Know Your Brokers!

So, dear traders out there, here’s a big question for all of us: Of all the different types of brokers out there, how do we know which is the best to trade with? Well this is indeed quite a tough nut to crack, but today we shall attempt to examine two of the most commonly used brokers so you can come up with your own verdict!

First up, what exactly is a foreign exchange (FX) broker? A FX broker is basically a financial service company that provides traders like you and I access to a platform for buying and selling foreign currencies. Let’s narrow that down to two types of brokers broadly used by most traders: the Straight-Through Processing (STP) broker and the market maker. These two brokers are vastly different brokers, each with their own pros and cons, hence it would be wise to know how they work and which one best suits your needs!

Market Maker

A market maker is also known as a liquidity provider as it is typically a brokerage firm that quotes both the “buy” and “sell” prices within a certain currency pair. It accepts deals at prices within certain constraints and takes the resulting exposure on its own books, at least initially.

Market makers are essentially counterparties to forex trades as they take on the opposite side of your trades. They can choose to earn through spreads or they can take positions in a currency at their discretion by making a trade with another bank, or by pricing accordingly in order to attract trades in a certain direction. Some may call them “artificial brokers” as market makers do not reflect the market prices directly, everything is managed in-house and processed internally. As such, the perks of using a market maker would be the liquidity it can provide. The possibility of less volatile currency price movements due to the internal quotations of price also makes market makers attractive to some.

As counterparties of their client’s trades, market makers are able to make profits beyond just spreads. Therefore, you can expect some platforms using market makers to provide sizeable bonuses that other types of brokers may not be able to provide. But do note, as counterparties of your trades, they may very well have a clear conflict of interest in order executions as they may trade against you, and they may display lower bid/ask prices than another broker. Market manipulation then becomes a possibility with such brokers.

Straight Through Processing

STP brokers are basically the middleman serving as a silent connection between the market and traders. With such a broker, traders can have direct market access as it passes its clients’ orders directly to its liquidity pool. Hence an obvious benefit is that orders are filled up at the best possible price, with only a small mark-up spread. With direct market access, you can also expect various price quotes to be listed and all orders to be fulfilled. More importantly, there is little chance for manipulation with STP brokers as they merely serve as a middleman with no incentive to manipulate prices as they largely profit from spreads or commissions from traders. However, as a result of that, STP brokers are unable to provide large bonuses or rebates for clients. But here’s the good news for us: since STP brokers only earn through spread, they are always going to be on the side of the clients!

Is Omada a Straight Through Processing broker or Market Maker?

Omada is a Straight Through Processing broker that ensures currency rates are accurate, orders are instantly executed and we provide live market movements as orders are directly sent to liquidity providers in the market. You can also expect much smaller risks when dealing with a non-dealing desk broker like us! Risks like market manipulation or conflict of interests can certainly be eliminated. 

At the end of the day, the choice of broker is very much dependent on the individual trader. Transaction fees are also a common factor of consideration. While some STP brokers do charge commissions per trade, Omada is a commission-free platform! Being free of a counterparty who may have conflict of interest will also allow you to trade with a peace of mind. So do consider your own needs and preferences when choosing the right broker for yourself! Start your Forex journey with us today!