Forex Trading Without a Broker -

Forex Trading Without a Broker -

  • Can I do stock or Forex trading without a broker?
  • What are brokers for, and what functions do they perform?
  • Why should I pay intermediaries if I can do without them?

Those are beginner investor questions aimed at cutting potential expenses.

You make money from currency moves without brokers when you buy currency at a bank or exchange office and then sell it at a higher price. However, this is currency speculation, and it has little to do with investing in Forex assets.

If you want to become a serious investor, diversify risks, and make profits in a few seconds, then you can't do without a Forex broker. Read on to learn who a broker and a sub-broker are, what their functions and advantages are, and how you can do Forex trading on your own.

What is Forex Broker?

A Forex broker is a legal entity that acts as an intermediary between sellers and buyers or between traders and the Forex market itself.

Private persons aren't entitled to conduct currency trades on their own. All trading operations must be registered and conducted through a Forex broker.

Forex brokers' activities are strictly regulated and must be licensed. Currency market participants are retail traders, legal persons, and institutional investors. In particular cases, a broker itself can act as a counterparty in a trade.

How Forex brokers work

  1. A broker company signs a contract with liquidity providers - big investment banks or ECN systems, such as Currenex or Integral. The broker also opens segregated bank accounts to keep its money and client money apart.

  2. To be able to trade Forex, a client must make a broker service agreement with the broker. Then, the client has a personal client space registered. A trading account is open in his/her name too. Next, the client tops his/her account and sends the broker a request to buy or sell currencies using a dedicated trading terminal.

  3. Those requests are called "orders," and they can be executed in a variety of ways:

  • The broker executes the trader's order by matching it with an opposite order. For example, the broker receives two orders: to buy 100 euro and sell 100 euro at Bid and Ask prices. The broker matches those orders and earns a fee as a difference between Bid and Ask prices.

  • The broker redirects an order to a liquidity provider, which acts as a counterparty and executes the order.

  • The trader's order is directly transmitted to the ECN system and executed at the best price.

Why do you need a Forex Broker?

Let’s figure out how to trade forex without a broker and what you will need for it. First of all, the retail trader should get access to the market through an electronic trading platform.

A trader's main instrument is a trading platform. It allows a broker to load current quotes, and a trader can analyze a market situation. In a trading platform, traders are opened, and orders to sell/buy currencies at a current price are sent.

You cannot get access to the trading terminal on forex without a broker. A broker usually buys a costly license to get the right to use a MetaTrader and pays monthly fees for it.

Then brokes develop the bridge to liquidity providers to transfer client’s trades to open market. You won’t be able to trade without the platform and ECN technologies that the broker provides to retail clients.

You can't simply take a bag full of money, come to an international bank and say, "I want to trade in the currency market." They will only suggest that you make an exchange operation at the bank's rate. Only a broker can provide you access to currency buy/sell operations.

Can a broker trade for himself?

In most cases, it can. However, there are some exceptions. Regulators impose some limits in some countries. As a result, access to foreign brokers is banned, and trading without a broker is impossible.

Traders themselves can't open an account with a foreign broker that isn't licensed by a local regulator. This system is true of the USA, Japan, and Indonesia, where strict rules apply to CFD trading. Using a sub-broker solves the problem:

  1. A broker that can't access the US currency market makes a broker service agreement with a licensed broker. Another way is to register a subsidiary company in the USA that will fully comply with the US regulator's requirements to get a license.

  2. A trader opens an account with the broker and places an order to conduct a trade. The broker redirects the order to the US-licensed broker that executes the trade.

Thus, the trader's main broker acts as a sub-broker: not being the US market member, it resells another broker's service (prime broker) to the client. However, this scheme has two drawbacks: the more counterparties a trade has, the higher the risk and commissions are. Continue reading


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