What is the difference between a broker and a dealer?

When deciding whether to choose a broker in the Forex market, people often encounter such words as "Warehouse", "Pyramid" and so on. Often, without even understanding the true meanings and representations of what it really is. We would like to shed some light on this issue by presenting variants of the Forex Broker and Forex Dealer, comparing the peculiarities of each of them.

To date, there probably is not a single company that willingly recognizes itself as a Dealer. Let's see why? Who are brokers? Who are the dealers and what is the difference between them?

In order for the client to have the opportunity to make transactions in financial markets, he needs to either possess a significant amount of his own funds, or an intermediary that helps him make deals with other participants. This intermediary can be filled by two professional participants: a broker and a dealer.

Broker

Broker - a legal entity that performs intermediary functions between the seller and the buyer. The client forms an order for the transaction and sends it to the broker, who in turn passes the already formed order to the ECN network for execution. Inside the ECN-network, according to the necessary parameters, a counterparty to the order in question is found, after which the order is executed. Earnings of brokerage companies are built exclusively on commissions for intermediary activities, that is, the conclusion of transactions on liquidity providers or immediately on the ECN-system.

ECN (Electronic Communication Network) — is an electronic communications network whose main task is to automate the transfer of data between all bidders. An ECN-network combines a lot of large market participants, in particular, various financial institutions, banks, funds, which significantly increases the liquidity of the market and the speed of execution of applications. Simply said, an ECN-system is a kind of aggregator of orders for the purchase / sale of various financial instruments.

Dealer

The dealer — is a professional participant in the financial market, which has the legal right to exercise currency quotes. In other words, the dealer creates an imitation of trade within their own system, thus pursuing their own interests. Let's see the dealer's work on example: the client forms an order and sends it to the dealer, which unlike the broker, does not display it to the ECN-network, but overrides it independently. The trader's application goes to a special office, where employees or specialized programs make decisions about interference or non-intervention in the client's trade. A transaction can be overlapped by a counter order of another client, or it may be by the broker itself, as a result of which, a conflict of interest arises.

A hybrid model is also possible, in which the dealer outputs part of the transactions to the ECN-network, and leave part of the transactions inside their own system. Thus, where exactly a profitable deal may be executed is known only to the employees of the company.

If we consider the intermediary activities of the Broker and the Dealer, from the point of view of business, where the Broker earns only on commissions, and the Dealer picks up the deposits of his clients to himself - it becomes clear which type of business is preferable.

The main difference between the broker and the dealer

The dealer earns when the trader bears losses. If a trader is profitable - the dealer loses money, which, naturally, is not profitable for him. To avoid such situations, the dealer can interfere with the trader's transactions. This is not difficult, since the dealer cannot transfer the transaction to an ECN-network. The dealer has the ability to execute the client's transactions at favorable prices, as they own all information about all client orders. This makes the dealer’s position more profitable, compared to his clients, who they may manipulate. That's why there are so many Dealers in the world, yet fewer brokers.

But the times when dealers intervened in most deals have passed, now the companies (dealers) try to "simplify" the process of becoming a trader as much as possible, offering various bonuses, artificial terms of trade, presents and even offering to try to trade the first deals at the expense of the company ... It all sounds very tempting. Imagine, the spread is fixed even during the release of important news, you enter the market only at selected prices, while if there are none, you are offered alternative prices, given bonus funds for trading, compensated any commissions for account funding/transactions, contest for various prizes ... It seems like a utopia, does not it?

There are no such conditions on the real market. You must understand the real trading conditions and why they are exactly like that. The trader can choose to trade in a real market with a broker where there are no attractive conditions, but at the same time there is a guarantee that the deal will be executed on the real market, or use the services of a dealer who will provide much more comfort and favorable conditions, but at the same time knowing that when you make a profit, your balance will be at risk.

ARUM Capital

The Broker Arum Capital is licensed by CySec under the number 323/17. CySEC (Cyprus Securities and Exchange Commission) is the Cyprus Securities and Exchange Commission, which serves as the state regulator in Cyprus. 

The Cyprus Commission monitors the work of investment firms so that they comply with the directives of the legislative and regulatory framework of both Cyprus and the European Union. This public body holds control over actions and operations on the stock exchange. In detecting violations, CySEC has the right to apply different measures, administrative or disciplinary sanctions - from the collection of fines up to the revocation of licenses.

A broker with such a license is interested in long-term cooperation with investors and does not set himself any goals to deceive traders in any way or steal funds, because then, CySEC, being an imperative body, will simply begin the procedure for terminating the activity of such a broker.

ARUM Capital is a part of compensation fund of investors. If the company can not fulfill its financial obligations to customers, then they are entitled to a minimum guaranteed payment, the amount of which is up to € 20,000. The payment applies only to retail clients. More here.

Trading platform at ARUM Capital
 

RiskDisclosure

Currency pairs (Forex) and CFDs, being marginal products, are of high risk and may result in the loss of all invested capital. Hence, Currency pairs and CFDs may not be suitable for all investors. You should not risk more than you can afford to lose. Before you start trading please ensure you understand the risks involved and that you have sufficient level of expertise and experience.

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These reviews are a private opinion of ARUM CAPITAL and are provided for information only. In no way can the provided analysis be considered as an action signal, neither is it any sort of investment advice (for the purposes of EU Directive 2004/39/EC). ARUM CAPITAL waives any liability for the trading results which may arise after using these reviews. These materials contain NO warranties or guarantees, either direct or implicit, on the precise, complete or confirmed character of the details they contain.

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Traders past performance and their strategies are not a promise or a guarantee of future profitability.