Brokers, can’t live with them, can’t live without them. These institutions are an integral component to why online trading is so efficient and speedy nowadays. Way back when engaging in forex trading meant traders going through numerous loopholes and maintaining relationships with their banks.

Fortunately, things are a lot simpler now. Despite this efficiency, brokers have not always been seen in a favorable light, considering the decentralized nature of the currency market

It’s a known fact every broker provides slightly different prices, presenting challenges of transparency. In truth, there is no universal forex market where institutions follow the same exchange rates across the board.

Many have become aware of the different brokerage models in how brokers process their clients’ orders, one of which (the dealing desk or market maker model) is not always seen favorably because of the perceived conflict of interest. 

These are just some of the disadvantages with brokers, leading some to wonder whether one can realistically trade the forex market without these middlemen. This article will cover the role of forex brokers, how people could speculate in currencies without brokers, and the pros and cons of doing so.

What is the point of a forex broker?

It’s beneficial to understand currencies have historically and continue to be the product of large commercial and central banks globally. Essentially, these organizations create and regulate much of the foreign money used by people. 

Back in the old days, clients needed to buy and sell currencies through banks to participate in foreign exchange trading. As one could imagine, platforms had not existed at the time, making the whole process cumbersome. 

Two innovations came into the picture towards the mid-90s specifically for forex; advanced trading platforms for home use and external market makers. Trading platforms allowed the average Joe to trade currencies, though the puzzle wasn’t complete without a broker facilitating these trades. 

A market maker is a financial organization responsible for essentially providing the market people trade. Although banks have traditionally always performed this role, it became possible for businesses to become market makers without solely relying on such institutions.

Thus, a broker is simply an intermediary between the retail client and the banks, allowing for simpler, cost-effective trading on designated charting software. For their efforts, these groups receive compensation from commissions or spread for every order they process. 

In short, a broker lowers the barrier to entry of trading currencies, and without such institutions, it would be much more challenging to speculate in currencies.

How realistically can investors trade forex without a broker?

Despite the advantages listed in the previous section, there could be a group of investors interested in bypassing brokers. So, how can such a group realistically trade forex without a broker? 

The only possible method is for someone to buy a large number of currencies through a bank account. For instance, let’s imagine a European predicted the euro would gain value against the dollar over the next month with the current EUR/USD exchange rate of 1.10.

Let’s also assume this individual invested €10 000, resulting in $9090 (10 000/1.10). If the exchange rate rose to 1.20 after a month, their $9090 would turn into €10 908, resulting in a €908 profit (excluding any fees).

Numerically, this rise is close to a 10% increase. Although this scenario exemplifies some gains, the clear problem is one would need to put down significantly more due to an absence of leverage. 

While leverage indeed is a double-edged sword, trading through a broker on a platform can allow traders to realize the same percentage increase without needing to invest as much initially. Thus, the biggest limitation of not using a broker is the margin.

The pros and cons of trading without a broker

One of the benefits of trading without a broker is more transparency in dealing with a bank than a brokerage. Clients would not need to deal with widening spreads, slippage, and other glitches traders commonly experience with a typical broker on certain occasions.

The investor would effectively own the actual euros or dollars instead of trading these through software as a derivative. Moreover, even if these currencies lost value in the near term, one could still hold and not sell at a loss. With leverage, most traders typically never maintain their positions for long.

As briefly mentioned, leverage is the most significant disadvantage of not using a broker. One would need to invest tremendously more to realize the same percentage gain than trading on a platform with leverage. 

Another disadvantage is someone can only buy a currency initially, unlike with CFDs (contracts for difference), where traders have the luxury of going long (buying) and going short (selling). Lastly, there are far fewer markets tradable through a bank account than the tens of instruments available with most brokers.

The only people who could realistically not use a broker in forex are long-term investors who have purchased astronomical amounts of currencies to make the potential gain worthwhile.

Thus, it might be a strategy through this method, assuming the investor understands the drawbacks.

Final word

Whether people were aware of it or not, most have conducted some currency exchange through a forex bureau at an airport or shopping center. The practice of swapping currencies occurs at various levels regularly. 

Without brokers, the only groups that could make worthwhile gains from the markets would be the banks and other large financial institutions. Fortunately, with the advancement of charting software and the decentralization of forex, the playing field has become much more expansive.

While opportunities to profit from the markets are available for virtually everyone, even with $10 to their name, it’s still crucial to understand all the risks involved in using brokers and trading platforms.

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