According to the triennial report of 2016, released by the Bank for International Settlements, the average forex market size is $5.1 trillion per day. This makes forex the most liquid and the largest market in the world. High liquidity allows traders to enter and exit positions easily, which is one of the key attractions of this market.
For a trade to occur, we need both buyers and sellers. There needs to be an exchange that ensures fair trade, guarantees trade execution and regulates trading operations. Buyers and sellers cannot execute trades directly on an exchange, so they need a broker to do it for them. Brokers are registered members of an exchange, who can add customers and intermediaries. Brokers are also responsible for trade execution on the exchange.
Since brokers and exchanges both provide means to trade the financial markets, it can be easy to get confused between the two. Let’s take a look at the key differences between them.
With a broker, the brokerage firm fixes the price and the fee it is willing to sell for. They either hold the assets or collaborate with a network of other brokers to keep the supply of that asset intact. Brokers are most likely to maintain similar prices in the market to attract customers and sustain demand for their services in a competitive market.
A number of buyers and sellers are present on an exchange, placing orders to buy and sell financial securities. Buyers can choose to buy at any price, but the trade will not be completed until a seller agrees to sell at that price.
Brokers and centralised exchanges have always existed in the traditional financial markets. A centralised exchange works like a governing authority, creating the exchange and set of rules to be followed by participants on the exchange. The rules dictate the information participants are allowed to share, securities to be traded and withdrawal limits on the exchange.
But with technological advancements and the rise of digital currency, decentralised exchanges have emerged. The rules and procedures for operations on these exchanges are set via smart contracts, instead of a governing authority.
The forex market is the most liquid market in the world and fluctuations in the market provide opportunities even for first time traders. However, success depends not only on the trader’s skill but also their choice of broker or exchange. Here’s a look at some things to consider in forex trading.
Ensure that your forex broker is fully regulated and their track record is good. Forex brokers will be responsible for keeping and managing your funds in different accounts. Exchanges, on the other hand, are also regulated and have house brokers to execute trades. You cannot directly trade on an exchange, unless you are trading significant volumes. There are minimal chances of exchanges shutting down.
Ease of use plays an important role in trading. A forex broker facilitates processes, such as setting up your trading account, means to deposit funds in the account and a trading platform that can be used on the go for executing trades.
If you are new to forex trading, a forex broker can offer just the right support to help you learn and hone your skills. They can provide you the means to connect with the banking network and purchase currency pairs of your choice. Before there were forex brokers, a person willing to trade forex needed large sums to invest and special contacts and relationships to buy foreign currencies.
Cryptocurrencies are also traded on exchanges, with the last couple of years seeing the mushrooming of crypto exchanges all across the world. On a crypto exchange, traders work to generate gains from the fluctuating prices of cryptocurrencies. Forex brokers offer crypto CFDs (contracts for difference), which offer similar potential to trade on price fluctuations. The basic difference between trading digital currencies themselves and trading CFDs is that the exchange provides ownership rights on the cryptocurrency, which can be transferred anytime to your crypto wallet, whereas CFDs are derivative instruments, which use cryptocurrencies as the underlying asset.
Here’s a look at why forex brokers should be used for crypto trading over currency exchanges.
Despite the number of services and options offered by cryptocurrency exchanges, they are vulnerable to scams and hacking, and are unstable. For instance, Bitfinex, a well-known crypto exchange was hacked in 2016 and 120,000 Bitcoins were stolen, worth $72 million, from this exchange.
Forex brokers, on the other hand, are highly regulated by governing bodies. They have to fulfill a number of criteria to get legal and regulatory approval, ensuring safety and security. In addition, with CFDs, since the trader does not actually own the underlying asset, the fear of theft and loss due to hacking is avoided.
Leverage provides traders the flexibility to enter positions larger than the capital in their trading account. A currency exchange provides maximum leverage of up to 1:2 or 1:3, solely depending on the other market participants. Forex brokers offer leverage of up to 1:20. They do so because they have highly developed risk management tools that can be used for crypto trading as well.
Leverage fees charged by forex brokers is minimal, while the leverage fees charged by currency exchanges completely depend on the other participants providing extra currency, while considering the associated risks and compensation they need to be paid.
A forex broker includes all the costs associated with trading in their spread. An average spread might vary between 10 and 14, depending on the volatility of the market. Currency exchanges provide tighter spreads but charge a commission on the volume of cryptocurrencies being traded. Generally, the trading cost is similar in both cases.
There is no doubt that cryptocurrency exchanges provide more crypto coins to trade, in comparison to brokers. Make sure that the broker you choose provides multiple crypto trading options. Brokers also offer traders the choice to trade in commodities, like oils and metals, helping you diversify your portfolio.
In conclusion, while the choice between exchange and broker will depend on individual preferences, brokers offer robust online trading platforms, efficient customer services and educational material to help traders make the most of their trading decisions.