What is a Forex Dealer?

What exactly is a Forex dealer? They aren't exactly like your local auto dealer, but they do essentially the same thing. A dealer acts like the middle man in Forex investments. While nobody likes the middle man, they can truly help you in this market. They actually make it possible for you to participate, in most cases.

Role of the Dealer

A Forex dealer is a type of financial institution which acts as the middle man between two parties who want to trade Forex. They take the currency from one source and give it to another source who wants to buy it. This is essentially a Forex broker, although it could be an individual as well.

Just like a car dealer, they take the product from one source, sell it to another and then make a little bit of money on each transaction. In the case of a Forex broker, they make money off of the Forex spread. This is the difference between what buyers are willing to buy for and what sellers are willing to sell for.

This is typically a very nominal amount of money for each transaction.

Authorized Forex Dealer

Occasionally, you may hear the term "authorized Forex dealer" thrown around in regards to brokers. When you hear this, it's basically a fancy way of saying that they are a member of the regulating agency in that particular country. For example, in the United States, the National Futures Association is in charge of Forex brokers. A broker who is an authorized dealer has received the appropriate licenses and pay the appropriate fees to the regulatory agency.

This is designed to give you a warm and fuzzy feeling when you open an account with a broker. It tells you that they're hopefully not going to take your money and run off to Tahiti with the babysitter. They have checks and balances in place with their regulatory agency that will supposedly protect your money and keep you from being scammed.

What Really Happens

Although brokers supposedly trade your currency with other individuals, this is usually not how it works. In reality, the broker simply takes the opposite position of your trade. They know that the vast majority of traders will lose more than they win and they just bet against you. In most cases, your trade never actually makes it to the market. The broker simply keeps it on their books and pays you if you win. If you lose...well you get the idea.

The Good

If you look at it from one perspective, working with a dealer might seem like a bad deal. Many of them take the opposite position of you and take the spread on top of that. However, without dealers, you most likely would not be able to trade in the Forex market at all. With brokers, you get to trade with large amounts of leverage, which is required in the market. Unless you have $100,000 to invest in each lot that you buy, you're going to need leverage. This means that brokers are a necessary evil in the FOrex market.

Considerations

The broker you choose can have a lasting impact on the level of success that you are able to achieve in the market. The difference between spreads, execution and policies can be the difference between being profitable and losing money overall.

Because of this, it is important to find out exactly what you are getting into with a broker. Check out our Forex Brokers page to find out more and to see reviews of some of the most popular brokers on the market.

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Return From Forex Dealers to Definition of Foreign Exchange

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