Choosing the right Forex broker to trade with is one of the most daunting tasks new Forex traders face. Especially in a market where different types of Forex brokers operate, each with a distinctive style of functioning. But with an understanding of the types of Forex brokers and their workings, it won’t be so difficult anymore.
To help you choose the right type of broker let’s see in detail about each type of broker and how they function.
White Label Forex Broker
White labeling refers to the practice of one firm buying another firm’s product and marketing it in its own brand name. In the Forex market, a white label Forex broker is one who buys trading software, platform and other services offered by a broker and markets it under his brand name. This type of broker runs his business with the help of an independent primary broker who manages the trades for him and retains major control over it. The primary broker may be a standalone or a prime broker.
White label broker functions just like independent brokers in that they offer trading platforms, set spreads/commissions, open accounts, facilitate deposits/withdrawals and monitor reports. In limited white label, the broker may choose to account management functions and other reporting and administrative activities to the primary broker.
But the white label broker’s control does not extend to currency pairs available for trading, opening/closing of trading hours and security of the system. The control of all these will remain with the primary broker. A white label earns an income from each of his client’s trade with a revenue model that is more flexible compared to other types of brokers.
A standalone broker is an independent retail Forex broker of small scale who partners with a number of banks and trading platforms to give their clients access to the best rates, funding facilities and a stable trading software. By partnering with liquidity providers, a standalone broker offers leverage to traders that allows them to control a large amount with only limited resources.
The independent broker directly trades with the trader and acts as an intermediary between the trader and the market. The broker retains the entire execution of his client’s trades as there are no intermediaries between a standalone broker and the trader.
This type of broker may offer his client his preferred trading platform or may leave it to the trader to choose any trading software in the market. The functions of a standalone broker include opening trading accounts, accepting deposits/withdrawal and executing trades for the clients. A standalone broker also offers his clients 24/7 customer support through email, phone and chat. For these services the broker may charge a commission or spreads from the trader, depending upon his revenue model.
Prime brokers are independent Forex brokers operating in a large scale with huge volume of trades and clients with large investments. Typically individuals cannot open account with a prime broker, only proprietary trading concerns and institutions deal with prime brokers. Prime brokers have access to better market depth by partnering with multiple liquidity providers, some of them being the biggest lending institutions an average trader or small brokerages cannot access.
Having access to multiple liquidity providers allows prime brokers to improve execution rates and offset risk/losses better. Small retail brokers establish a relationship with such prime brokers to tap into its deep liquidity. Due to its large scale of operations, the transaction costs of prime brokerages are comparatively lower.
A prime broker’s primary mode of compensation is the prime brokerage fees. Therefore it can afford to offer tighter institutional spreads to its customers, usually 2-3 pips tighter than retail brokers. Prime brokers also offer better execution, operational support and value added services like risk management advice, capital introduction and consultancy services.
Regulated Forex brokers are registered members of regulatory agencies or government financial institutions like the CFTC, FSA, NFA that is bound to abide by the rules and regulations of the Forex market. Such agencies and institutions regulate the activities of brokers to ensure fair trade practices and to safeguard the interests of traders. To be regulated, a broker needs to be registered and licensed in the jurisdiction the brokerage has its base.
Regulated brokers offer better security of funds because these are required to comply with requirements like minimum capital investment, investor compensation in case of bankruptcy and segregation of funds. Like any industry the Forex market too has its own share of substandard and fraudulent operators. Regulation plays a major role in helping traders to spot out the reliable brokers.
Despite of being licensed as a financial institution, Forex brokers who partner with a company registered with non-financial activity and engage in forex broker business are called as unregulated forex brokers. In trading with unregulated brokers, traders may face the risk of losing all their hard-earned capital as these may not offer investor compensation in the form of refund of deposit if the brokerage goes bankrupt. Trading with unregulated brokers also has some advantages like best spreads, fees and commission compared to regulated brokers as the business expense is less. Brokers who forego regulation cut down the expenses related to it and are able to charge lower spreads/commissions to their customers while still making a profit. This is mainly because gaining and maintaining regulatory license can be quite costly.
Prospect of Forex Broker
Choosing the right type of Forex broker business will help you to sustain and be profitable without much risk. However, all types of brokers will exist and can generate revenue, but the onus lies on steady, long-term, high profit, risk-reward business model. Still unsure? Get the help of professional experts to identify what will work best for you and build your business.