has been traded on the interbank market by larger clients such as importers, exporters, banks and multinational corporations who need to trade currencies for commercial purposes and hedging against international currency risks.
Retail forex is forex that is traded through dealers, often by smaller or individual investors. These firms are also known by the term "retail aggregators." Retail forex trading began to become popularised in the late 1990s with the emergence of internet-based financial trading. At that time, retail forex brokers and dealers went into business to allow smaller traders to get into markets that were previously limited to large-scale businesses and financial institutions.
Retail forex brokers typically allow traders to set up an account with a limited amount of assets and let them trade online through internet-based trading platforms. Most trading is done via the spot currency market, though some brokers deal in derivative products such as futures and options. Forex trading has been popularised among individual traders because brokers have offered them the chance to trade with margin accounts. These allow traders to effectively borrow capital to make a trade, and multiply the principal that they use to trade by large amounts, up to 50 times their initial capital.
Brokers And Dealers
Most retail forex brokerages act in the role of dealers, often taking the other side of a trade in order to provide liquidity for traders. Brokers make money with this activity by charging a small fee through a bid-ask spread. Before the emergence of retail forex brokerages, individual trading amounts less than US$1 million were discouraged from entering the market by high bid-ask spreads.
Around the year 2000, retail brokers began offering online accounts to private investors, streaming prices from major banks and the Electronic Broking Services (EBS) system. The brokerages were able to provide retail service by bundling many small trades together and negotiating them in the interdealer market, which is dominated by banks. Because the trade volumes were much larger, participants in the interdealer market were willing to provide liquidity for the retail brokers' accessible prices. Bid-ask spreads are generally higher for retail customers than they are in the interdealer market, but they have been found to narrow as trading volume rises.
Typically, retail forex traders can only access the market through a broker. However, forex brokers often offer two modalities of trading.
- The first is "dealing-desk" trading, where brokers act as dealers and take the opposite position of a trader. Traders may pay larger spreads on average in such trades, and orders can be filled on a discretionary basis by the broker.
- The other type of service is "no dealing desk" trading. Traders are given direct access to the interdealer market, but they may be charged a fee for this service. They also could be exposed to wider variable spreads on occasion, depending on market conditions.
Other Services Offered By Brokers
In addition to helping clients buy and sell assets, brokers often offer other related auxiliary services. These can include the following:
- information and news feeds and research services,
- asset price charting,
- trainer trading programs and advice
- and professionally managed accounts.
Some of these services may be offered for free and others may involve the payment of a fee.
Forex brokers offer an essential service for markets, especially for retail forex traders. Since they began operations in the retail market, brokers have helped open up a field of opportunity that previously wasn't available to individual traders.
With an internet connection and a computer or mobile phone, traders can now open an account and trade in a market that was previously only accessible to banks, large companies and financial institutions, and very wealthy individuals. Brokers also offer services that can be valuable in assisting traders to understand price movements and potentially make profits.
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…