Best Forex Brokers UK

Best Forex Brokers UK

How Do UK Forex Brokers Make Money From Orders?

Forex brokers make money from all orders using a basic concept called ‘Slippage’. Slippage refers to the difference between the price at which the order should have been executed and the price it was actually executed at. It can occur because of news events that have increased the volatility of the market and have made a certain order’s execution impossible. When slippage occurs, the traders and brokers execute the trade at the next best available price.

In case of stop loss orders, brokers make money by increasing the slippage. Slippage would occur when the stop loss order was not executed at the specified price but at the next best price. There are many dealers and brokers who routinely take some pips of slippage out of the trader’s stop order. This would especially be the case when the market traded in the same direction and made the rate of the order further attractive than the current rate, even after including the slippage. Using a similar concept, brokers and dealers can also make money on take profit orders.

  • Another way of making money for dealers and brokers is to sell the order flow to a market maker. This adds money to their pockets and also benefits the market maker.
  • It could, in fact, result in mutually cancelling orders. Also, for the market maker, there is the added benefit of finding out the intentions of speculative traders, allowing them to place take profit orders ahead of the traders and make additional profit by triggering stop orders.

What Are Spreads And How To UK Brokers Deal In Them?

Because the Forex market is largely unregulated, the spread is what Forex brokers and market makers earn in exchange for providing liquidity in the market. When a trader chooses a Forex breaker, the best offered spread is chosen and it depends on the broker’s contacts with liquidity providers. If the spread is tight, the costs of the trader come down considerably. You can compare the different spreads of popular brokers at EarlyBull.

The ask rate is the buying rate that the trader can get and the bid rate is the selling rate. The difference between these two rates is called spread. In case of active pairs, the spread can be as little as 1 pip with good Forex brokers or it can be as high as 5 pips. Since many Forex brokers base their commission structure on the spread, sometimes a few pips of commission are added to the spread. The brokers get one rate from their liquidity providers and then, they offer a spread – either variable or fixed – to their traders.

For instance, in case of EUR/USD = 1.35640/35, the buying rate or ask rate is 1.35640 and the selling or bid rate is 1.35625. The spread is 0.00015. Since pip is expressed as the 4th point after decimal, the spread is 1.5 pips. It is important to mention that spreads change in the real Forex market. They are determined by factors of demand and supply, which keep changing. There are many other market factors that affect spread at the basic level. Then, as commissions and fees are added, the actual spread offered to a trader by a broker increases further.

Are Currency Options Offered By UK Forex Brokers And What Do They Entail?

Options are offered by Forex brokers and they are hedging tools. Options allow the trader to make gains from currency trading without actually trading in a currency pair. Also, options can be used for limiting losses and locking in profits from a trade. Since writing and trading in options is a high risk activity, large sums of collateral capital is needed before brokers allow their traders to write them. Options are a right to trade in a currency pair and not an obligation.

Option trading is not offered by all Forex brokers, though, and before traders choose a broker, they should research whether options are traded by the said broker or not. There are two basic types of options – call and put. Call options allow the trader to buy a currency pair at a set price (strike price) at a future date. Put options allow the trader to sell a currency pair at a set price at a future date. If the current rate makes the options worthless or out of money, they will just expire, and the only cost that the trader incurs would be the one spent in buying the options, nothing more. However, in case the options turn out to be profitable or in the money, the cost of the options would have to be reduced from the final profits that the trader makes from the trade.

  1. There are SPOT options as well which have a set condition, such as the currency exchange rate after 30 days or so, and if the condition is fulfilled, automatic payout of the option takes place. This means that the option converts into cash automatically.
  2. Even with options, various strategies like straddle, strangle, spreads et al are used where multiple options with multiple strike prices and expiration dates are purchased.

uk forex brokers

What Is The Function Of A Forex Broker in the UK?

When there are two trading parties, a Forex broker acts as a guarantor of creditworthiness and trust between them. Brokers are like middlemen in Forex exchange, similar to real estate agents. Their main function is to sell the product of one client to another one – i.e. match buying and selling orders between different clients. Because of brokers, traders can trade freely and without worry about the settlement of trades. Forex Brokers do not trade against or for their clients – their only job is acting as middlemen between two trading parties.

Another function of a Forex broker is to already have contacts and connections in the industry so that the benefits can be passed on to traders. These benefits largely include preferential rates for trading. The institutions that Forex brokers are affiliated with also get the benefit of bulk orders from traders. Because of their wide network of connections, brokers are able to offer tight spreads to traders. Most brokers have competitive ask and bid prices because of which the trader’s costs come down greatly. Brokers charge a fee for their services and this fee is called “broker commission”.

Order matching is also one of the main functions of Forex brokers. In this, one trader’s requirement (or order) is matched with another trader’s requirement at a quick rate. In the Forex market, even a second’s delay can lead to losses because the market is pretty dynamic. When large funds are involved, as is often the case with Forex, up or down movement by even a single pip can change the game. The speed of matching orders prevents this from happening.

What Are Dealing Desk Brokers?

Dealing desk brokers are a kind of Forex brokers and are also known as “market makers”. They are responsible for creating a market for their clients. This means that they can either take their clients’ side or bet against them. However, this doesn’t give them any conflict of interest. Both a buy quote and a sell quote is offered to the client. Thus, DD brokers fulfill both buy and sell orders. The decisions that a trader makes do not affect DD brokers.

They control the order fulfillment prices. Thus, their risk is little while their spread is fixed at all times. People who use DD brokers will never find out about the true interbank rates. But, because the competition among brokers in the market is so stiff, DD brokers’ rates and interbank rates are pretty close. A trading platform comes between the trader and a DD broker. The client executes a trade on the platform and then it goes to the dealing desk. For the clients who have made winning trades, an offset occurs with other clients. It can also be passed on to another provider of liquidity. In case the client has made a losing trade, DD brokers counter-trade it and convert it into a profitable transaction for themselves.

  • When an order is bought (or sold) by the client, the broker’s first attempt is to find a matching order.
  • Only when this cannot be done, a liquidity provider (like a bank or similar financial institution) is approached.
  • These sizable entities can buy and sell orders of any quantity readily. This minimizes the risk for the DD broker.

What Are ECN Brokers?

ECN or Electronic Communications Network brokers provide direct access to the Forex market for their clients. They deal with a variety of traders and consolidate the price quotations. As compared to other brokers, the bid/ask rates offered by ECN brokers are much tighter. Because their job is only to match trades against each other, there is no conflict of interest. Unlike certain retail Forex brokers, ECN brokers do not trade against their clients. Since their bid/ask rates are much narrower than other, the commission they charge is fixed on a transaction basis. This makes them a bit expensive.

ECNs operate by acting as a bridge between retail traders and financial institutions. Because the ECN technology is pretty sophisticated, this link is possible. The name of this technology is FIX Protocol. For huge currency pairs, the spread with ECN is sometimes pretty close to zero. However, since the money is made on transaction basis, ECNs don’t care about the client’s successes or losses. ECN trading platforms are relatively difficult to master and are ideal for traders who want to deal in a huge amount of funds. Since commission is on transaction basis, high volume of activity and large balances are usually favorable.

The biggest benefit of ECN brokers is that they allow scalpers to flourish. Since there are no issues of re-quotes or order slippage, and the order execution is instant, quick buying and selling is facilitated. However, the leverage offered by them may not be too high. Certain kind of orders (like take profit or stop loss) might also be different as compared to other brokers and platforms.

What Are STP Brokers?

STP brokers are another kind of no dealing desk brokers. There are many brokers who might say that they are ECN brokers but, in reality, they just have an STP system. STP or ‘Straight Through Processing’ system allows these STP brokers to route the client orders to liquidity providers. These providers have interbank market access. STP brokers are usually in contact with a variety of liquidity providers. All these providers quote their individual bid/ask rates, offering the STP broker a wide variety of choice. Their system shows them the liquidity providers (and the offered bid/ask rates) in a list.

The STP broker can sort these rates on the basis of most favorable to least favorable. The best bid rate and the best ask rate would be the real rate for them. However, the trader would obviously not be able to see all the rates from all the liquidity providers. They will only see the best bid and ask rate, with an added markup of a few pips on their screen. Thus, when a trade is placed by the trader, it is routed to the liquidity provider on the best rate. Because the trader is being offered a marked up rate, the difference becomes the broker’s profit.

Since liquidity providers have fluctuating spreads, the best bid/ask rate for traders dealing with STP brokers are also variable. As the spread of the liquidity provider rises or falls, the STP broker has to change their spread as well. However, there are a few STP brokers who offer a fixed spread.

Sources & Further Reading

[1.] – Best Forex Brokers in Canada
[2.] – Regulated Forex Brokers List
[3.] – Forex Trading Online
[4.] – Top Forex Brokers Comparison
[5.] – Online Trading UK
[6.] – Best Forex Brokers For Beginners
[7.] – Trade Forex, CFDs, metal and more