Forex Broker vs. Dealer: Do You Know Who You’re Trading With?

When you decide to trade on the retail Forex market, the first thing you do is look for an intermediary company that offers favorable trading conditions, minimal costs (fees and commissions), and honest and transparent relations. You habitually call this company a broker, often without realizing that you are dealing with a dealer. Although both perform similar functions, they operate differently. We will explain the main differences between them. So, Forex broker vs. dealer: do you know who you’re trading with?

Who Is a Forex Dealer?

The vast majority of Forex market participants use the services of dealers, typically without even knowing it. Historically, almost everyone providing clients with access to trading currency pairs and CFDs has been called a broker. This is not entirely accurate. A well-known Forex dealer explained what their functions entail.

A dealer, also known as a market maker, is a financial company (less commonly, an individual) that acts as a counterparty to all client transactions. This means that all orders placed by the trader will be executed by the dealer: the dealer buys what the trader intends to sell and sells to those placing a buy order. Essentially, the dealer acts as the sole liquidity provider for traders — the client does not make deals with other participants since they do not have direct access to them.

How a Dealer Works

The model used is called the “Dealing Desk” (DD). Essentially, in this model, the role of a Forex dealer is that of a trader, making trades on their own behalf and in their own interest. They buy assets at lower prices and sell them at higher prices, making a profit from the difference between the buying and selling prices. Generally, they set these prices at their discretion.

A Forex dealer cannot arbitrarily set the price of any instrument, be it a currency pair or the underlying asset of a CFD. If they did, clients (traders) would refuse to trade with them. They use indicative prices broadcast in electronic trading systems such as Reuters and EBS for pricing. Based on these, they form the buying and selling prices of the asset, setting the spread. This spread is the primary source of the dealer’s income.

The spread size for a dealer is not limited (except by common sense). Many companies use so-called “floating spreads,” the width of which depends on the instrument’s liquidity. For example, the EURUSD pair is highly liquid and leads by far in the number of trades made by traders. Therefore, setting a wide spread for it makes no sense. In any case, with a minimal difference between buying and selling prices, the dealer can make significantly more profit from traded volumes than by setting a wide spread and waiting for rare trades. Since the liquidity of an asset can vary depending on the time or the release of economic news, spreads can widen or narrow.

A dealer does not always execute client orders at the requested price. If the price changes significantly during order placement (the definition of “significantly” is also set by the company), the trader will receive a rejection of the order placement or execution and new quotes (requote). Otherwise, the company may incur a loss when executing the client’s order, which most such organizations aim to avoid.

Naturally, a dealer is interested in balancing the volumes of buying and selling an asset. Their reserves are not infinite, and in the event of an imbalance, there is a non-zero probability that the company will not be able to execute a client’s order. This problem is solved by obtaining additional liquidity from large providers with whom agreements are in place. Regulated companies work with several liquidity providers simultaneously, allowing them to eliminate imbalances quickly and at the best prices. As a result, their clients receive prices close to the average for trading platforms and narrow spreads.

Forex Dealer Regulations

The activities of Forex dealers are regulated by financial authorities in the jurisdictions where the companies are registered and/or provide services. To confirm that a firm operates in compliance with current laws and regulatory requirements, regulators issue licenses. Having a license is mandatory for all entities providing dealer services in the financial market.

The requirements of reputable regulators are quite strict. For example, they include:

• Mandatory public disclosure of detailed information about the company (including financial statements in most cases), as well as its payment details.
• Disclosure of information about the services provided, including the parameters of transactions.
• Limitation of leverage sizes for professional and retail investors.
• Prohibition on using bonuses to attract new clients, etc.

Attention! If these requirements are not met, you are likely dealing with fraudsters. Some offshore regulators may impose more lenient conditions, but they are very few, and dealers under such regulators usually do not work with clients from European countries, Japan, and others.

Advantages and Disadvantages of a Dealer

The main advantage of working with a Forex dealer is that they act as the liquidity provider. This means that the company can execute client orders of any size almost instantly. The exception might be trades that lack sufficient liquidity.

However, since there are no other participants in the trading process, the majority of trades are merely electronically marked as executed. In reality, the trader does not become the owner of the asset but can only claim profits (at best) after closing positions.

Accordingly, the dealer usually does not need to seek additional liquidity from providers. Most likely, their own funds will be sufficient to pay the trader’s profit. Thus, even a liquidity shortage does not affect the speed and volume of trade execution.

The main disadvantage of working with a dealer is their involvement in all client trades as the sole counterparty. This leads to a conflict of interest — the company pays the client’s profit from its own funds, and the client’s loss becomes the company’s income.

To achieve greater profits, some dealers may even manipulate prices in their favor. Of course, such practices are strictly prohibited by regulators. Therefore, licensed companies must have a document addressing conflict of interest and its resolution. Typically, only fraudulent entities lack this document.

Who a Forex Broker Is and How They Work

A Forex broker in the Forex and CFD market functions similarly to brokerage firms in other markets. They act as intermediaries, accepting orders from buyers and sellers and matching them when there are corresponding orders at the same prices to facilitate a trade.

Forex broker duties include:

• Receiving and placing client orders on the trading platform.
• Executing orders at the best possible price based on opposing client orders.
• Managing the trade and open positions (calculating margin, balance, equity, free margin, and other metrics).
• Transmitting quotes to clients’ trading terminals.
• Attracting liquidity providers to ensure the execution of all incoming client orders.

The broker does not act as a party to the transaction; instead, they match buyers and sellers. They also do not set the prices of trading instruments; prices are formed automatically based on traders’ orders.

Important! When working with a broker, spreads can start from nearly 0 pips because the liquidity providers are the trading participants themselves.

A broker earns not from the difference between buying and selling prices. Instead, they charge trading commissions for order processing and execution. This is generally more advantageous for traders than paying a spread. For example, with a commission of $7 per buy or sell trade, the total fee for servicing a position of 1 standard lot (approximately $100,000) would be $14, or 0.014%. With a leverage of 1:100, the trader pays 1.4% of the actual trade amount. This is roughly equivalent to a spread of 1.4 pips. Considering that spreads for most currency pairs (and for minor and exotic pairs in particular) are much higher, the trading costs with a dealer are higher.

The model used by brokers is called No Dealing Desk (NDD) and can have various types, such as STP or ECN. In any case, when working with a broker, there is no conflict of interest between the trader and the company. As a result, the broker is interested in increasing the number of client trades rather than their losses (the financial result at position closure does not affect the broker’s income).

Regarding the regulation of brokerage activities in retail Forex, it is similar to the regulation of dealers. The same requirements generally apply to providing brokerage services.

Broker vs Dealer in Forex

Thus, services in the retail Forex market can be provided by both brokers and dealers. Clients usually do not understand who they are dealing with and habitually refer to any company as a broker.

However, differences between forex brokers and dealers are quite significant.

As we can see, it is more advantageous to work with a broker on Forex. However, dealers have the potential for higher profits, which is why their number on the market is significantly higher than the number of brokers.